Wednesday, January 4, 2023


2023 is starting off the same as 2022, except this year instead of the all time high into wave one (blue) down, this is a broadening top into third wave (blue) down. The difference will be in how much underwear is soiled this year compared to last year...

The Dow's all time closing high was a year ago today. The all time intra-day high was a year ago Jan. 5th, aka. my birthday. Those early Jan. 2022 highs have stood until now. Which leaves the only question on the table - is this week seeing the highs of the year for 2023?

For the record, now that 2022 is over we know that the post mid-term election "melt-up" never happened AND the annual Santa rally was a total dud. The Goldman Sachs/Zerohedge Q4 stock buyback bonanza also failed to deliver.

Nevertheless, the Q4 low volume/volatility collapse has carried over into the new year. The only way to keep the market pinned at these levels is to essentially lower liquidity until all trading stops. Case in point, today the Nasdaq VIX flash crashed the most in history. Clearly the algos are having a hard time maintaining this illusion when one by one all of the market cap generals get taken out and shot. Today it was Microsoft's turn to get downgraded due to "rapidly decelerating" cloud (Azure) growth. Meaning, it was a veiled downgrade of Amazon as well. Recall that in the last quarter, analysts valued Amazon's Ecommerce business at $0, and ascribed all market cap to AWS. Which is now "rapidly decelerating".  

It's the same low volume in the housing market. Last week we learned that pending homes sales have collapsed to two decade lows.

This chart shows the ratio of U.S. home prices to U.S. incomes, available from the OECD web site. The middle pane shows the months of homes available for sale. And the bottom pane, pending home sales. Note that the monthly inventory of homes for sale only rose AFTER prices began to fall in 2006. Whereas this time it has already shot up. When prices finally begin to collapse, sellers will rush to the market and all try to get out at the same time. 

It won't work.   

Michael Burry was out this week saying the U.S. is already in a recession and he believes the Fed will make the same mistake Volcker made which is to stop tightening too soon which will allow inflation to reaccelerate. That's a bold call to make and it's quite bullish. However, there are reasons to believe that won't happen this time around.

First off, Burry ignores the fact that financial conditions today are nothing like they were in 1980. Today they remain far too loose for the Fed to pivot. It would have to be one hell of a crash to make them change their mind. Without that, CPI won't be coming down any time soon.

Back in the early 1980s, there were protesters outside the Fed:

"Those were tough times—economically and politically. Interest rates of 20 percent and unemployment rates of 10 percent; rings of tractors around the board building; offices filled with 2x4s mailed in by builders; consumer demonstrations outside the building; talk of his impeachment in the Congress"

Which get us to the the next point: by this time in both 2000 and 2008, the Fed was ALREADY easing. So this idea that they will push the economy deep into recession and push markets lower, THEN bail them out has no basis in reality. They neither bailed out the stock market nor the housing market the last two cycles. Unless you consider SPX -50% a successful bailout. 

The risk isn't that the Fed restarts inflation, the risk is that they create runaway deflation. In 1980, Volcker had 19% of Fed rate to ease. This Fed has 4.25%. Consider the fact that the 1990, 2000, and 2008 recessions all required 5.5-7% of rate cuts.

In other words, if the Fed woke up to their incipient mistake tomorrow, it would still be too late to bailout markets and the economy. 

On a related note, Burry is ignoring the fact that in 2008 the CPI collapsed 7 percentage points WHILE the Fed was easing. It actually went negative. 7% is an interesting number because it happens to be the current CPI.

In summary, the only REAL question is, how much does the Fed have to crush the Nasdaq and the housing market in order to collapse CPI. And then once they find that out the hard way, they can jump in their time machine and go back one rate hike.

That is the bull case in a nutshell.

"Policy makers worried they could have to raise rates more than projected if higher stock, bond prices spur economy"