mor·al haz·ard
"lack of incentive to guard against risk where one is protected from its consequences"
Any questions?
I asserted two blog posts ago, that the greatest risks of 2023 are as yet unknown. No sooner did I say that when bad data out of China imploded global markets this week. Of course the China risk has been simmering in the background for over a year now, but we were told over and over again that it was "fixed". So fixed, that in fact quite a few smart people bought into this belief that China would lead the world economy in 2023. Even The Big Short's Michael Burry was buying Chinese Tech stocks earlier this year. And yet, we see via this Emerging Markets stock chart, that this was the SECOND fraudulent Chinese recovery since 2021. And notice that the first one took place on the left shoulder (the equal weight semiconductor index shows the head and shoulder top in the background (gray)).
Still, I would argue that this second "re-opening" has been an even bigger fraud than the first one.
Now, the Chinese government is struggling to get their currency back under control. Which, is deja vu of August 2015 when uncontrolled Yuan deval caused global markets to crash. That crash by the way took place over this week in August 2015 from Thursday through Monday. FYI.
In other words, a risk that was not even on the radar two weeks ago has now become the locus of global collapse. That's how things work on the right shoulder.
"The PBOC is in fact faced with a major dilemma: allowing the yuan to weaken along with deteriorating sentiment may increase financial instability, while propping up the currency too much would risk further hurting the fragile economy"
First and foremost, global central banks are now all at odds with their monetary policy. Some are tightening, some are pausing, and some are easing. There is literally no coordination taking place on monetary policy. Which, happens to be the opposite of what happened in March 2020. We don't know how they will react to a global financial meltdown, all we know is that it will be an abject clusterfuck.
The other source of unknown risk will stem from all of the fraud in the era. We are about to find out who has been swimming naked in a pool of cheap money. And, rest assured it won't be pretty. When it comes time to actually buy stocks in this market, for what will be a decent trading rally, it's going to feel like buying Maui real estate with the houses on fire.
Another risk that raised its ugly head again on the right shoulder is bank run risk. Ratings agency Fitch came out this week and said they are putting U.S. banks on watch for potential downgrade. In other words, they waited for the four month short covering rally to end and then they monkey hammered banks all over again.
As we see in this chart below, S&P down volume has been tracking higher with each time the Financials test support.
And then of course there is Fed policy risk. We learned via the July Fed minutes that the majority of FOMC members remain hawkish. In addition, we learned this week that GDP Now real-time GDP tracker is now predicting 5% growth in the current quarter (Q3). Bear in mind, that fake growth is ALL borrowed money, because the U.S. deficit is currently 6% in 2023. Running a massive pro-cyclical deficit the largest since WWII with the lowest unemployment rate in 50 years is bonkers asinine. Hence, it's largely unquestioned.
Nevertheless, it's why J. Powell will do what he did last year at this time, and monkey hammer markets lower. If they haven't already crashed in the meantime.
