HOT AIR EXPLOSION

Markets have now fully priced in a Fed pause for 2023. There is only one problem - it's a total fabrication. Which means that this market is now priced for a high altitude explosion.

Any questions?

As it is with all problems this Idiocracy faces, they are now painted into a denialistic corner of their own making. And still they are somehow totally oblivious to that fact. 

Yesterday, the Fed raised rates another .25%, to the highest level in 22 years, and they signaled they are ready to hike again in September if necessary. Bulls took that to mean that rate hikes are over. Hence, they have now vaulted the Dow to the longest winning streak since 1987. I would be remiss if I didn't remind everyone that it was the combination of Fed rate hikes and market melt-up that preceded the crash in 1987. 

The problem with fully pricing in a pause is that there are multiple inflation reports and job reports between now and September. When the Fed paused back in 2007, inflation rebounded sharply. Currently, the CPI has already fallen for 12 months straight which is the longest monthly streak in over 40 years. Betting on another month of falling CPI is like betting on another Dow up day. They have a similar probability except if the CPI turns up again, the Dow is going to have a down year, not a down day. 

Today, we already got news that GDP is re-accelerating. This chart shows that consumer sentiment is chasing markets. It used to be that markets follow the economy, but now the economy follows markets. 

It's only a matter of time before the inflation downtrend reverses. 

We also learn that money managers are no longer hedging, which is why per BofA/ZH: "It has never been cheaper to hedge a market crash". From a nominal cost standpoint, S&P puts have never been cheaper. That's because there is ZERO risk management in this market. You see, despite put options being record cheap, that does not prevent them from losing 100% of value in a melt-up such as the one we've been in since mid-March. But money managers can't afford to lose more relative performance to the most narrow market in history that is now powered by a "Magnificent Seven" stocks. 

Which is why we see that even as active manager risk exposure has round-tripped back to the highs of late 2021 (lower pane), the index over-weighting to Tech is now MUCH higher. 

Which is a disaster wanting to happen. 

All of which gets us back to a Fed who continue raising interest rates while keeping their balance sheet at double the size it was pre-pandemic. At the rate they are rolling off the balance sheet, it will be several years to normalize. In doing so, they are favouring the wealthy over the middle class.  

Which means that when markets explode, the middle class will be pre-imploded by two decade high interest rates. And consumer sentiment will collapse like a cheap tent. 

It's the same mistake the Fed made in 2008. 

"As late as August 2008, there were no clear signs that many financial firms were about to fail catastrophically"

Same.

FOMC: FEAR OF MISSING CRASH

"It's called the American Dream for a reason - you have to be asleep to believe it" - George Carlin

I just finished watching the HBO special, George Carlin's American Dream. I thoroughly enjoyed it of course. It confirmed my view of the degeneration of humanity. Throughout Carlin's life his views on society became darker and darker, but then he died in June 2008, just before the big housing collapse and bailout clusterfuck. Imagine if he were alive today what he would be saying about this current gong show? Over the past 15 years since 2008 all of Carlin's self-destruct themes have gone into overdrive. The difference is that in 2008 we discovered Quantitative Easing - printed money - the secret of effortless wealth. Which happens to be just another drug - a financial drug. I call it monetary euthanasia - just hose down markets with enough free money to give everyone the illusion of normalcy. In other words, central bank manipulated markets give the sheeple the illusion of wealth while everything falls apart in real time. Carlin would say that it's all a big fucking conspiracy.

Of dunces. 

Which gets us to this coming week's central bank extravaganza. The Fed is widely expected to raise rates again. The ECB is also expected to raise rates again. The BOJ is once again expected to continue massive easing.

The question for the Fed is what do they tell markets going forward? Headline CPI has dropped sharply, but now GDP is re-accelerating and the last time the Fed signaled an impending pause was at their May meeting, at which point markets exploded higher. Which has forced them to put on another rate hike in July. In other words, their dovish commentary at the May meeting made another rate hike necessary. Will they make the same mistake again?

Which gets us to the casino. Since this rate pause rally began late in 2022, mega cap Tech stocks have vaulted 100%. Typically, Tech/growth stocks are the primary beneficiary of a slow growth economy with receding interest rates aka. "The deflation trade". However, the rally was running out of gas in May, but the Fed reignited the rally with their June pause which coincided with the debt ceiling resolution. Those two events AND the AI frenzy led to the recent overthrow high for mega cap Tech.

Which gets us to this week. 

At the start of this rally no one expected rate hikes to be continuing into July. Therefore, the bull case is that now with another potential pause coming, Tech stocks should bolt higher again. However, one could make the case that even if the Fed is dovish going forward, much of the "pause" has been priced in already.

If so, then we are looking at history's biggest rope-a-dope, as Tech is now the most crowded trade of 2023. 

Making life a bit more complicated for bulls is the fact that this past week Tech earnings were a shit show. Netflix imploded and then Tesla imploded. But it was Taiwan Semiconductor that threw cold water all over the artificial intelligence rally. They guided revenue down for the full year and said that AI demand was not sustainable following the initial surge in orders. In other words, AI is turning out to be just another Tech scam similar to Crypto, Cloud, and Metaverse. Consider that we've now been told that semiconductors went from a shortage in the pandemic, to a glut in early 2022, to a shortage in early 2023, to now a glut again.

Sure.

Here we see the semiconductor sector (weekly) with Taiwan Semiconductor. 

This has been the best start to a year for Tech stocks in 30 years of data. Including the Y2K bubble. 

Tech stocks are now up seven months in a row, including July.

According to bulls, the bull market is just getting started. 

In summary, the sheeple are going to soon awaken to the inconvenient truth that the American Dream is just a big fucking scam.

And when they do, they are not going to be fat and happy.

 

THE END OF THE SUPER CYCLE

What we are witnessing in real-time is the end of the 90 year stock market super cycle. In hindsight, historians will say the pandemic super bubble was the end of the super cycle rally which began in 1933. 

The extraordinary era that is assiduously used to extrapolate future stock market gains, is over. It turns out printed money is not the secret to effortless wealth. But, who knew?

Leaving politics aside, the health-related response to the "panicdemic" was unquestionably incompetent. An approach we were told was based on "science", at the local level, resulted in a hodge podge of made up rules with zero consistency from one city and country to the next. Any time you traveled you had to learn the new set of rules, all of which were based on "science". It was pathetically idiotic and yet there has been literally no assessment of what should have been done better. Which is how we roll in this society - lurching from one crisis to the next. However, it will be the  global Federal economic response which will cause by far the most dislocation. The true cost of which has so far been obscured by the super bubble. 

Three years ago in March 2020, global central banks panic eased the most in history. They flushed global markets with unprecedented amounts of printed money, which went straight into asset markets. From that point forward we have witnessed one pump and dump implosion after another. Beginning with the Gamestop melt-up in early 2021 which was attended by the Ark ETF, IPO/SPAC, Chinese stock vertical melt-up and meltdown. At the lows of that meltdown, the hedge fund Archegos exploded amid RECORD Nasdaq down volume. 

That event is what I call the "left shoulder" of the super cycle head and shoulders top. But, stocks recovered and marched to the all time highs in late 2021. That event was attended by the melt-up high for Crypto currencies, reflation trades (banks, industrials, retail, leisure, transports), and of course Tesla and the EV complex. That peak was the "head" of the super cycle  head and shoulders top. Next came the bear market of 2022 which culminated in an oversold low in October 2022. Since that time, markets have been rallying in what bullish pundits are calling the "new bull market". Which is what I call the right shoulder of the super cycle top.

The super cycle head and shoulder top can best be viewed by semiconductor stocks which have the most obvious top. Notice in the lower pane that consumer sentiment has been trending down throughout this topping process. Why is that not getting any notice from today's bullish pundits? Why would they assume the consumer is still strong after 20 consecutive rate hikes. Which happens to be three more rate hikes than what imploded markets in 2007.

Today's bullish pundits inform us that there has never been a Dow/S&P rally of this size and duration that didn't end at new all time highs. Never - meaning going back to WWII (1945). The last major rally of this size and duration that failed was 1930. Currently, the S&P 500 is up 28% off the lows of October 2022. Coincidentally, the same size rally as occurred in 1930. The one that back then had everyone convinced there was a new bull market. 

At this latest one year high, the S&P 500 is STILL unconfirmed by the equal weight S&P, despite the primary cap weighted index making ten successive new 52 week highs. This is the longest string of divergent highs between these two related indices, in 20 years of market history.

All due to this artificial intelligence mega cap Tech rally. The bank run in the Spring is long since forgotten. 

All of which brings us up to date.

Market history and Elliott Wave Theory predict that the impending failure on the right shoulder will be cataclysmic for risk assets. The fact that the equal weight index has not made a new high indicates that for most stocks, this counter-trend rally ended in February of this year. 

Note the record NYSE down volume in the lower pane which attended the Spring bank run:

What we are witnessing now with this latest melt-up is bearish capitulation. 

Once the global margin call begins, the main thing we should expect is that unlike March 2020, this time around central banks will under-react to this crisis. A crisis they helped to create. Which means that the liquidation of risk assets and attendant de-leveraging will be deeper and more severe than what we saw last time. By the time central banks panic, the global margin call will be complete. 

And then will come the bullish capitulation AND total loss of faith in printed money.

The erstwhile secret to effortless wealth.

FROGS IN BOILING WATER

Human beings have only one natural enemy - themselves...

I predict the artificial intelligence rally will end badly. At least it's named appropriately.

The temperature is white hot in the hottest summer in recorded history. Yet, you couldn't tell from stock bulls. The temperature is just right for boiled frogs. As with climate change and every other man made problem, denial is rampant. And lethal. After all, how could they see the problem when they are the problem? 

Investing is "so darned easy" you just throw your life savings into a handful of parabolic tech stocks and ignore all risk. Because everyone knows that stocks always go up in the "long run". Perhaps, but after 1929 it took 25 years for stocks to return to the prior high. After 2000 it took the Nasdaq 17 years to breakeven.

Once again, this society has painted itself into a corner with no way out. This week there were many indicators that were reminiscent of the all time high. It appears that the recessionary CPI collapse catalyzed total bearish capitulation. What else?

First and foremost is the fact that the Nasdaq (100) reached two years overbought on the % Bollinger Band which in the standard setting is 2 standard deviations above the 20 dma. The last time this happened was February 2021 during the Gamestop melt-up. The tall wick on the daily is of course reminscent of the all time high.

Then there is leading mega cap Tech stock, Nvidia, which at the highs of the week was up 240% in 2023. Then it suffered a major reversal of fortune on Friday which is deja vu of the Nasdaq's all time high in November 2021. 

Then there is the rampant speculation in all manner of junk stocks, led by Crypto infrastructure stocks. 

These stocks haven't been this overbought since you guessed it  - when Nvidia peaked at the Nasdaq all time high in November 2021. 

This is where it gets interesting - For some reason the banking crisis in the Spring catalyzed an artificial intelligence rally into the summer. Why, is not for me to say. 

This is a topic I haven't touched on for several months, so it's time to revisit FDIC risk. 

Back in the Spring, the FDIC organized several large takeovers of failed banks which helped to prevent their deposit insurance fund (DIF) from being depleted. However, in the meantime, the problem of $9 trillion of uninsured deposits remains totally unaddressed. 

This is what Janet Yellen said back in March - basically that these initial bank failures got special treatment:

“Will the deposits in every community bank in Oklahoma, regardless of their size, be fully insured now?” asked Lankford. “Will they get the same treatment that SVB just got, or Signature Bank just got?”

Yellen acknowledged they would not"

The issue is that barring additional takeovers of failed banks and barring FDIC bailout > $250k there will inevitably be panic among uninsured depositors leading to even larger deposit withdrawals than the record withdrawals so far in 2023 (below). When that happens, there will be mass bank failure. In other words, what happened so far, was just the easy part of the bailout.  

Year over year deposit flows, $:

Has this risk been priced in to the Disney markets since March?

Of course not, it has been priced out. The net effect of the artificial intelligence rally is that this time, Tech stocks won't be a safe haven from meltdown. 

ALL IN RECESSION

Sadly, in a proven Idiocracy, there is no strength in numbers...

Bears have been stampeded by rampant short covering. Bearish capitulation has created the illusion of a new bull market. Once again, hedge fund managers have been forced by the Reddit mob to chase risk higher. However, there are a multitude of indications that this rally is the ultimate fool's errand. Begin with the fact that we have now achieved a consensus of idiots that this is a new bull market. Below, it's clear that value investing has morphed into momentum investing during the past 15 years of continuous monetary bailout. If only investing was as easy as buying what every other dunce is buying:

Here we see the average U.S. stock remains in death cross on a weekly basis. A perfect predictor of S&P crash over the past 30 years:

Not only is breadth lagging within the cyclical sectors, but it's also lagging within the leading Tech sector itself. This week, the Nasdaq finally passed the 61.8% retracement of the all time high, after a nine month rally. Even among the largest cap Tech stocks, only three of Cramer's "Magnificent Seven" have made new all time highs: Apple, Microsoft, and Nvidia. Whereas, Meta (Facebook), Google, Amazon and Tesla are all trading well below their all time highs. Investing is now "so darned easy", that now you could buy just three stocks and trounce the "market".

Last week's bullish hubris has morphed into this week's extreme buffoonery: 

Unlike the bond market which has been warning of recession via the inverted yield curve for the past year, stock gamblers have no such concerns. Leave aside the fact that the U.S. Federal deficit at 5.5% is the largest deficit outside of EVERY recession since World War II. In other words, this tepid expansion is ALL borrowed money. History will ascribe this generation's continual moral degeneration for ignoring the incipient economic implosion. 

Worse yet, stock gamblers continue to evince unquestioned faith in a Fed that made a policy error in 2021 keeping rates too low for too long, and is making a policy error right now in jacking up rates far too quickly. All while their balance sheet remains pinned near all time highs. It's clear that the Fed has totally underestimated the trickle down fake wealth effect. Coincidence? I think not. For decades Fed policies have been extremely regressive, meaning favoring the wealthy at the expense of every one else. Whenever wages start going up, that's when rate hikes must end the party.  

All of which is why Fed rate hikes have succeeded in collapsing headline inflation at the fastest rate since the 2008 recession. Which is confirming the inverted yield curve. 

Stock buying opportunity?

It's just so darned easy to believe. 

MAX FRAUD MAX PAIN

Bulls got their first taste of risk off this week but they escaped the week intact. Past performance is no guarantee of future results...

To summarize, in June the fiscal debt ceiling was finally resolved and the Fed finally paused rate hikes. Those two events encouraged retail gamblers to embrace stocks at the fastest pace since the Gamestop melt-up in early 2021. What I call the left shoulder of the pandemic head and shoulders top. That retail stampede forced hedge funds to cover and otherwise go net long the most since the all time high in late 2021, which is the head.

Which is why entering July, bulls are claiming victory over bears:

"As the trillion-dollar artificial intelligence rally gathers pace, pity the humans on Wall Street trying to figure out this gravity-defying market"

Pity the fools who dare to question artificial intelligence. Where to begin...Suffice to say, this type of hubris in algo-fabricated Disney markets will not go unpunished.

The problem with the bullish victory hypothesis is that the rationale for over-allocating to risk no longer exists. This week the FOMC minutes confirmed that rate hikes are set to resume. Fed futures now put a July rate hike at over 90% which is a mere 2.5 weeks from today.

The two sectors that were the most sensitive to rate hikes in the past year were Tech stocks and bank stocks. Recall that regional banks spontaneously exploded in March of this year when the Fed shocked markets with a hawkish pivot. Now we see short-term rates have round-tripped back to the March highs.

For Tech stocks, this new hawkish pivot is even more precarious. The entire melt-up from the March lows was predicated upon a Fed pause which no longer exists. Now Tech bulls are way over their skis in the sector that is most likely to implode next. 

Another problem for bulls is that the Yen carry trade is rolling over again. 

Globally, things are even more precarious for this fraudulent rally.

In summary, bulls are claiming victory in the midst of battle. 

Probably because they have no defense and their offense is spent. They have no plan B for when this all explodes. 

And round 2 is about to begin.