Deflationary Value Trap

Gamblers are rotating into the bankrupt sectors while fantasizing over a "return to normal" that no longer exists...

For over a decade straight global central banks held interest rates at record lows to buy time to borrow our way out of the 2008 debt crisis. The net effect of course was a colossal increase in global debt that has accelerated 10x during "MAGA":

"However, the coronavirus pandemic is not the sole factor to blame for the massive level of global debt.

“The pace of global debt accumulation has been unprecedented since 2016"

Economists never question what all of this debt means for the long-term economy. Of course it's deflationary, however, far worse, it portends mass corporate bankruptcy on an epic scale.

This week I am staying at a Doubletree hotel which is part of the Hilton brand of hotels. I've stayed in this particular hotel many times over the years, but I've noticed the hotel has become very dilapidated since COVID began. The hotel is currently half staffed and the large neon DoubleTree sign at the top of the hotel is only half lit. So technically I am staying at the Double Hotel. This hotel is illustrative of what is taking place across the economy. Going into this pandemic, companies had gorged on a decade worth of cheap debt. Which they used to buy back stock and to invest in "growth". This year's emergency borrowings are going solely to keep the lights on until normalcy returns. They are making zero new investment. 

Which means that the assets on their balance sheet are rapidly depreciating while their debts are skyrocketing, which is destroying their shareholder equity. These companies are ticking time bombs. For example, Hilton has a negative book value (shareholder equity) of -$4.77.

 

Since the election there has been a MASSIVE rotation into the cyclical sectors, under the auspice that it's finally time for value to outperform. Investors are looking past the short-term COVID spike to the "return to normal" when COVID subsides. However on the other side of this disaster these companies will be zombie corporations, at the mercy of their debtholders. The travel and leisure sector could take decades to return to 2019 peak activity level. Which means there is a decade worth of over-investment that needs to be rationalized across hotels, airlines, rental cars, mall retail, and of course the fossil fuel sector. Ground zero for over-investment in long-term losses.

Today's economics establishment never considered the long-term deleterious impacts that low interest rates would have on future growth. Essentially these low interest rates pulled forward decades of investment into a low demand environment. Deflation created more deflation. Many people are quick to blame central banks for keeping interest rates low. However, central banks can't hold interest rates low in a truly reflationary environment. Bonds are priced off of forward reflation expectations. The true cause of low interest rates are Third World imports. The U.S. has been mass importing deflation via low priced imports. Which means the U.S. is essentially importing poverty in order to create prosperity. A death spiral of collapsing demand now featuring companies borrowing money to stave off bankrutpcy. Under COVID, the U.S. has achieved a 100% virtual economy. Growing poverty has been well disguised by the global asset bubble. Which is why the "cycle" can never end. This must be the first time in world history wherein the debt accumulation cycle lasts forever. Growing to infinity.

Normally, higher interest rates end the debt accumulation cycle. However, in 2008 it was mass subprime defaults that ended the cycle. The same thing will be true now. Mass corporate defaults will explode the infinity credit bubble. And when that happens there will be a glut of everything: Hotels, jet airliners, homes, cars, boats, expensive colleges, gold bars, and overpaid economists. 

The Free Money Hypothesis

Is about to get system tested...

It's the irony of markets that only when the vast majority of people believe the market is going higher, and commit their capital accordingly, that it rolls over and crashes.

It took a global pandemic, crashing economy, depleted stimulus and vacuum of leadership, to convince gamblers to go ALL IN. On the universal belief that printed money is the secret to effortless wealth.

Everyone is now on the same side of the boat, which is why RISK OFF is no longer an option. 

According to the geniuses on Zerohedge, aided and abetted by con artists on Wall Street, global asset prices are on their way to infinity on the premise of more money printing while everything else implodes in real-time. They are exhibit A of monetary heroin addicts convinced that free money can create an infinite divergence between fantasy and reality. More than anyone they will be shocked when it doesn't happen. No question, today's Idiocracy aided and abetted human history's largest bubble for over a decade. Which is why we are now seeing an epic rotation into risk at the end of the cycle. This is how it was always going to end - a manic melt-up into final implosion. Global investors rushing into a burning Trump Casino.

Everything these people believe is 100% imaginary - an imaginary recovery, an imaginary COVID cure, imaginary stimulus, and an imaginary leader in the White House.

At the intersection of the economic reflation delusion and manic social mood is the alt-currency Bitcoin:

The gold trade is already in deep trouble

The Dow finally eclipsed its February COVID high this week. However, the Nasdaq peaked in September and the NYSE composite peaked prior to COVID:

Shorts have been monkey hammered mercilessly since the election. Ironically led by a rally in retailers.

However, we got news this week that retail sales are starting to slow down in front of the critical holiday season. Picture a massive COVID spike during peak shopping weeks. The critical point in time when retailers typically breakeven.

This COVID winter will be the death knell for mall retail:

"U.S. retail sales increased less than expected in October and could slow further, restrained by spiraling new COVID-19 infections and declining household income as millions of unemployed Americans lose government financial support"

In other words, here comes Black Friday, the day when retailers finally become profitable for the year:

“Our cases are increasing so rapidly here, we literally today are making plans to put refrigerated trucks for morgue space outside of our hospitals and field hospitals,” said Dr. Forman

Emergency room doctors said they are worried about the toll the pandemic is taking on healthcare workers"

I predict that healthcare workers will walk off the job at some point this winter, in protest over all of the Trump dumbfucks who don't wear masks. Then I predict a shortage of freezer trucks.

In summary, Chinese and Japanese gamblers have already learned the lessons that U.S. gamblers are about learn.

You can't ignore deflation forever.

And there is no such thing as "free money" 

"Boeing (NYSE:BA) cut gains after Morgan Stanley warned that bullish sentiment on the stock was getting ahead of fundamentals. The aircraft had been up more than 6% intraday after the Federal Aviation Authority ordered the ungrounding of Boeing's 737 Max, which was involved in two deadly crashes"

FOMO: Fear Of Missing Obliteration

It was inevitable that a narcissistic psychopath would one day become president. Trump is the Jim Jones of presidents. His legacy will be measured in astronomical body count...

FOMO on the left shoulder and FOMO on the right:

A combination of events have coalesced to create a lethal winter interregnum at the behest of an intransigent psychopath. 

When the COVID crisis hit, Trump's signature response was denial, blame, and incompetence. He first went to great lengths to obscure the lethality of the virus, as described in Bob Woodward's latest book, Rage. And then Trump went to great lengths to ridicule mitigation measures such as masks and social distancing. Instead he placed all of his efforts on developing a vaccine at "Warp Speed". He bet that a vaccine could be created before the winter of COVID hell. He was right, the vaccine has been created. However, it's not the vaccine that matters, it's vaccinations that matter. Fully half of Americans have already decided they won't be getting vaccinated from COVID. In addition, there are the logistics of distributing the vaccine to millions of people, a process that will take several months. 

What to do, as COVID cases skyrocket? Trump is now actively blocking the incoming Biden administration from accessing the transition resources they need to plan an effective COVID strategy. Which means that the Biden administration will be several months behind the curve when they take over. In the meantime, Trump's body count will be piling up to record levels.

Trump has ample assistance from his rabid base of denialists. One must wonder if they really don't believe this virus is real or if they have some sort of death wish. These are the least healthy people on the planet. Many of them have marginal access to healthcare. And yet they continue to play along with the theme that this rising death toll is merely a hoax propagated by Democrats to win the election. Or, a "plandemic" to place more economic control in the hands of Jeff Bezos.

No one can stop Trump. The much feared "Deep State" has been wholly incapable of derailing Trump's subversion of democracy. History informs that nothing is as vicious as a Fascist party that refuses to relinquish power. They will use every trick in the book to hold on to the White House.

Only Covid can stop them, the very thing they deny.

This lethal delusion is driven by manic social mood that attends a monetary asset bubble now reaching new all time highs, while the economy collapses. Global central banks have done their part to administer lethal doses of monetary euthanasia to the Soylent Idiocracy.   

This graph below shows that ex-deficit, this is the worst economy since the Great Depression. I call this honest GDP because it adjusts for the ludicrous amounts of borrowing that give this economy the illusion of recovery. Had prior administrations been as profligate as the current one, the U.S. would have been bankrupt decades ago:

The intersection of maximum pain is GOP intransigence on stimulus during a skyrocketing pandemic. States that had ordered lockdowns in the Spring are now reluctant to do so in absence of a Federal safety net of the type offered six months ago:

"Polis said that it’s not fair to impose a stay at home order, especially when the federal government was not offering the same benefits to Americans who would be forced out of work as it had done earlier in the pandemic."

With its uniquely deficient virus response the U.S. is diverging massively from the rest of the world. While Trump focuses his attention on frivolous lawsuits and his election temper tantrum, the U.S. has become the outlier nation with respect to COVID impact.

https://www.theguardian.com/world/2020/nov/15/covid-world-map-which-countries-have-the-most-coronavirus-cases-and-deaths

As the data comes in over the coming weeks showing wholesale economic collapse, Treasury bond yields will collapse. Which will unwind the STILL record Treasury bond short.

And then the Trump Super Bubble will explode.

The Hardest Crash In History

This week, bulls went ALL IN while weak bears got steamrolled by delusion. A necessary and sufficient condition for hard reversal of fortune...

The problem with Trump's all or nothing vaccine approach is that it failed. The vaccine won't be available soon enough to prevent the uncontrolled super spike in COVID cases we are now witnessing. Sadly, Trump people are not experts in pandemics, climate science, economics, or anything for that matter. What they are is expert con artists. The MAGA pump and dump is the largest Ponzi scheme in U.S. history. Which raises the question - who will the GOP choose as their next leader, Bernie Madoff? If so, he and McDonald Trump will just switch places.

High to low, the crash in February was the most brutal crash in history. This impending crash will make that one seem like a picnic. All it took to get the Dow back to all time highs was 30% of GDP in fiscal/monetary stimulus, record global stock inflows, and record call option speculation.

It's all hands on Ponzi deck in 2020:

This week, rumours of an impending vaccine shotgunned global markets through the ceiling. There's only one problem, there is no vaccine.

Aside from that it's clear sailing:

"Inflows into global stocks hit an all-time record this week, netting $44.5 billion"

U.S. stocks grabbed the lion’s share with $32 billion, the second-largest on record

"Nearly $45 billion in net inflows rushed toward equity funds in the latest week, which Bank of America calls an all-time record...the last comparable intake was in January 2018...the passage of the Trump tax cut weeks earlier"

“We are sellers-into-strength into vaccine...based on peak positioning, peak policy, peak profits, comparing it to the 2018 pattern."

Trump's tax cut con job came at the front of the MAGA delusion and the vaccine con job is coming at the end of the MAGA rally:

Bulls see an "all clear for a re-opening rally" amid imploding consumer confidence and COVID super spike

"Americans are turning pessimistic about the economy for the first time in months as coronavirus cases repeatedly hit new records."

The vacation from responsibility is over:

https://data.sca.isr.umich.edu/fetchdoc.php?docid=66344

“And we know the cases reported are an underestimate of what is out there ... we’re missing many cases because people aren’t getting tested. So the true number is much higher than what we’re actually seeing.”

What's coming next won't be a crash, it will be an explosion.

Of surplus ordnance left over from McDonald Trump's final rigged election.

Looking Across The Valley. Of Death

A combination of record stimulus, Ponzi borrowing, record gullibility, and plain old greed, has obfuscated the end of the cycle. Gamblers have been told they can ride out depression in bankrupt companies...

The level connivance we are witnessing right now is the sum total of over a decade of Disney markets. Imagined Realities in the Hendryite tradition.  

"In the long run we will come to rue the central bank actions of today. But today there is no serious stimulus programme that our Disney markets will not consider to be successful."

Central banks are the only reason markets never priced in economic reality this year of COVID. And what remains of "GDP" is entirely predicated upon fiscal stimulus currently accounting for 17% of the economy. Add in state and local unemployment programs and total government stimulus is unprecedented in U.S. history. 

And it's all about to run out. 

And yet, Wall Street is telling their clients to buy economic cyclicals as the pandemic explodes out of control. Our favourite "quant guru" of bullshit who made the worst call in history one year ago, is back selling Kool-Aid again. 

Waves 'a' and 'c' of this value spike saw the two highest call/put ratios in history:

This week, the S&P 500 made a new all time intra-day high, that was unconfirmed by both the NYSE Composite AND the Nasdaq. I highly doubt that has ever happened before in history. The Nasdaq peaked back in September. Whereas the NYSE Composite peaked back in February and is currently at the same level as early 2018 almost three years ago. This is the true MAGA top as evidenced by the most economically sensitive sectors. Note that realized volatility is at the same level it was at the bottom in 2018. Which is extremely unusual:

Now, what remains of "GDP" is set to collapse by the end of the year. The economy is on life support which is about to be turned off:

"Two critical unemployment programs are set to expire at the end of the year, potentially leaving millions of Americans vulnerable to eviction and hunger and threatening to short-circuit an economic recovery that has already lost momentum."

Up until now there has been no sign of panic because gamblers have had the virtual simulation of prosperity to rely upon.

They have been well conditioned to believe in Disney markets:

In the process they have loaded up on bankrupt companies, and are currently being pushed towards the most insolvent sectors. This year in a bizarre distortion, record bond sales have attended record corporate bankruptcies. Financial markets never got the memo to stop lending to bankrupt companies. Just as Millennial newbies bought Hertz stock in bankruptcy, so to are the morons on Wall Street lending to insolvent companies.

After all, if they stop lending, these companies will go bust sooner rather than after bonus time. So they just keep shoveling good money after bad.

Which is why this week Bill Ackman made a(nother) bet that the credit markets are about to crash. His first bet paid off handsomely, as the Credit Default Swap (CDS) premiums exploded. however the actual full scale of defaults never took place, because lenders are bailing out insolvent borrowers with more debt.

Ackman is betting that at some point the lenders are going to shit a brick:

Corporate debt % of GDP:

All of which is identical to the events of 2008 wherein the CDS premiums FELL as the subprime mortgages deteriorated. For a time. And then they exploded.

Hyman Minsky Financial Instability Hypothesis:

"Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance"

Gamblers are betting that Wall Street won't let them down.

Again.

Rule By The Wicked. Is Ending.

In hindsight, biblical scholars will call MAGA the era of false witness. A time when criminals ran rampant and worshipped their modern day Caligula, while the empire imploded in real-time...

It took Mother Nature to put a stop to this farce.

As I said in my prior post, the sheeple are entirely unaware of their descent into squalor. It was gradual and hence it went unnoticed. For amnesiacs it's impossible to remember a time when "news" wasn't 100% circle jerk. A time when non-stop lying was considered abrogation of the Ninth Commandment, and not basis for re-election. And a time when conspiracy theories were not used to explain away facts and reality. 

Faux News (Fox) stock just took a pounding, as apparently Trump is planning to start his own "news" network. His true believers are enraged that the network is not aiding and abetting his gambit to steal the election. They now consider Fox News to be a left wing fake news outlet.

 

"President Donald Trump went on a Twitter tirade against Fox News on Thursday morning, escalating recent attacks against his long preferred cable network."

Therefore, they are going to start a new network. We can probably guess the name. The top contenders will be INN: Idiocracy News Network. Or NJN: Nutjob News. Regardless of what it's called, it will be non-stop bullshit and conspiracy theories catering to the dumbest people on this planet.

Corporations caused this problem, they wanted a dumb and facile populace that they could exploit for maximum profit. From there, the GOP cultivated a base of useful idiots. Now, their frankenmonster is off its leash. Rupert Murdoch's evil empire is only the last casualty. Since McDonald Trump hijacked their party, traditional conservatives have had a choice, leave the party and have no representation whatsoever, or join the league of nutjobs. 

Conservatives have lost track of right and wrong. An outcome predicted by The Lonely Crowd over 60 years ago, in which society would get hijacked by sociopathic extroverts. The gullible would come to prefer opinion over facts and data, until they could no longer tell the difference. As their living conditions deteriorated, they would seek out a new lower common denominator in facile buffoonery:

The Lonely Crowd also argues that society dominated by the other-directed faces profound deficiencies in leadership, individual self-knowledge, and human potential"

The Founding Fathers would not recognize McDonald Trump and his cabal of liars. Because they are the antithesis of what the Founders sought to create in their new republic. We live in a society of Disney people not willing to reveal too much of themselves to others lest it reveal the Oz-like production taking place behind the curtain. The ability to work a room with small talk is valued, however, revealing the truth is frowned upon. People who are too honest about themselves are deemed antisocial or perhaps even "on the spectrum". The slick carnival barker is preferred over the genuine individual. Where do the sociopaths learn these skills? College of course. America's black hole of wasted time and money. An industrial factory for pumping out commodified widgets for corporate use. And along with these superficial relationships has come a profound sense of loneliness and disconnection from the rest of society. No one knows who they can trust anymore.

The next thing you know a con man is trying to tear down democracy with the assent of nearly half the country.

We have entered a black hole of leadership between now and the inauguration late January. During this time, Trump will be solely preoccupied with his own future, at the expense of the country. Planning a new talk show network reveals that he is already thinking about his next move. In the meantime, there will be no stimulus, no COVID strategy, and no leadership. This period will reveal the full extent of his incompetence and negligence of duty. To even the most ardent of supporters. And they will come to know fear. 

In the biblical tradition.