Sunday, November 20, 2022


In my last blog post I demolished the fundamental hypothesis. Now I will tackle the technical hypothesis. In a nutshell, the entire bullish thesis is predicated upon the ongoing misallocation of capital to the stock market, just as it is with every other Ponzi asset class...

First off, many pundits are now questioning why the Fed is over-tightening. The reason the Fed is over-tightening is because the jobs market remains inordinately strong due to the fact that low paid service workers are extremely scarce and in high demand. However, at the same time we are witnessing the beginning of a white collar recession centered in the Tech sector, which is what Michael Burry has been predicting for the past year.

Which means there is a severe mismatch in the jobs market: High demand/low supply for service workers. Low demand/high supply for Tech workers. These two labour markets are totally separate and yet they lead the Fed to the same conclusion - keep tightening. It's not as if Tech workers are going to take jobs at Chipotle. At least not yet. And if they do, the collapse in total consumption will be highly deflationary. Similar to what happened when laid off manufacturing workers took jobs at Home Depot. What we are witnessing is the last stage of the decimation of the middle class.

Now on to the casino...

Stories abound as to what caused the collapse of the FTX Ponzi scheme. Because what could go wrong? What these exchanges all have in common is that they issue their own proprietary Crypto currency which they use as the medium of exchange for all trades. The FTX coin (FTT) was one of the best performing cryptos of the past two years because FTX was laundering all client cash through their own currency in order to keep it artificially inflated. The other thing they were doing is what's called "burning Crypto", meaning destroying large amounts of their own currency float in order to keep it artificially scarce. Making it easier for speculators to manipulate it higher. Then they were taking this artificial wealth and they were squandering it on everything from penthouses and drugs to political bribes to ensure their scam stayed unregulated. 

And it worked great.  

But it was all doomed to collapse because the entire business model was not built upon creating value, it was predicated upon the greater fool theory. And so it was DOOMED to collapse. 

What's more interesting is that the wave pattern for FTX coin has been 90% correlated to the Nasdaq for most of 2022. Which proves that social mood is driving ALL markets now. 

For those who are not familiar with Elliot Wave Theory, it merely posits that wave patterns are the manifestation of investor emotion in markets - greed and fear. Much of the time wave patterns are not clear, particularly when markets are not trending. Other times, they are crystal clear. 

What is the most clear is when a market is declining and rallying in a three wave correction. This pattern is highly reliable because it indicates a waning level of speculative appetite and waning momentum.

Here we see FTX coin overlaid on top of the Nasdaq. FTX peaked ahead of the Nasdaq, but since then, every correction has been synchronized, with each correction weaker than the last. 

Until implosion.

Asking why FTX imploded, is like asking why Bernie Madoff imploded.

"The man who had to clean up the mess at Enron says the situation at FTX is even worse, describing what he calls a “complete failure” of corporate control"

Which gets us to the end of year bonus meltdown. This is normally the time of year when Wall Street does everything possible to keep markets levitated into early January. For obvious reasons. There are only a few weeks left in the year which can make or break their annual bonus. Historically betting on a market crash at this time of the year is a very bad bet. The seasonal rally tendency is strong. 

Be that as it may, December rate hikes are ALSO extremely rare in history. Only five in the past fifty years. Two of those rate hikes came in the past seven years, and they were BOTH disasters. In 2015, the global markets had been monkey hammered by the August China devaluation. So when Yellen raised rates .25% in December, the market crashed at the start of January. In 2018, global markets had been monkey hammered by Fed rate hikes, QT, and Trump's trade war with China. The rest of the world was much weaker than the U.S. UNTIL October when U.S. markets imploded as well. The U.S. market bounced weakly in November and then imploded in December. When Powell delivered a rate hike in December the wheels came off the bus. 

So it is that we find the Nasdaq has the same coiled spring pattern that failed late in 2021. Back then, Thanksgiving was the beginning of the pattern, whereas this year Thanksgiving appears to be the end of the pattern. 

Bank of America asserts that this rally is now running on glue fumes. To paraphrase this article, global stock inflows are the highest in eight months, marking a likely end to this latest bear market bounce:


As we see also, the oscillator is back in overbought territory and rolling over deja vu of prior rallies this year:

On the other end of the spectrum is the reflation trade, featuring financials, industrials, transports and other economic cyclicals. Financials do not like inverted yield curves, because it makes it impossible for banks to make money since they borrow short and lend long. Which doesn't make money when short-term rates are higher than long-term rates. 

Here we see another clear example of Elliot Wave correction, which happens to be distinctly reminiscent of the pandemic. 


In summary, risks have increased massively year over year. 

However, complacency has attended this entire decline, now featuring eight month high stock inflows. Here we see VIX 2nd derivative volatility at pre-pandemic lows. What's coming is an FTX style meltdown that will include ALL global risk assets imploding at the same time.

The Nasdaq now has the exact same wave pattern as an Enron-eclipsing Crypto Ponzi scheme. The bull thesis is that the exact same wave pattern that imploded FTX, is precursor to a new bull stock market. 

Anyone who believes that, deserves their fate.