Wednesday, May 3, 2023


To date, the emergency response to this incipient financial crisis has been the exact opposite of 2008. It's clear that 15 years of continuous monetary bailout has fried the brains of investors and policy-makers alike...

We have achieved Terminal Idiocracy.

In my last blog post I asserted that the debt default "x-date" was not yet known. This week, Treasury Secretary Yellen said the default date is very likely early June, so about a month away. Granted, there is no question a deal will get done. The question now is WHEN will a deal get done. Because in the meantime, stocks have no upside. No large scale investor is going to commit capital on a substantial basis until the debt deal is out of the way. 

Furthermore, in a year when recession risk is already cycle high, stocks now face simultaneous monetary and fiscal tightening. Either Biden commits to reduced spending or the markets explode. Either way, it's deflationary.

In this chart I showed that every small cap death cross since 2009 has led to S&P 500 crash. Four out of five times were due to either fiscal or monetary tightening. This time, we face BOTH fiscal and monetary tightening in a confirmed death cross:

Also since my last update, we now know that First Republic did indeed implode. However, the carcass was bought by JP Morgan over the weekend, which prevented the FDIC from realizing additional major losses. Regardless, the collapse of regional banks resumed this week because investors have figured out that under the terms of the BTFP liquidity lifeline, there likely won’t be any regional banks still standing a year from now. The BTFP merely exchanges balance sheet losses for P&L losses.

What banks need is a recession and lower interest rates ASAP. Because they can’t make money borrowing at a Fed rate of 5% against a bond portfolio yielding 2%. In addition, BTFP only lasts one year so rates need to come down ASAP before the entire sector implodes.

But, rates won't come down until banks implode.

As expected, criminality is exploding on this right shoulder of the two year head and shoulder top. So far, we've seen FTX implode. Adani implode. THREE of the largest bank failures in U.S. history: First Republic (2nd), Silicon Valley Bank (3rd), Signature (4th). And Credit Suisse imploded. 

This week we learned that Carl Icahn is running a "Ponzi-like" structure. The same short-seller - Hindenburg Research - that imploded Adani, went after infamous short-seller Carl Icahn. 

Reading through their analysis is highly reminiscent of Bernie Madoff's strategy. Basically, a fixed rate of return (+15%) which was in no way backed by asset increases to match the rate of return:

"Icahn Enterprises’ current dividend yield is ~15.8%, making it the highest dividend yield of any U.S. large cap company by far, with the next closest at ~9.9%...The dividend is entirely unsupported by IEP’s cash flow and investment performance, which has been negative for years. IEP’s investment portfolio has lost ~53% since 2014"

And yet with each fraud revelation, complacency among investors remains extreme. Here we see the Nasdaq VIX collapsed down to the same level as May 2021 which as we recall was the left shoulder.

We have only scratched the surface of impending revelations of rampant fraud.

In summary, I was going to wait until after the FOMC decision to make this post, but why wait. I think today will be the last rate hike of this cycle, because gamblers are now exchanging a long-awaited Fed pause for incipient economic and financial meltdown.

This Congress can't even agree to avoid a U.S. debt default, so how could they ever arrange a just-in-time financial bailout? That is wishful thinking of the highest order. 

Hence, it's consensus across Wall Street.