The Point Of No Return

This decade will forever be known as the decade of delusion. A period in which this society sacrificed its sanity in order to avoid the inconvenient truth that Globalization had failed. Instead of lifting most people out of poverty, it lowered most people INTO poverty - while making a handful of bailed out oligarchs wealthier. A decade of handing out trophies for failure, culminating in the Casino-Bankrupter-in-Chief leading a final round of let's play "No one saw it coming"...

Most people are of the socially obligatory delusion that central banks can stop this bubble they created from exploding. They are all very wrong. Nevertheless, the burden of truth remains on those of us who are not smoking crack, or otherwise trying to maximize bonus. The magnitude of over-valuation, combined with the magnitude of Tech stock concentration has put this mega bubble far outside of the realm of bailout. Which is why this won't be a crash, it will be an explosion. One that ends an entire consumption-oriented way of life, based upon mass deception - formerly known as "The American Dream". Now, dwindled down to the American Powerball lottery...

Today is quad witching, which means the confluence of multiple options and futures expirations (weekly, monthly, quarterly). On Zerohedge this week there has been a lot of talk about dealer "gamma" hedging which has accelerated this melt-up. When call option buyers bet on upside, market makers must hedge their (short) exposure by buying the underlying stocks. Which creates a massively leveraged melt-up situation of the type we are seeing right now.

Options speculators are essentially renting short-term leverage from Wall Street dealers, which has the net effect of driving the market higher. Until speculators sell to lock in profit, which reverses the "gamma" hedging flow. We can think of derivatives and machines as essentially momentum accelerators for leveraged casino gambling.

It's all fun and games until someone loses an everything. 

This week, the equity call / put ratio hit levels last seen at VixPlosion 1.0 (circled) and before that the election:

This era will be known as a failed experiment in algo-driven markets lubricated by central bank drip feed liquidity injection. The widespread delusion that traditional valuations are no longer a part of "investing". An experiment in pure momentum gambling. 

Apparently it's necessary to be self-medicated to see the point in all of this delusion.

What we see via Apple is that the Tech melt-up began seven months ago when Powell capitulated to Trump and fabricated the "Mid-cycle adjustment" fantasy, first hinted at on 60 Minutes, June 2nd, 2019:

Which spawned a Y2K style melt-up:

Outside of the 5g bubble which includes Apple and semiconductors, the rest of Tech peaked months ago. These stocks bounced and are now completing second wave correction:

The reflation trade and attendant cyclicals are dependent upon reflation which is peaking deja vu of last year.

aka. 'Conomy

Some cyclicals are already rolling over

Defensive safe havens are also finishing up their first leg correction:

Emerging Markets had a good week following last week's all-important fake trade deal:

Notice the difference, one year of non-stop bullshit later:

As of today (Friday), positioning is back to the prior decade highs that brought the last two dislocations.

Perfect timing:

"No one saw it coming"

2019: Year Of Imagined Realities

For the benefit of historians, I will provide a synopsis of 2019 using an investment letter penned in the spirit of former hedge fund manager Hugh Hendry...

January 1st, 2019:

Dear Super Idiocracy,

Good news, I too am smoking crack now.

There are times when a manager of other people's money must believe in things that don't exist, in order to maximize bonus. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully.  

This is one of those times.

Remember the film The Matrix?  Morpheus offered Neo the choice of two pills - blue, to forget about the Matrix and continue to live in the world of illusion, or red, to live in the painful world of reality. Today's perma-bears have chosen the red pill and with it the frightening and less lucrative world of reality. 

The bears know that today's central bankers are spinning a falsehood of recovery; they steadfastly refuse to be suckered in by the euphoria of a monetary boom; and they are convinced that they will therefore be spared the consequences of the inevitable crash. Everyone else, currently drugged by the virtual simulation of prosperity and its acolyte QE, will be destroyed. They can't pinpoint the date, they just say it's inevitable. Which is why we keep your money fully invested at all times. 

As your dutiful non-Fiduciary money manager, Trump has absolved me of all malfeasance, therefore I have chosen the path of virtual prosperity which is far more accretive to my annual bonus. Fortunately, today there is no stimulus program that our Disney markets will not consider to be successful. The good news is that mankind clearly has the ability to suspend rational judgment long and often. 2019 will mark the longest suspension of judgment in U.S. history. And we expect it to continue indefinitely. 

In 2019, the U.S. is set to record the weakest GDP of the entire cycle despite running an asinine 5% of GDP deficit. What would be considered a recession at any other time in U.S. history. Trump will be escalating the trade war throughout the year, in order to coerce the Fed to expend the last of their rate cut ammo, ahead of the impending recession. By June, this will be the longest cycle in U.S. history. However, the Fed will tell everyone this is the middle of the cycle, and everyone will believe them.

Throughout this year, insiders will be dumping stock at the fastest rate since the top in 2007. Meanwhile, Wall Street and Silicon Valley will dump a record number of unprofitable billion dollar market cap "unicorn" IPOs into this market, all of which will implode spectacularly.  

By August, Trump's mega deficit will be causing massive dislocations in the overnight funding markets. Therefore, the Fed will be forced to monetize his entire deficit. This monetary overdose will cause speculators to push stocks to cycle high over-valuation. The market will enter a Y2K-style end of cycle vertical melt-up. Led by the riskiest junk stocks in the market. By this time next year, there will be no safe havens in the stock market and no safety net beneath the economy. Which is why the general public will be told by their advisors that this is the beginning of a new bull market, hence they will move their capital back into the market in decade-high size.

With any luck, what would have been the end of the cycle in 2018 will be inflated to a much larger Tech bubble one year hence. Giving Wall Street one more chance to cash out at public expense. 

The overall theme of 2019.

The U.S. Super Tech bubble will distort all of the major indices, giving the illusion of a strong stock market and strong economy. The majority of U.S. sectors (Banks, Transports, Homebuilders, Autos, Retail, Energy) have already peaked in 2018. U.S. gamblers will be merely misallocating capital and making up stories as they go. In the longstanding tradition of Wall Street.

What economic "reflation" exists, will be solely a function of the oil futures market. And the largest IPO in human history, Saudi Aramco (December 11th, 2019):

Also by the end of the year, copious  disinformers will claim that "World" stocks are at an all time high, however the rest of the world left this gong show in disgust a long time ago.

This is now a uniquely American circle jerk:

Late in December 2019, Wall Street will break out their Magic 8 ball and extrapolate another year of projected gains for CNBS to publish along with the Farmer's Almanac and horoscopes for 2020. We expect the market should go into manic blowoff mode at around the same time as Trump is impeached for rampant corruption on a scale never before witnessed in U.S. history. Completing a full year round-trip of non-stop lying and mass lunacy. This last stage of delusion will complete the right shoulder of a two year head and shoulder top for the U.S. stock market ex-Tech.

The three major speculative bubbles will be in crytpo currencies (left shoulder), pot stocks (head, what else), and real drugs, the kind that kill you (right shoulder).

Algos will do everything possible to keep this Ponzi scheme pinned to all time highs for as long as possible, on minimal volume and minimal volatility. 

Which ensures that final rollover will be violent and spectacular as a year of fraud and record leverage is unwound overnight.

Regardless of dislocations we will keep your money deployed through year end bonus, since no one can predict the future. 

Happy New Year Dumbfucks.

Trapped In Trump Casino

One year ago, it appeared to be the end of the cycle, fearful gamblers were fleeing Trump Casino. Trump rescued the markets with his call to "BTFD" on Christmas Day. That ignited a stimulus-driven Super Tech bubble, unconfirmed by the rest of the market and the economy. One year later, manic greed is as stoked as fear was a year ago. Now that his true believers are locked in Trump Casino, the Tech bubble will explode...

Fake trade deals, presidential impeachment, record stimulus, non-functioning repo market, end-of-cycle melt-up rally, Central banks maxed out, cycle low global growth, extreme over-valuation, Y2K-level concentration. Extreme complacency. 

Recession ex-deficit
Bear market ex-Tech

What's not to like?

In hindsight, the record will show that the true bull market ended in 2018. 2019 was a very narrow Tech bubble fueled by record combined fiscal and monetary stimulus. The vast majority of stocks and sectors, including the rest of the world, peaked in 2018.

In other words, this is a stealth bear market

Jesse Felder noted yesterday that Rydex bullish asset positioning is near decade highs:

What we notice from the Rydex asset ratio is that not only is it approaching prior highs, but it's also three wave corrective in 2019:

Aside from Info Tech, most sectors are three wave corrective.

Including Biotech:

I bring up Biotech because the top performing stocks right now are Biotechs

Also among today's highs:

The other top performing stocks are semiconductors, some of which are at new all time highs, however most of which are also three wave corrective

In other words, social mood is heading for third wave down panic attack

Here we see the ISE call/put ratio:

Overlaying the Rydex ratio with the Hindenburg Omens, also confirms the head and shoulders pattern

The stealth bear market is about to come out of hiding with a vengeance

"Market timers are as extreme optimistic today as they were pessimistic one year ago at the bottom"



What we are witnessing is a one year round trip. Except wave 3 down will do in days what wave 2 took a year to accomplish. 

And that will be just the start of it...

Years ago, pundits predicted that as the Boomers retired, they would dump stocks and crash the market:

We're about to find out

Crash bets are at the highest level of 2019:

Rich Man's Panic Attack

History will say that this past decade did to capital what prior decades did to the middle class - lured it in and obliterated it...

Way back in 2003, I lost faith in Ponzi capitalism. The Fed had lowered interest rates to 1.5% and was encouraging people to use adjustable rate mortgages, zero down payments, and other gimmicks to increase leverage. Policy-makers were pulling forward consumption from the future to boost GDP today. Of course a lot of people, still reeling from the Dotcom bust and recession, took the Fed up on the offer. So began the housing bubble.

Cheap money is an aphrodisiac, it can be irresistible. Worse yet is when the neighbours are all borrowing and spending, which leads to fear of missing out. Why don't we have a home equity line of credit ATM? Unfortunately, central banks had no exit strategy for all of that borrowed money. Starting in 2004, Greenspan raised rates 17 times in a row, obliterating anyone who took them up on the offer. It wasn't just Greenspan of course who had recommended ARMs, realtors were using adjustable rate mortgages with "teaser rates" to get homeowners to splurge on a larger home under the belief that their incomes would outgrow the inevitable interest rate "reset". Of course that isn't what happened. 

So it was with the economy, so it is now with investing. The seduction of cheap money, the "fear of missing out", and no exit strategy provided by central banks from their mega bubble. Sound familiar? Central banks have succeeded in creating an aura of invincibility that has convinced the masses to believe in an indefinite asset bubble. And an endless economic expansion. Retirement "planners" have done their part in convincing people that if they don't buy into the mega bubble they will never retire. Low interest rates did the rest. Forced people to believe in delusion.

In other words, deflation emanating from 2008 and the de facto failure of globalization, collapsed the cost of capital and forced investors further into risk. We stopped pretending a long time ago that the rest of the world will ever have our standard of living. Now we're just worried whether WE will have our standard of living. 

Just as the middle class got obliterated in the last bubble, the vast majority of capital will get obliterated in this one. For much the same reason - a tsunami of deflationary poverty capital lowered real rates of return to nothing. The only return now is the zero sum Ponzi return from chasing asset bubbles. A game in which the vast majority always lose. Left holding the bag again at the end. Many right wing pundits blame central banks for sponsoring this delusion; however, central banks were just trying to keep the almighty capitalist system duct taped together after 2008. Because when the system itself explodes, people will begin to question whether or not the model really worked in the first place. At which point they will finally demand to rebalance the economy back towards the worker. If this society had a cumulative IQ of five, that would have already happened by now. But American mythology isn't going to die easy, it wants to explode. 

We've reached a point now wherein investor sentiment no longer correlates to the economy. Central banks are managing asset rotations, that are wholly detached from economic reality.

Case in point, the Fed ALWAYS steepens the yield curve at the end of the cycle. That doesn't mean the coast is clear:

  

Pavlovian response to cheap capital made it inevitable that recession would be widely viewed as a buying opportunity.

"When the Fed hits the gas, buy bank stocks with both hands"
"I've heard that before, but I can't remember when"

Step 1 see it coming.

Get that step wrong, go back to CNBC. 

Judgment Day

This is an historic moment. Trump has never been held accountable for anything in his entire life. And he is none too happy about it either...

He was never held accountable for his bankruptcies - his creditors always left him personally intact and re-financed his subsequent failed ventures. His serial adulteries were merely try and buy prior to his next marriage. He threw his lawyer Michael Cohen under the bus for the porn star payoffs. And his serial tax evasion, still not prosecuted. The FBI never directly proved that Trump is Putin's Manchurian Candidate, despite having indicted the rest of his campaign team. Which is why he so brazenly extorted the Ukrainian government, now leading to his impeachment. He built his entire 2016 campaign around a racist lie that President Obama was not really an American. Which won him the undying love of the KKK, alt-right Neo-Nazis, Evangelicals, and every combination thereof. Subsequently his plundering of the treasury and de-regulated corruption have won him the undying love and support of Wall Street. He is THEIR man. 

This level of greed and corruption has never before been imagined in U.S. history. The Founding Fathers never saw this coming. Which is why the system has no recourse. They never predicted an entire party would base its platform on ending democracy in order to permanently install corruption. Historians will draw a direct line from the disgraced Nixon, to the b-Actor Reagan, to the C student GW Bush who did his best implode the entire global financial system. To the endgame show host, Trump. A narcissistic black hole of humanity. Ever greater abuses of power. All a direct line result of moral collapse while worshipping the cult of self-interest. The inversion of morality from altruism to narcissism. Now culminating in a morally void president. And a movement that will stop at nothing to see him re-elected. Including destroying democracy itself.

Make no mistake, this is an historic moment. The crater left behind by this cataclysmic explosion will be massive to say the least.

Nevertheless, a necessary consequence arising from epic greed and corruption. The mythology of greed will be duly imploded.

Everyone will ultimately understand the downsides of taking self-interest to its furthest logical conclusion - a nihilistic society of consumption addicts willing to sacrifice the future for instant gratification today. Ending in totally "unforeseen" self-implosion. A society too self-absorbed to see it coming.

Now convinced that endless borrowing and printed money are the secrets to effortless wealth.

It's truly shocking how few people see this ending. Three years of insanity has desensitized everyone to risk. In a society steeped in corruption, the biggest liars have the most airtime and the most followers, which is why Sean Hannity and Faux News are number one in viewership with a substantial lead. In addition, there is unprecedented pre-election stimulus lubrication now that the Fed is monetizing Trump's deficit.

*2019 monetary stimulus (balance sheet expansion) is through Jan. 2020:

The 2020 Election Is Rigged. To Explode.

History will say that out-of-control greed wiped the Banana Republican party off the map. Imploded by the last Trump Casino, rigged with record stimulus gimmicks to buy the 2020 election. The End...

Over the past decade the entire world turned into Japan - an old age home run by and for demented geezers who can't accept that the past is over. Unwilling to make a paradigm shift away from relentless greed to something more civilized. Recycling failed stimulus gimmicks over and over again, each time expecting a different result. Culminating in a record asset bubble in which faith in the central bank Jedi Mind Trick for weak minded fools is now complete...

Any questions?

https://money.cnn.com/data/fear-and-greed/

“What was once extraordinary has become ordinary, not just in the United States but all over the world”

The real pioneer of QE, though, was the Bank of Japan, which has practiced expansionary monetary policy for decades, though to less clear results. The BOJ has exploded its holdings by some $4.5 trillion over the years, only to experience minimal growth that included the “lost decade” of the 1990s."

There is a belief right now within the Fed, the White House, Wall Street, and Zerohedge, that central banks can keep asset bubbles growing forever, or until the November 2020 election, whichever comes first.

ZH:Bank Of America's "melt-up" hypothesis:

"In other words, it appears that neither Trump, not Powell, will allow the S&P to dip even modestly before November [2020]. After that, however, all hell breaks loose."

Unfortunately for that asinine delusion, as both Japan AND China have discovered the hard way, central banks can't just continue inflating ever-larger bubbles. Not for lack of trying mind you.

No country has done more to prop up their stock market than Japan - including buying up half of the stock ETFs, and yet the Nikkei has gone nowhere for two years straight:

Recall China's Imagined Realities, circa 2015:

"China is set to record its weakest growth in GDP in 25 years. Yet it seems to have entered a bull market and may be where we deploy much more of our risk capital next year. That's because the recent exuberant run up in onshore Chinese equities seems to me to amply demonstrate the power of imagined realities."

The Chinese state is the largest shareholder in the Chinese financial system. That surely makes its ability to stave off a liquidity crisis pretty much limitless"

July 2015:

"All that’s left to happen in China’s stock market is for government leaders to admit they are powerless to stop a selloff."

When policy-makers actively encourage melt-up bubble chasing, I call it Shanghai Surprise. Which is the fate that now awaits U.S. bubble chasers, stoned on imagined realities. 

"Analysts at Bank of America Merrill Lynch, led by strategists Michael Hartnett, described the market as “primed for Q1 2020 risk asset melt-up,” with the Federal Reserve and the European Central Bank still providing ample support to portions of the market and economy that have shown some signs of softness."

"Melt-up will begin soon"

"It is important to note that the a so-called melt-up is considered by market pundits as the end phase of an asset bubble"

"I'm waiting for a greater fool to buy me out at a higher price"

“However, the percentage of S&P 1500 companies with positive forward EPS growth has deteriorated meaningfully since 2018”

“Further, the current level of this measure is worse than it was during the 2015–2016 manufacturing recession, a trend driven mainly by smaller-capitalization companies which are struggling with higher labor costs” 


"Don't worry, the Fed is providing ample support to portions of the market showing signs of softness"