The market is overbought heading into ANOTHER Fed rate hike, while the Fed takes liquidity down to ZERO. Today's investors are not thinking about what could go wrong, only about what could go right...
This week we learned that Artificial Intelligence is within seven years of overtaking human intelligence. The event is called the "singularity" and it means that artificial intelligence will be in total control. How that's different from now is not for me to say. I had been thinking about this recently so I created a graphic to show how I predict human intelligence "evolving" in the future based upon the current trajectory.
Recall that no one questioned Bernie Madoff until they couldn’t get their money out. Before his implosion in 2008, the extraordinary gains he provided over many years went totally unquestioned. The same can be said about Modern Monetary Thermonuclear policy aka. MMT for the rich. Until it explodes with extreme dislocation, the policy of manipulating markets will go totally unquestioned. Moreover, it has become the primary reason to ignore all risk and misallocate capital without the slighest concern over valuation or impending recession.
The Fed is set to raise rates again next week and STILL not one pundit has caught on to the fact that interest rates are too tight and Fed balance sheet is too loose. The Fed is imploding the economy, but not the markets. Which is driving a chasmic divergence between fantasy and reality. This week, the Conference Board Leading Index confirmed that the economy is heading for a hard landing. The Fed has never hiked rates with leading indicators at this level. Therefore we have now officially crossed the Rubicon of unprecedented policy disaster aka. "BTFD".
Moral hazard has driven a chasmic gap between stocks and fundamentals. Inflation trades REMAIN late stage bid because money is fleeing Tech into the rest of the market. Which is causing the divergences between reflation stocks and their underlying markets to reach lethal extremes.
Case in point, homebuilders:
This article by investment manager "RIA" posits that investors are all bearish hence the contrarian trade is to be bullish. If one uses the past decade+ of central bank bailouts as a reference baseline that is true. However, on a timeline spanning multiple cycles that assertion is patently false, as we see in the chart below.
What is clear is that a lot of money managers are betting the farm that this IS not the end of the cycle. Because if it is the end of the cycle, this will be the end of THEIR cycle as well.
It's called "Heads I win, tails you lose" and it's Wall Street's favourite game.
What we are witnessing is lethal misallocation of capital, on the belief that central banks are invincible. This week's NYSE glitch was a warning that there is NO liquidity in this market. Low volume and volatility are masking fragility. Below we see in the lower pane that Nasdaq (and NYSE) volume are at multi-month lows. The lowest since the August 2022 countertrend market high. On the left shoulder we see late Jan/early Feb 2021 which was the Gamestop blow-off top in global risk. After Chinese New Year, which happens to be this week, the wheels came off the bus. Nasdaq down volume hit an all time high and the Archegos hedge fund exploded.
EMs show that Chinese New Year was a critical turning point for markets for the past three years.
There has been no real selling since the debt ceiling crisis and it turns out that we are in ANOTHER debt ceiling crisis right now.
"The debt ceiling is a real risk that will come to a point where it will terrify markets, because it is a wild game of chicken
Expectation of a recession has made markets more sensitive to unanticipated risks"
Debt ceiling
Recession
Tech collapse
Housing collapse
NYSE glitches
Liquidity collapse
What else do bulls want?
Fed tightening.
