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.
