Goldilocks And No Bears

We have no economy, no stimulus, no vaccine, and no president. So instead we get bedtime stories with happy endings, in the Wall Street tradition...

The great rotation to value continued for the second day today. How many times just in the past year alone have we heard this story? Recall not even a month ago, the entire "blue wave" fantasy was going to bring endless reflation. Then, that crashed ahead of the election, as the odds of a contested election increased. Last week, we got the Goldilocks fairytale via Zerohedge:

Friday, Nov. 6th

ZH: Gridlock = Goldilocks

"So what about the reflation rotation - is that dead? Well, according to BofA, yes"

That prediction had a shelf life of hours. Not to be outdone, Barron's had an article over the weekend saying that Tech stocks are the new safe havens. That trade has been getting monkey hammered this week. 

Now, of course all of the dumbfucks have raced BACK to the other side of the boat. Embracing the vaccine reflation trade and dumping Tech deflation trades en masse.

Fast Money started out with a segment tonight on where bond yields are headed. The unanimous consensus was higher. Meaning buy banks, industrials, hotels, airlines etc. Every time Tech pulls back, the value rotation hypothesis comes back in fashion. Go figure.

CNBC: Prepare for Bond Yield Breakout

Anyone who trusts people who can invert their entire bedtime story in a matter of hours deserves their fate.

So, what's the answer, deflation trades or reflation trades? The answer is NEITHER. Cash is king. 

First, I will revisit the reflation trade which I touched upon yesterday. Here we see the thirty year yield with Treasury bond shorts (lower pane). As we noted last week this is the most crowded trade in human history. The net speculative as of the most recent CFTC data is from one week ago. However, anecdotally one could make the case that this is still a crowded trade. 

All it would take is one state-wide lockdown and this trade will explode, meaning bond yields will fall.

Backing up this hypothesis is the fact that the equity option call/put ratio is back at the all time high from June, which is when the entire reflation trade spiked and then exploded:

Of course, when the reflation trade exploded back in June, there was a MASSIVE rotation back to Tech stocks. Because those are safe havens, remember? Why can't that happen this time around?

After June, Tech continued climbing and then had a blowoff top back in September. Since that time, the sector has been trending down. Each rotation to "reflation", has led to a lower high in Tech. 

We learned today that Millennials are now doubling down on work from home stocks as they take profit in cyclicals.

Which explains why there has been no panic. Yet.

All of which leaves Utilities holding up the Casino:

Gamble at your own risk.

Winter 2008 Deja Vu

After more than a decade of monetary Japanification topped off with four years of Circus Donny, one thing we've learned with certainty is that an aging society can no longer accept the truth...

The World's handling of this pandemic has been all wrong from the start. Trump's handling of it was the worst in the world. I seldom agree with Bill Gates, but he has said from the start that testing was key to keeping the economy open. He was spot on. However, Trump in his infinite denialism put all of his eggs in the vaccine basket. And many people believed it would be a silver bullet panacea. Even now, with Pfizer's most recent 90% efficacy indication, it won't prevent the winter from hell. What it will do however, is allow people to let their guard down and assume the pandemic is ending. Which will increase the spread further.

As Gates has said, if we had focused our efforts on instant testing, most of the economy would be back open by now. However, denialists don't like testing because it "causes" the case load to skyrocket. Which looks bad for Trump. Denialism strikes again. 

Which gets us to the casino and the 2008 paradigm.

People forget that there were many false dawns in that fateful Autumn leading into winter. The largest rallies are always in bear markets, which caused a lot of people to assume the worst was over.

The last false dawn was a fake reflation rally that put a massive bid under cyclicals and in particular small cap value stocks which had been beaten down the most. Nevertheless, like all things Wall Street, it was an ephemeral end of cycle blow-off top. Bought and believed by the majority, solely due to the misallocation of capital and short-covering. 

Last week starting on election eve, Wall Street put on a massive Tech trade and shorted the Russell 2000 under the auspice of the Goldilocks gridlock trade. 

Now all we are seeing is that trade get monkey hammered due to one vaccine headline. In Disney markets consensus trades are lethal.

Zooming in to this year's view, Regional banks are leading this last rally amid a familiar spike in bond yields. June was the mid-point of the rally and this is the end:

Due to mass delusion, most people today are of the brainwashed belief that this economy is stronger than the one in 2008:

"Joe Biden is returning to the White House to lead the United States in the midst of an economic crisis after beating President Donald Trump in Tuesday’s election, a turn of events likely to conjure an eerie sense of deja vu for the Democratic former vice president."

Unlike in 2008, when the country elected Democrat Barack Obama and his running mate Biden as the global economy teetered from the sub-prime mortgage crisis and collapse of the Lehman Brothers investment bank, the worst of the current economic downturn may have passed already, economists and analysts say."

Got that? The worst is over. 

There is literally no basis to compare today's imploded economy to the one in 2008. Today, there are millions more unemployed than at the peak in 2009. Today, combined fiscal and monetary stimulus is DOUBLE what it was in 2008.

Here we see the employment/population ratio is at the lowest level in four decades. Large companies are crushing small business, and society is ignoring the consequences.

Oil demand is a good proxy for economic activity. This economy just lost three decades of oil demand. 

Emerging Markets peaked almost three years ago near the beginning of the MAGA fantasy. Now they are soaring back on the belief that the worst is over.

When in reality, the worst hasn't even started yet.

EMs are a good proxy for global social mood, which is three wave corrective:

In summary, we have a v-shaped recovery in delusion. Wall Street is like every other American Dream factory - Disneyland, Hollywood, Faux News - it's 100% fraudulent. And yet people accept the lies over and over again.

Right now, we are watching the final capitulation to fantasy. A movie some of us remember, and most want to forget.

 

Front-Running Collapse

Four years ago, the Trump MAGA bubble got tacked onto the "big, fat, ugly" Obama bubble, creating the longest bull market in history, compliments of record stimulus. There were only three crashes along the way (-10%, -20%, -35%). Now Wall Street would have us believe, the Biden rally will extend the party. In Disney markets, people will believe anything...

Writing on Sunday evening and gauging the early futures, the Biden rally has officially started. Last week's record no leadership rally finally has a geezer to call its own. The weekend Biden win was of course interpreted bullishly by the headline scanning algos. As I wrote last week, Wall Street is busy re-arranging all of their forecasts around the now "bullish" gridlock scenario. Historically, gridlock has been very good for markets, because it meant no major changes in policy. In this case a major sigh of relief that there will be no Marxist regime change. All good. There's only one problem, we've round tripped back to the February crack high of skyrocketing Tech stocks and skyrocketing COVID. This time with exhausted fiscal stimulus. 

Basically what we have is manic rotation to a Super Tech bubble while the economic sectors go dark again. How long until we start to see either lockdowns again, or hospitals turning away patients? Either scenario won't be bullish for sentiment. Meanwhile, the political atmosphere has turned from bad to hellacious. So extrapolating past scenarios into the future is a fool's errand. Which is why Wall Street is all over it.

The problem with the nascent "Biden rally" is that gamblers were already lubricated going into the election. Here we see via Rydex positioning, the difference between 2016 and now:

Meanwhile, the call/put ratio shows that speculators are back with a vengeance.

Barron's was out this weekend saying that Tech stocks are the new safe havens. Nowadays, after over a decade of non-stop stimulus people are questioning whether or not bubbles even exist. Especially the ones that are broadly owned. In my prior post I said that total stimulus had reached a ludicrous 30% of GDP. I was wrong. I went back and did an historical analysis and found that combined fiscal and monetary stimulus has now reached 47% of GDP in 2020. 32% of that is growth in the national debt year over year, and 15% is monetary expansion. All figures are from the Fred database. 

If every other generation had been as profligate as this one, there would have been no recessions and the Great Depression would have been a minor event. 

The dollar would have become worthless decades ago.

But there would have been one hell of a big party before it all exploded. Like the one taking place right now. 

Amid all this epic super bubble in profligacy and RISK ON party, Wall Street has decided that the most toxic political environment in U.S history, is good for stocks. The average household may well implode, small business will be decimated, but "stocks" will go higher.

It appears they have all settled upon the Goldilocks and The Three Bears bedtime story for euthanized gamblers. Meaning not too hot and not too cold. Everything is just right.

One of these storytellers is the famed "quant guru" Marko Kolanovic from JP Morgan. It was exactly one year ago, that he made the worst market call in world history, when he said that the value stock rotation was a "once in a decade" opportunity. Of course no one could foresee COVID, but he happened to pick the part of the market that performed the worst during the crisis. Then, leading into the election, he predicted Trump would win. Another bad prediction from the "quant guru" of bullshit.

Now, he's onboard with the standard Goldilocks delusion, that Trump refusing to leave the White House and Pelosi and McConnell at opposite ends of the stimulus spectrum, is "the best of both worlds". JP Morgan's equity team is now predicting a 54% rally post-election, based on what they call under-weight positioning by investors:

Got that? There is NEVER a reason to be anything but massively over-allocated to stocks. Note that they never mentioned record valuations and record risks, they only mentioned positioning and central bank dopium. Meaning ignore all of the risks that abided the last time these exact same morons were CRITICALLY wrong in February, add in Constitutional crisis, pre-imploded economy, and exhausted stimulus, and roll the dice again.

Notwithstanding Wall Street's usual bonus time Kool-Aid serving party, the question on the table is how long can the Biden rally now last? Months, weeks, days, or hours?

Given the epic con job underway now, I will go with hours to a few days at the outside. Followed by epic uncontrolled meltdown.

Skynet can no longer handle a global RISK OFF event, given the amount of leverage in a handful of overowned stocks. 

Back in February recall that despite the -35% decline, there was a net rotation into Tech stocks that prevented wholesale meltdown.

Don't expect that to happen again. Gamblers are well conditioned to front-run collapse. 

The MAGA Kingdom Is Rigged To Explode

Archaeologists will say the MAGA Kingdom was the largest bubble in human history. Inflated by record fiscal and monetary irresponsibility at 30% of GDP, and abetted by four years of incessant bullshit...

Now Trump's signature petulance will pop his epic bubble:

Coming at the very end of the American empire, the MAGA movement was a last ditch attempt to restore greatness by rolling back decades of self-inflicted implosion by doubling down on blind hubris. To this very day, the seeds of self-destruction remain fully evident in the libertarian movement which "won" the ideological economic war in 1980 with the free trade movement: 

1981: Ron Paul via Ludwig Von Mises Institute

"Today the policy of protectionism is again gaining favor in Congress, and in other countries. But it must be fought with all our strength"

Indeed it was. 

From that point forward, the U.S. went from being the largest creditor nation to becoming the world's largest debtor nation, within one Reaganite decade. Any attempt to roll back free trade and re-impose the protections that had created U.S. industry in the first place, would be deemed "socialist". For most of history, the U.S. had retained strong trade protections to fend off foreign dumping. Which used to be considered a major trade violation. All of America's Asian trading partners from Japan, to China, to the Asian Tigers, are mercantilist. Which means they don't believe in free trade.

Otherwise known as "Beggar thy neighbour" policy:

Mercantilism:

Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce a possible current account deficit or reach a current account surplus, and it includes measures aimed at accumulating monetary reserves by a positive balance of trade, especially of finished goods

Along with the squandered U.S. advantage in manufacturing, and the concomitant loss of intellectual property, outsourcing by definition ballooned the trade deficit and hence the national debt. What a country does not create for itself, must be borrowed from its suppliers. U.S. economists have long turned a blind eye to these ever-growing liabilities that now have doomed the U.S. dollar. The economics profession will very soon lose all credibility. They will be written off as money printing imbeciles. Engineers created U.S. industry, then marketers and financiers gave it all away, because economists knew the cost of everything and the value of nothing. 

To this day, Ron Paul and the NeoCon founders of this entire downfall remain worshipped by libertarian ideologues. Never once questioned nor held accountable. 

Enter Trump, a serial casino bankrupter and reality TV game show host, who was called in to reverse almost four decades of failed trade policy. To close the barn door after the horses are out. After all, what the wise man does at the beginning the fool does at the end; so they decided to begin a trade war with their largest supplier. A country that was now embedded at the heart of the entire U.S. supply chain. 

What it all points to is a group of people who had no clue they were voting for their own self-destruction all along. And when it came time to right the wrongs of the past, they opposed any attempt to rebalance the equation, as "socialist". 

History will say they were the dumbest people in U.S. history.

Nevertheless, being a proud idiot is not a crime. Everyone has a right to their own opinion, but no nuclear superpower has the inherent right to hold the entire world hostage to the vagaries of a feckless dictator. All of the fascist dictators in history have come to an ignominious ending. Trump is no exception. It took every ounce of America's once great democracy to put a stop to his reign of criminality. He left the vaunted American system in shambles. A global laughingstock. The end result of a demagogue running roughshod over the rule of law, encouraged by a venal mob.

The factors and grievances that got Trump elected however are not going to go away. He gave voice to those disenfranchised by Globalization. Had Trump tweaked his schtick only slightly to wrench more stimulus from McConnell or showed a small amount of empathy for those stricken by the Corona plague, he surely would have been easily re-elected. If Trump showed even one hint of compassion or humility he could have had a landslide victory. 

Pollsters appear entirely incapable of locating Nixon's silent majority minority:

"The silent majority minority is an unspecified large group of people in a country or group who do not express their opinions publicly"

Nixon, along with many others, saw this group of Middle Americans as being overshadowed in the media by the more vocal minority"

Trump is now the voice of the silent minority. Which happens to be almost half the country. People who have tremendous grievances against the status quo and yet to this day constantly vote for policies that make their own economic lot in life worse. How sorry can you feel for these people, when in every way possible, they are their own worst enemy? Voting against public healthcare during a pandemic amid mass layoffs and companies dropping healthcare coverage by the millions. Trump supporters are the least healthy people in the country:

"Because most U.S. workers rely on their employer or a family member's employer for health insurance, the shock of the coronavirus has cost millions of Americans their jobs and their access to health care in the midst of a public health catastrophe,"

In the final analysis, Trump is going to get millions of his own true believers killed. Be that through direct COVID infection, or through economic decimation. He was an opportunistic con man dispensing Kool-Aid at a lethal time. Trump is the Jim Jones of presidents.

And what about China? What will they gain from this Trumptopian downfall? This past week, EVERYTHING China went parabolic, as fund managers reluctant to gain exposure to China finally went ALL IN.

However, China resembles Japan circa thirty years ago. Back then Japan had won the Pyrrhic victory of the mercantilist exports, but that was their pinnacle, after that peak their model imploded. It was not based upon sustainable growth.

Ironically, this week we were told that Japanese stocks reached a 29 year high. Below we see what happens to countries that cling to the past and never face reality:

 

Running With The Bullshit

Over the past 12 years stoned gamblers became addicted to monetary heroin. Over that time, the dumbest money enjoyed the biggest (unrealized) gains, until there was no smart money left to find. COVID ended that paradigm; unfortunately there's no one left to get the memo. Now there is universal belief that printed money is the secret to effortless wealth. Because everyone knows that 7 billion morons can't be wrong...

 

What was astonishing on election eve via the futures market was the MASSIVE rotation to the monetary heroin (QE) trade and the simultaneous dumping of the reflation trade, as the blue wave got priced out. The Nasdaq 100 and the Russell 2000 were polar opposites of green and red. It was the exact reverse of four years ago when Trump got elected and the reflation bid was put on in size. 

Below we see via the Nasdaq futures that the election rally came at the mid-point of the three wave rally:

This week, the Nasdaq 100 returned to the same level from two weeks ago at the blue wave high.

Year to date, the Nasdaq 100 has seen the largest inflows in two decades:

What happened that night of course was the story of the week, and the year:

"A strange thing happened on the way to the biggest post-election surge in modern stock-market history. On Wednesday, while the S&P 500 was tacking on $600 billion of fresh value, most of its members fell.

How the index still managed to gain so much altitude is the story of the week and of the year: a reigning oligarchy of market behemoths, soaring past everything else"

...it was the first time in at least six decades that the S&P 500 jumped more than 2% as more volume flowed into declining securities than advancing ones on the New York Stock Exchange"

Here on a weekly chart we see that the virtual economy was down for the two weeks prior to the election. And then enjoyed the largest up volume EVER this past week. And yet the index (ETF) never made a new high:

Rotation into an imploding Tech bubble is only part of the bull trap that took place this week.

Prior to the election, along with every other pundit, I posited the various election scenarios. Going in, the blue wave was priced in. However, I gave this current gridlock SNAFU a probability of "high". I said the outcome would be deflationary and rioting would be pending the end of stimulus. 

Nevertheless, Wall Street being what it is - an asset allocation machine with a bedtime story to follow, has rotated to the QE asset reflation narrative in size. Zerohedge does a great job of explaining the new narrative, while questioning absolutely none of it. How could something that worked so well for over a decade, fail now? Won't the stock market diverge from the economy forever? 

ZH: Gridlock Means Goldilocks

When the usual people go under the bus, that's "Goldilocks" in Wall Street parlance. Because the only people who get bailed out in this economy are the criminals who collapse the financial system. 

Gold exhibits everything that is wrong with the policy of monetary euthanasia - we have an imploding economy and ubiquitous belief in free money. Gold ETFs have seen record inflows during 2020. The abiding belief is that as long as the monetary spigots are open, gold can't go down. Here we see that from 2009 to August 2011 gold rose along with Treasury reflation expectations. However, when Treasury yields rolled over, gold followed. The QE in 2013 had no effect on reversing gold's downtrend. Fast forward to now and we see that gold gamblers have been front-running reflation for two years now, going back to October 2018.

It's a very crowded asset allocation rally aka. a greater fool's rally. 

It should come as no surprise that gold peaked when the stimulus ended in July. Since that time, amid record inflows it has trended lower, until this week:

Meanwhile we already got news that the stimulus impasse we've enjoyed since the end of July is already set to continue:

Those who are wed to their trades and to groupthink narratives will never make it through this impending gauntlet. First they will hide out in mega bubbles that are perceived safe havens, then when those implode they will rotate to cash just when the real money printing gets started. Applying the standard lessons of the past decade will be lethal.

This generation is way overdue a good hard lesson in basic economics. The cost of this deflationary oppression has been falling on the working class every day since 2008, while the Casino class has been enjoying non-stop asset reflation. There is only one way to fix the problem.

Return to the origin, sans bailout.

Base case scenario.

Who Won This Election?

It's time to send in the UN observers and assess whether or not this is still a functioning democracy, or a full fledged banana republic. The going in assumption is the latter...

In this post we will assess via the markets who really won the election while we wait to find out which geezer will preside. Given that we've already record rallied on no one, we could see a major sell the news reaction on someone. If this election drags on, we should ask Zimbabwe for some pointers on how to run an election. I think they could be helpful. When Las Vegas is holding up your election you know you have a problem. Those people aren't even awake during the day much less counting ballots.

Four days of robo rally and via the new highs list we are starting to see who "won" the election.

There were 254 stocks that made new 52 week highs on the various exchanges today. Which is quite sizable. And there were 233 ETFs concentrated in a handful of sectors: Chinese stocks, Emerging Markets, clean energy, internet/work from home, Bitcoins, online retail, small cap growth, semiconductors, and momentum tech.

Hindsight being 2020 (I know), these are all sectors that have benefited in some way from the COVID collapse. Despite the fact that the virus originated in China, their total control over society meant that they recovered far more quickly than the rest of the world. As the year wore on, the rotation to these winners seen below grew more and more manic. This election was the last phase of the blowoff top:

Markets have taken the liberty of deciding that Biden will win and the trade war is over. Which means that China is the big winner in 2020. Multiple ETFs across a multitude of sectors reached new highs today. This is the broad-based index:

Yesterday I said that the alternative energy rally was over due to the fact that there was no blue wave. However, yesterday's selloff was followed by a new parabolic blowoff top today. Note that the top performing ETF of the year, Solar (TAN), the one I showed yesterday, did not make a new high today.

This broad-based clean energy ETF was the top performer today:

Semiconductors went parabolic today led by Qualcomm. Up 200% since the March lows.

Here is the 15 year chart. 

Any questions?

No sector has benefited more from COVID economic decimation than online retail:

No blue wave means that social media companies will not be held accountable for destroying society. They are now free to finish the job.

Note the similarity to September. It's called hard re-entry from outer orbit:

New daily record COVID cases, 116,000, compliments of the Trump superspreader 2020 tour

Momentum Tech, new parabolic high

New 52 week high for BitCasino:

And last but not least, now that Sith Lord McConnell is once again leading the Roman Senate, new highs for Wall Street:

Any questions?

Now For The Real Crash

Conditions are eerily similar to March - escalating pandemic and oblivious gamblers. Except this time, there's no fiscal safety net...

The greatest risk markets face is Trump having an infantile hissy fit if he doesn't win re-election. Trump's good Christians are soon going to realize that they are following their avatar of hate straight down the toilet of history.

For 12 years those of us skeptics of Ponzinomics and Japanification have said that these stimulus-addicted policies would end abruptly and badly for the majority of people. During that time, more and more people went under the bus to feed quarterly profit, but there was never a dramatic explosion as expected. Which clearly proved us skeptics "wrong", as the euthanized zombies never panicked, they merely adapted to their new level of squalor. Then they elected Trump to fix it all with more tax cuts for the ultra wealthy. But the main thing that kept this gong show from imploding was the escalating abundance of McJobs. So abundant that some people now have two or three McJobs where they used to have one real job. As predicted by Future Shock: 

"People of post-industrial society change their profession and their workplace often. People have to change professions because professions quickly become outdated. People of post-industrial society thus have many careers in a lifetime. The knowledge of an engineer becomes outdated in ten years. People look more and more for temporary jobs."

California just held a referendum on whether or not gig workers should be regulated as employees, which passed in favor of Uber and Lyft. It was seen as a vindication for the virtual economy and "freedom" to work when and how one chooses. These gig workers have zero degrees of freedom. They live on a subsistence basis. Taking away that gig work would be a catastrophe. On the other hand, putting people in a no-win position of being forced to work as near slaves is not a vindication of the new business model. It's merely proof that the U.S. is becoming a Third World country.

Be that as it may, the ability of this CappuccinoConomy to create new junk jobs ended last March with the COVID onslaught. Six weeks of COVID obliterated TWENTY years of McJob creation. Yes, you read that right. At the nadir last Spring, the number of U.S. jobs was back at Y2K levels. The same thing happened to George Bush, his decade of transient jobs vanished in a matter of months during the Global Financial Crisis.

All of which means that, millions of people are now fully dependent upon ongoing stimulus and a functioning political system. However, we are now entering the lame duck session of Congress and possibly Trump's presidency, which will more than likely see the expiration of all stimulus. 

"America’s economy faces severe new strains in the two months between Tuesday’s election and January...millions of Americans are at risk of having their power and water shut off with unpaid utility bills coming due, while protections for renters, student borrowers and jobless Americans will expire by the end of the year absent federal action."

“All signs suggest that we’re in for the worst of this at the same time the situation in Washington is also becoming its worst and most horrible,” said Michael Strain, economic expert at the American Enterprise Institute"

Several million people will begin to exhaust their base unemployment benefits starting in the middle of December. Absent action, a separate federal unemployment program for as many as 10 million gig workers and others not eligible for traditional unemployment insurance will expire Dec. 31."

Among the biggest mysteries hovering over this uncertainty is what Trump and his aides will do after Election Day, particularly if he loses to Democratic nominee Joe Biden"

It's not a mystery at all. If he doesn't win, Trump is going to throw a big hissy fit and declare this election a coup d'etat. He is not going to sign any stimulus bills nor is he going to compromise with Democrats:

“I don’t think he’s got much interest in stimulus,” said Casey Mulligan, who served as chief economist for the White House Council of Economic Advisers until last year. “He doesn’t like to give anything for free, and I don’t think he’s going to start now. That’s not his style.”

None of this infantile behavior is priced in to Disney markets right now. We are currently having the biggest post-election rally in history compliments of a leaderless White House. So far, Noman is the greatest president in Dow Jones history. Next time, try Woman.

All of which sets up a repeat of last March, but this time with a hard landing. One fraught with record discord and gridlock. Under Hendry's immutable law of Disney markets, today's gamblers have been well-conditioned to ignore economic implosion. 

"The worse the reality of the economy becomes, the more we take on the reflexive belief in further and dramatic monetary expansion and the more attractive the stock market looks."

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