Monday, May 22, 2023


Sadly, in an Idiocracy there is no strength in numbers...

As I have pointed out several times on Twitter, the NYSE Composite is tracing out the same head and shoulders top as it did in 2011. Nevertheless, bulls and their amnesiac pundits seem to forget that the market imploded when the deal was actually made AND then the Fed was forced to ease WEEKS later. Given the state of this current impasse, the 2011 redux is now the best case scenario. However, the Super Clusterfuck is the most likely scenario. Sadly, only happily ever after is priced into the market. 

It's extremely ironic that the long-awaited Fed pause is now set to occur during the same month as the fiscal cliff diving gong show. Which explains why bulls are loathe to go risk off. Because clearly once the debt ceiling is raised it's off to the races. Sadly, they forget the experience of 2011 in which stocks crashed 20% AFTER the debt ceiling was raised. They also happen to forget the experience of March 2020 because as the chart above shows, stonks were in melt-up mode leading to the pandemic. Then as now, bulls were solely focused on the Fed. Because it's so much easier to reduce all of investing down to a single variable and then ignore that single variable when it doesn't suit your asset allocation. Merely waiting until the Fed is forced through economic dislocation to return to the bailout position. What I call buy and explode. 

Where was I...

Last Thursday, Biden and McCarthy said they were optimistic about reaching a deal. Then late on Friday, the GOP delegation walked out of the negotiations saying they were going "backwards". On Saturday, Biden said that the direction of the talks was "unacceptable".

So tonight, we have now come back to FULL circle jerk mode:

"There's nothing agreed to but everything's being talked about"

"Let me be clear. No, we're never putting a clean debt ceiling on the floor," McCarthy told reporters

Janet Yellen has spent the last two days reaffirming that June 1st is a hard deadline. That likely doesn't mean a Treasury debt default, but it could very well mean a pay suspension for Federal employees which would likely be met with a debt downgrade deja vu of 2011. We don't have long to find out. 

Trump has been pounding the table for the GOP to force cuts and otherwise force default:

“Republicans should not make a deal on the debt ceiling unless they get everything they want (Including the ‘kitchen sink’)”

"The former president is still influential in parts of the House Republican conference in particular, and his plea for the GOP to avoid making a deal that is good for both sides could throw a wrench into talks"

Clearly, any deal - if one were to occur - would be recessionary. In addition to large spending cuts, there is the issue of the liquidity implosion caused by massive Treasury issuance when the deal gets made:

 “My bigger concern is that when the debt-limit gets resolved — and I think it will — you are going to have a very, very deep and sudden drain of liquidity” 

What bulls ALSO forget is that in 2011, the Fed was forced to implement a variant of QE called "Operation Twist". Whereas currently they are still engaged in 2x QT mode. These are facts that the financial punditry are happily ignoring. 

All that is the good news. 

If the Treasury does default on one or more of their various commitments then bond yields would likely sky-rocket. Which is why I don't see an all clear yet to go ALL IN the long-term bond trade. In the case of a deal, then T-bonds likely take off as they did in 2011 (yields fall). However, if there's a default, things could get very ugly across the board. At which point not only would there be a fiscal clusterfuck, but a monetary clusterfuck at the same time. Which is why I recommend keeping some powder dry.

Either way, the upside for bonds far exceeds that for stocks in 2023 as the yield differential between the 1 year Treasury and stocks is now at the 2007 level:

In summary, never go FULL circle jerk.

Because in an Idiocracy there is no strength in numbers.