NO LEADERSHIP

Current markets are a reflection of current politics - no leadership...

In my last post I predicted an epic clusterfuck out of this election. So far, it's been a clusterfuck. I'm not sure I would call it epic. There is something about a global superpower with 10x the population of Canada that has its entire election held up by a handful of ballots in the middle of nowhere that makes one think, maybe this is the problem:

Writing early Wednesday, clearly this a fluid situation, however these are my thoughts relative to the election and markets, "post-election" whatever that means. 

First off, the blue wave fantasy is over. In the middle of the night as odds of a blue wave collapsed, the Nasdaq went parabolic as the deflation trade came back on in size. I attribute most of that move to short-covering, however, it may continue for a while longer. After a momentous occasion such as this one there are massive amounts of option "gamma" to unwind meaning two-way volatility could linger for the remainder of the week. That said, per my last blog post, regardless of who wins at president, if the Republicans maintain the Senate then the outcome will be gridlock and more deflation.

As far as the presidential race, it's still too close to call. Trump has already signaled that he will attempt to delegitimize any votes that come in after the election. Meaning, the closest scenario we have to compare to is again the Y2K scenario between Bush and Gore. Meaning that notwithstanding some short-term options-induced whiplash, the overall trend is down.

The fact that yesterday was the second largest election day rally in history, behind November 2008, was apparently no cause for concern. Most people apparently don't know that the biggest one day rallies are always in bear markets.

Nevertheless, as I predicted, under the divided Congress scenario, the reflation trade went bidless. Just as the Nasdaq (futures) soared, the Dow (futures) and in particular small cap (futures) crashed.

The record net Treasury shorts got pole axed.

Even before the election, the commodity trade was already signaling that reflation was a fantasy, even under the best case blue wave scenario:

The key takeaway from a political standpoint whether or not Biden wins, is that Trump's presidency is effectively over. The Democrats strengthened their control over the House, which means that Pelosi will have no problem blocking McConnell and Trump on further criminality. 

Of course a Biden win would be fantastic, however, unlike year 2000, this time both sides are committed to the fighting for the presidency to the end. Which could drag this out for several weeks. In the meantime, the deflationary forces of a collapsed economy, non-existent stimulus, and soaring COVID will be raging in the background. Ultimately these forces of reality will be the deciding factor on impending economic policy. 

Meanwhile, from an optics standpoint, the collapse of the MAGA stock bubble on Trump's watch would be highly preferable to a collapse under Biden. I could just hear my MAGA in-laws telling me for the rest of time that Biden crashed the stock market, because it was all going so well otherwise. I can't argue with that kind of logic.

This week is also the FOMC decision (Thursday) and the jobs report Friday, so the potential for options manipulation for maximum pain is enormous. So far, however, the March primaries analog is still on track. We can expect a lot of "gamma" unwind to drive the casino today:

Finally, with respect to rioting and acrimony, we can fully expect that the pressure cooker combination of a contested election and a lack of stimulus is going to raise the temperature substantially between now and year-end. If Trump loses, he has already conditioned his base to believe it's because the election was rigged against him. If on the other hand, through all forms of criminality, Trump steals the election, the alt-left will likely pick up where their most recent anarchy left off.

Either way, we can expect rising acrimony into the end of the year.

With the election date passed, the wildcard is the Fed who may decide to increase quantitative easing over the next several weeks. Which may goose markets for a few days, but will do absolutely nothing for the economy. Monetary policy is no longer effective without its fiscal counterpart. Which means that gridlock has rendered the Fed inert. Ironically, the Fed has been pounding the table for more fiscal stimulus, yet it's only because they boosted stocks into bubble highs that more fiscal stimulus hasn't arrived already. The irony can't be overlooked. They are the ultimate sponsors of the virtual economy.

Other factors to consider are European implosion shown below and the impact on Chinese markets should Donny get re-elected (not shown).

In summary, notwithstanding a massive options unwind, markets are as leaderless as the White House at this juncture. The reflation trade is over and the Tech bubble will resume imploding once this final rotation ends.

As far as this Tech bubble for all ages, what we now know is that four years of Supply Side MAGA accelerated the deflationary economic decimation that ensued after 2008. Over more than a decade, each false dawn of reflation has sponsored a larger and faster rotation into the Virtual Economy. Then COVID came along at the end and put the entire insanity on steroids.

All that's left now is an imploding Tech bubble in a collapsed economy, amid mass delusion. 

Epic Clusterfuck: Base Case Scenario

All of the pundits are out war gaming the election scenarios and market outcomes, so I have to do my part. The biggest risk markets face is the fact that if Circus Donny doesn't get his way, he is going to have a biblical temper tantrum...

Soon we will know whether or not human history's largest pump and dump will continue. Or explode.

First off, we know that with less than two months to go Wall Street is leaning hard into the end of the year. They can't afford another SNAFU like 2016 when Trump won and the market exploded higher to everyone's surprise. Which is why CNBS all star bulltards such as Tommy Lee are saying that every election scenario, including a contested election will bring a happy ending for gamblers. This guy should have never quit his day job as drummer for Motley Crue. Nevertheless, he predicts a blue wave as his base case scenario, so let's start with that possibility.

He admits that under a blue wave scenario the Democrats are going to come out swinging against the mega cap Tech cartel. So take the largest sector off the table. He neglects to mention that Democrats are also going to monkey hammer Wall Street back to Dodd-Frank land. So take the second largest sector, Financials, off the table. Then they will go after the healthcare cartel, so take the third largest sector off the table. After that they will put taxes back to where they should have been this entire time. What the barely recognizable drummer from Motley Crue turned investment guru forgets is that before any of the aforementioned takes place, Big Donny is going to have a big hissy fit and pass nothing until inauguration. Leaving the cyclical trade also bidless.

That's the best case scenario.

The second scenario he posits is a Trump win. For some reason, Lee doesn't consider who wins the Senate. He fantasizes an even bigger rally than the blue wave, so we have to assume a red Senate, meaning the exact same gridlock we've enjoyed for months now. First off, what no one expects is that China will implode if Trump wins. The top performing stock market of 2020 will get monkey hammered one day ahead of the largest IPO in history. 

Meanwhile, the stimulus impasse that has continued non-stop since stimulus lapsed at the end of July will continue. McConnell has already said there will be no stimulus until 2021 at the earliest. A Trump win will only encourage him to continue his overarching goal to implode blue states. In that scenario, bond yields collapse, the muni bond market explodes, and the cyclical trade goes bidless. 

The scenario that Tom Lee omits is a Biden win with a red Senate under McConnell. In that scenario, stimulus impasse deepens and Trump throws a bitch fit until inauguration. Not pretty.

Last but not least is the wholesale clusterfuck that I expect. A contested election that drags on for weeks. Tom Lee expects markets to defy the Y2K analog and rally, albeit on a muted basis. One would have to be smoking crack to believe this guy, which is why he is the go to guy on CNBS.

If we look to one chart that sets the table for Tuesday, it would be this one of the almighty Dow.

The Shanghai Comp is standing by to get monkey hammered by an unhinged nut job and history's most leveraged IPO:

“This is huge: the largest IPO ever, priced at the top end and now this huge premium in the gray market,”

“It’s pretty extraordinary given the backdrop and it shows you how much Asia is decoupling from the United States.”

What could go wrong?

The virtual economy is at the precipice

In summary, we are about to find out whether or not four years of incessant bullshit is about to turn back into a pumpkin.

The Global Dow peaked in early 2018, almost three years ago, when the rest of the world decided they had seen enough greatness to know that it should never get re-elected.

"Seven Billion Morons Can't Be Wrong"

Yes they can...

Archaeologists will want to know how so many people bought into human history's biggest con job. We have a society unwilling to change, which is why this had to go down the hard way.

Future observers will look back and wonder how so many people bought into this delusion of a virtual economy. The central bank Jedi Mind Trick that has kept asset prices inflated while the real economy imploded in broad daylight. Now, all that's left of the virtual economy is a collapsing Tech bubble. Japanification has taught us that an aging population has an extreme preference for return on capital over return on labor. In today's situation, at the expense of return on labor. Which is why so many people are oblivious to the decimation of the real economy under COVID. 

Today's sheeple are on 100% auto-pilot. When people are historically illiterate and amnesiac it's clearly impossible for them to recognize the disintegration of society taking place on a day to day basis. Like frogs in boiling water they continually adjust to their new circumstance. A much more intelligent society would have revolted a long time ago. However, today's sheeple are of the well-cultivated belief that strip-mining the middle class while bailing out billionaires, is proof of the superiority of capitalism.

Some people tell me that I should not be angry about things beyond my control. These people believe that we should all just try to be fat and happy with whatever comes our way. However, history is made by people who know right from wrong, not left from right. By people who believe in absolute morality not relative decadence. What we are witnessing is the ubiquitous belief that if enough people are doing something wrong, then it must be right. Monkey see, monkey do.

I can't live like that. I want to face my grandchildren and say I was against this corruption the entire time. Revolutions begin with ideas. Beginning with the idea that exploiting people for zero sum gain is immoral. We live in a society that believes in caveat emptor, meaning buyer beware. A belief that has morphed into a con man's paradise. 

COVID 2020 has pulled back the curtains on this failed model. Not only do we have an aging society riddled with bad lifestyle choices, but we have an exorbitantly priced private healthcare model that is bankrupting people at a staggering rate. The combination of "consumer choice", corporate frankenfood, and widespread healthcare coverage gaps, is a death sentence for millions of people who will die young and bankrupt. For most of human history, eating whole foods was the only choice available. Today, eating whole foods is considered an elite extravagance. The people with the worst healthcare coverage are the ones forced to eat a toxic diet. Expendable guinea pigs to the corporate meat grinder. 

At some point along the line, the conservative movement jumped  the shark from doing what's right, to doing what is expedient. While adopting a delusional fantasy of returning to the fictional past. A movement that is now obsessed with pro-life at the expense of pro-living. A movement that has become far too comfortable with embracing human squalor as the price to pay for failed capitalism. 

They have Third World values. Which is good because that is their destiny.

Rapacious Criminality Rigged To Explode

When Trump heads to jail, Banana Republicans will forever be known for their corruption and criminality. With this election, they will now showcase their unlimited talent for skulduggery.

While markets explode...

If it's one thing we can expect from Trump supporters it's heinous criminality and corruption. In 2016, they used every KGB election-rigging trick in the book to barely win. Trump himself admitted that the election was rigged. But when he won, the rigging no longer mattered:

In 2018 they timed the tax cut for right before the election and Mnuchin rigged tax withholdings to give the illusion of a larger tax cut. What the middle class thought was a tax cut in their paycheck was actually just their next year's refund pulled forward:

January 2018:

"The agency is under pressure to take as little as possible so people will see big increases in their take-home pay ahead of this year’s midterm elections. But that would come at a cost: smaller or even nonexistent refunds next year, though millions rely on them to plug holes in their family budgets."

In 2019, when the Mueller report found no direct evidence of Trump's participation in the rampant election interference that took place in 2016, his people rejoiced. They totally ignored the fact that Russia was now running U.S. elections, and instead focused on Trump's exculpation in the process. Who cares about democracy as long as your own tinpot dictator gets elected? Feeling vindicated, Trump picked up the phone and called the Ukraine to demand they fabricate dirt on Joe Biden's son in exchange for U.S. military aid. For that admitted act of corruption he was impeached by the House of Representatives. 

The key risk in this election are the record mail in ballots that were made necessary by the COVID virus. All year since the pandemic began, Trump has been undermining the trust in mail-in ballots, even though he himself has used them in the past. People outside the United States can't believe the level of criminality taking place in broad daylight with the dumbfuck-in-chief:

August 2020:

"President Donald Trump frankly acknowledged Thursday that he’s starving the U.S. Postal Service of money in order to make it harder to process an expected surge of mail-in ballots, which he worries could cost him the election"

On election day this coming week, the opportunities for disruption are far greater, although they vary on a state by state basis. Each state has a different process for counting the mail-in ballots. Some states count them ahead of time. Other states count them only AFTER all of the in-person votes are counted. Since mail-in ballots skew Democratic, many fear that Trump will pre-emptively declare himself a winner before all of the mail-in ballots are counted. There are many other ways the GOP can interfere with this election, but we would have to be criminals to understand them all. What we know for certain is that there is no level they won't stoop to in order to steal this election.

"Trump has privately talked through this scenario in some detail in the last few weeks, describing plans to walk up to a podium on election night and declare he has won"

 Trump's team is preparing to falsely claim that mail-in ballots counted after Nov. 3 — a legitimate count expected to favor Democrats — are evidence of election fraud."

Many market pundits are using the 2000 year election between Bush and Gore as a template for how this could all play out. However, there are a few things they have neglected to mention. First off, Al Gore graciously conceded on December 12th even though he still had legal options to pursue. He felt that it was not in the best interest of the country to drag out the election. Had he known at the time the level of criminality that was about to ensue under GWB, Gore would have pursued the presidency to the ends of the earth. How many people in the Middle East and U.S. military are dead now because of that election? Nevertheless, we need have no fear that Trump will graciously concede until every possible obstruction of demoracy is exhausted. 

The other major difference these Y2K comparisons omit is the fact that the Tech bubble back in 2000 peaked in March and was well off the highs going into the election. Whereas the work-from-home Tech bubble peaked just two weeks ago.

Here we see the Y2K scenario:

This time around, as we see below, the market was pricing in a contested election in September. But then shorts got rinsed at wave '2' in October, which is why the contested scenario is not anywhere near priced in:

This past week, despite the largest decline since March, S&P futures net speculative reached a two year crack high ahead of the election. Since the RNC in August, futures positioning turned from net short to net long into the decline:

I predict the market will be hard down until Biden is confirmed. A record dislocation generated by record GOP criminality, bringing record COVID deaths and record financial and economic collapse. 

Every single day Banana Republicans will be reminded of the true cost of criminality. 

When the smoke clears, not one clown will be left smiling.

October 20th, 2016:

Slowly At First. Then Sumamabitch!!!

Picture the March market meltdown, but this time with the economy pre-imploded, no fiscal stimulus, and no Tech stock "safe havens". Because that's what's coming...

The best case scenario for today's capitalist stimulus whores, post election, is three months of lame duck inaction deja vu of 2000 and 2008. The worst case scenario is civil war.

As always, the burden of proof is on us skeptics of denial. 

History will say that after 2008 the world went full Japanification - the overuse and abuse of monetary policy to offset extreme economic deflation, in the absence of real economic growth. The increasing use of debt to paper over the deflationary impacts of too much debt. Because who wouldn't believe we could borrow our way out of a debt crisis? It was all running out of gas four years ago in 2016 when Trump did what every Ponzi economist had been recommending for a long time - he jacked up the fiscal stimulus to level '11'. Reflation soared for a while in 2017, but then the sugar high wore off and was replaced by the higher interest rates Trump himself had predicted, but before he became president. Net of the one time tax repatriation gimmick in 2018, Trump's tax cut had a negative economic multiplier due to the higher interest rates. In the fourth quarter of 2018 the economy lapsed back into deflation and the market crashed. Then the Fed pivoted in early 2019 back to easing mode. Once again, reflation expectations soared and then crashed towards the end of the year. Since 2008, with each iteration of stimulus driven "reflation", the Tech bubble grew in magnitude as the real economy disintegrated. Each rotation saw a larger migration of market cap towards the "virtual economy". For a few of us realists this term "virtual economy" is merely a clever play on words. For most people today, it's the core of their portfolios.

Then of course COVID came along and accelerated all of the trends that had been growing since 2008. After the March COVID crash, the virtual economy trade sky-rocketed. For a while, the reflation trade played catch-up but then it imploded in June when the stimulus ran dry. At that point the virtual economy trade went into melt-up mode into September. Then it crashed. Shorts moved in for the kill as Nasdaq futures short interest sky-rocketed. Then the blue wave fantasy took hold and the fake reflation trade was revived one last time. Every day for almost a month Pelosi and Mnuchin told us a stimulus deal was imminent. It was never going to happen. The work from home trade made one last blow-off peak in mid-October amid record call option speculation.

All of which means that central bank managed social mood is finally rolling over hard in front of the election.

The worst possible time for King Donny:

Bears got rinsed at the bottom in September, and bulls got rinsed at the top in October:

All of the above points to the fact that after over a decade of rotation, the virtual economy and the real economy trades are finally on the exact same footing: Bidless.

Visa has been a key beneficiary of the COVID cashless virtual economy. And yet that stock exploded back down to March levels this week, due to its exposure to the travel sector:

This past week, stocks had their worst week since March, as ALL of the MAGA Tech stocks reported earnings. Despite exceeding Wall Street's massaged "expectations", they all tanked, except Google which gapped up to the highs of the day and sold off all day on massive volume.

We have now seen peak Tech:

As far as the continuing stimulus impasse now several months old, Nouriel Roubini does a great job summarizing all of the dirty tricks Republicans will employ next week to subvert democracy. None of which will be "market friendly". Unlike Al Gore in 2000, we can be assured that Trump will not graciously concede for the good of the nation. He will fight on tooth and nail until he is either in the White House or jail.

As far as the pandemic goes, we are now entering the parabolic phase of the virus. Cases are expected to peak in November and the death rate will peak in December:

"The top five records in daily cases have all been reported within the last eight days, according to Hopkins data"

In summary, we are entering a period that will feature extreme political dysfunction/stimulus impasse, record pandemic impact, and an exploding Tech bubble. All while the economy implodes without stimulus.

Right now, there is no bullish case. There is only record amounts of bullshit. Hanging by a thread of well-cultivated delusion. 

Buckle up.

Soon everyone who didn't see this coming is going to be pissed off. Meaning everyone we know.

Gambling Through Civil War

Having been burned by being too cautious in 2016, gamblers are front-running civil war to buy stocks...

What could go wrong?

The three largest power shifts during the past twenty years took place in 2000, 2008, and of course 2016. We all know what happened in 2016. Circus Donny got elected with assistance from the Russians (No collusion ;-), the FBI, Facebook, voter suppression, gerrymandering, Faux News, and human history's biggest Idiocracy. 

Good times. 

Now let's war game the major scenarios for this election. First off, unlike past elections, we can presume that all of the gridlock scenarios shown above will be viewed as highly deflationary, as they will reduce the likelihood of massive fiscal stimulus. In that case, reflation expectations will implode, as will the RECORD Treasury shorts betting on reflation. With bond yields collapsing, the $USDJPY carry trade will go RISK OFF globally. At that point four years of MAGA will turn back into a pumpkin.

Four years of deflationary supply side criminality for the rich. At a cost of $6 trillion combined monetary and fiscal profligacy in 2020 alone. 

Will explode. 

Next, let's consider the contested election scenario with Trump winning. For that we need look no further than the year 2000 when George W. Bush stole the election from Al Gore. Gore won the popular vote, but the entire election came down to a handful of contested votes in Florida. By sheer coincidence, GWB's brother was the governor of Florida at the time. No collusion! 

Before we get to the casino, imagine the world today if Gore had won that election instead of Bush: no Iraq blunder, no Middle East implosion, no de-regulated Wall Street, no tax cut for the rich, no mass outsourcing to China, no global financial crisis, and a green revolution to repair climate change. 

If this (below) hadn't happened, Trump would have been avoided as well:

Where it gets more interesting, is that the Y2K contested election also came during an imploding Tech bubble. If Trump wins next week we can be assured that deja vu of 2000, it will come down to a handful of contested votes and a re-count process that drags on for days if not weeks. 

Here we see the Y2K chart:

Stocks fell almost 25% after the election, making their lows in March of 2001:

Lastly, let's consider what is actually fully priced into markets, which is the blue wave scenario. It just so happens that 2008 was a blue wave that took place during an economic meltdown as well:

"But in the end, as far as climate change, it didn't matter who won the election, because Mother Nature imploded the entire oil sector with a virus that forced video conferencing from home. Tech billionaires made hundreds of billions under Trump, while fossil fuel executives went bankrupt"

"Exxon is confronting one of its biggest crises since Saudi Arabia began nationalizing its oilfields in the 1970s. If the company takes the full $30 billion impairment, it will be the industry’s worst in more than a decade, according to Bloomberg data."

In summary, we are in a big, fat, dumbfuck bubble.

Which is why no one sees it coming.

September, 2016:

Party Like It's 1929

No, they don't see it coming. They have a perfect track record to maintain, and easy money to count on...

Watching Fast Money tonight, one of the guests was Tony Dwyer of Cannacord Genuity. He enumerated all of the unprecedented risks - the raging pandemic, existential election, stimulus impasse, geopolitical rancor, but he forgot a few things: the imploded economy, record jobless claims, record Federal debt explosion, technology bubble, global deflation, looming credit crisis, and the bear market in the average stock. Which is why he's still bullish. Because to offset all of those ludicrous risks, he believes the Fed can support the market through it all. Free money. That's it. The Fed versus $350 trillion in misallocated capital in a 1930s economy. He got no pushback from the Fast Money traders.

Over on Marketwatch, behind their new paywall which I have yet to sponsor, this is one of the top headlines:

First off, this is the type of headline for some reason I would never publish. It's called tempting fate to destroy all future credibility. Secondly, it's patently not true, as indicated by current level of bullish active manager positioning (NAAIM), the Barron's October Big Money poll, record call option buying, Rydex bullish asset positioning, the Ameritrade Investor positioning index, and then there is the CBOE Skew index itself which was created specifically to measure crash risk sentiment:

CBOE SKEW:

"Prior to the stock market crash of October 1987, investors were not sensitive to tail risk and the curve of S&P 500 implied volatilities had the shape of a smile. Post-crash, investors started to hedge their exposure to tail risk by purchasing S&P 500 puts with low strike prices. This shift in demand bid up the prices of these puts relative to their value under a normal distribution. Black Scholes implied volatilities calculated from their prices therefore increased and transformed the implied volatility smile to a skew. When investors become more concerned about the potential for a market decline, SKEW increases and the implied volatility curve tends to steepen"

In other words, when skew is high, it means that gamblers are actually positioned for a crash. What they say in a sentiment poll, is another matter.

The current skew is not high. The highest level was two years ago in October 2018 right before the mid-term election, when the market tanked -20%.

Apparently, risks have receded in the meantime.

On the side of not seeing it coming, is history's largest IPO and Alibaba fintech spinoff "Ant Group", now scheduled for right after the election:

What could go wrong?

The locus of thermonuclear detonation will be the well conditioned rampant denial over the economy. No matter how bad the economy becomes, Republicans never stop believing that reflation is right around the corner. After all, their portfolio balances reflated months ago.

This past week we got news that net bearish Treasury bond shorts reached a new record. These people have been wrong for two years straight, as deflation has been continuous since the tax cut. Now in the depths of an accelerating pandemic, they've decided to go ALL IN on a position that exploded after the election in 2008.

Suicidal.

Sadly, the Fed can't bail out everyone. 

And when the riots start they won't. 

One more reason to buy stocks:

Civil war

“Maybe I’m just looking at the news too much, but there are hints of civil war depending on who wins,” Ms. Johnson said