Fools And Their Money. Are Soon Parted.

Making money in an everything up market is the easy part. Keeping it is the hard part. Every generation has to learn the hard way the difference between unrealized and realized gains. In this Idiocracy, some people have to learn more than once. However, I suggest that for most people this will be their final lesson. They have been seduced by Hendry's Iron Law of Disney markets:

"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...amid this falsehood of recovery, those drugged by the virtual simulation of prosperity and its acolyte QE, will be destroyed"

Today, we were once again reminded that making money in stonks is easy. With a one word tweet, Elon Musk doubled Gamestop today, again:

"His one-word comment — "Gamestonk!!" — was all it took to cheer on the the popular Reddit page that's been generating most of the hype around the stock"

That one word tweet was good for another 100% gain in Gamestonk. Now up some 2,000% in four weeks. 

All of which is reminiscent of October 2008 when Volkswagen shares went late stage parabolic in what used to be the most famous short squeeze of all time. That was around the same time that the casino was going into meltdown mode post TARP bailout. 

While Reddit bulls are busy exploding hedge funds left and right, they appear to be ignoring the massive dislocations they themselves are creating in the casino. So far this week on both Monday and Wednesday morning, the casino had a close call with meltdown. On both days multiple retail brokerages had outages. Just a prelude as to what is about to come. Two dinky stocks with the combined market cap of one Tesla up day brought down multiple brokerages on Wednesday:

"TD attributed its app outage to 'unprecedented volumes' of activity"

Add Fidelity (my broker) and Robinhood to the list of sites experiencing intermittent outages today and Monday. Now picture what happens when Tesla implodes, along with Microsoft, Apple, Google, and Amazon. 

So far, all sage warnings have been ignored. Millennials are now searching around for the next set of stocks they can swarm higher. Making money via groupthink social media forums has never been easier.

It's clear that most people gambling today don't remember Y2K or, they were still in diapers during that era. Most people today seem to believe that the biggest losses were suffered in Pets.com, JDS Uniphase, Ariba, and other shooting stars that never survived that era. However, MOST of the real money was lost in Microsoft, Oracle, Intel, Dell, Cisco, Sun Microsystems and other large cap Tech stocks that were deemed "safe havens" at that time. Which is deja vu of today. 

Here we see the Nasdaq 100 / S&P 500 ratio. 

Of course the only thing easier than a Reddit message board for generating ephemeral wealth is central bank asset inflation. The source of all of today's billionaire fake wealth. For today's Tech billionaires in particular simulated wealth creation has never been easier while the real economy implodes in real time. Per Hendry's iron law of Disney markets. 

Bueller?

How To Create A Bidless Market

Central banks and Reddit traders are collaborating to create a bidless market. Millennials are putting Boomer retirement at risk, because they've mistaken the stock market for a casino... 

The biggest stock market rally in the past decade just took place during a pandemic that caused the most economic damage since the Great Depression. COVID accelerated the end of the cycle, but the central bank Jedi Mind Trick made it impossible to see it ending. A generation of financial illiterates with no experience in bear markets, is now convinced they are invincible stock picking geniuses. When volatility explodes, the global margin calls will arrive night and day. It will be the reverse wealth effect, and the margin clerks will be much faster than the central banksters. 

"When do you think we'll get another pandemic?"

Gamestop and the short squeeze story is now all over the financial pages, so I will spare you the details. Suffice to say our Millennial son called us on Friday to say he had banked $25k one day profit on this latest pump and dump. Easy money. Now, the retail Reddit traders are ganging up on hedge funds and options market makers. Jim Cramer sees nothing wrong with the little guy getting even with the big boys. If that was all there is to this I would agree. However, these rampant pump and dump schemes are symptomatic of a massively over-heated market. Picture self-directed retirement plans now 100% correlated to a Las Vegas casino. You get the idea. Millennials have their Robinhood portfolios stacked with GE and Ford stock side by side with Gamestop and Bitcoins. When the margin calls roll in the margin clerks will reach for whichever stock is most liquid. 

And it won't be Gamestop. 

Reddit traders are targeting all heavily shorted stocks, particularly in the retail sector, which is bolstering the delusion of a full recovery:

Move along, nothing to see here:

Just as Reddit traders are bidding up the riskiest stocks, central banks are doing the same thing to the broader market - compressing volatility making hedging totally unprofitable. Which is why last week asset managers reached decade high risk exposure:

As I've shown recently, Asian markets are going similarly bonkers. Hong Kong is playing catch-up with the rest of the world:

"A chill swept through Chinese financial markets after the central bank withdrew cash from the banking system and an official warned about asset bubbles."

The People’s Bank of China drained about $12 billion via open-market operations on Tuesday. The decision was unusual in the weeks before the Lunar New Year holiday, which in 2021 falls in mid-February"

The reaction was particularly brutal in Hong Kong’s stock market, where onshore funds were helping underpin a world-beating rally. Mainland investors bought a net $32 billion worth of Hong Kong stocks this year through Monday, almost 40% of last year’s total"

Five months of inflows in three weeks. 

The pounding in Bitcoin is a warning of what is coming to every other over-heated asset market:

"With a full-blown retail raid targeting their short books, many of the stocks hedge funds are bullish on are suddenly in trouble, too. That has prompted the industry to cut their risk appetite at the fastest pace in more than a year"

In a market where bearish wagers are backfiring like never before, one way to mitigate career risk might be to sell stocks that had previously been working -- even if that means parting with some beloved companies."

The irony that Reddit bulls squeezing hedge funds out of their bear trades could be the catalyst for the casino to come crashing down. Can't be overlooked.

Picture how many hedge funds hold Tesla:

In summary, short covering is providing the illusion of a recovery where there is none. 

Next comes the bidless market deja vu. And then Millennials will enjoy their first bear market wipeout. 

Good times. 

Still Stuck In Deflation

According to today's economic "experts", the cure for wealth inequality is greater wealth inequality. The only way this "system" gets fixed is when all of these "experts" and their dumbfuck ideas explode with extreme dislocation...

The Globalized economic paradigm has always been inherently deflationary - corporations constantly moving production to the lowest cost locales in order to "grow" profits. Leaving a wake of economic devastation behind them. The inevitable end result was global interest rates stuck at the zero bound for over a decade straight. Free trade generated free capital which then further accelerated the automation of jobs, thus creating the beloved COVID-resistant virtual economy. Global central banks have compensated for this depressionary capacity glut by pumping up asset values in the Tech sector, to reward them for obliterating traditional industries at an unprecedented rate. 

What could go wrong?

All of this chicanery so that Boomers could pretend their retirement is still intact. They can ride out a global depression in the most over-valued stock market in history to achieve the linear-extrapolated goals set forth by their investment advisors. Today's advisors and central banks are hardcore acolytes of the Bernie Madoff school of investing: Set a goal and then work backwards to whatever asset misallocation will achieve it. 

We now see that even the "blue wave" has still not changed the predominant deflation paradigm, which by sheer coincidence happens to be very billionaire friendly. It's at this time of year that Oxfam reminds us that global wealth inequality increases every year. This past year however has been one for the record books:

"Nine months. That's how long it took the world's top 1,000 billionaires to recoup their fortunes after the coronavirus pandemic hit.

More than a decade is how long it could take the world's poorest to recover, according to Oxfam International's annual inequality report."

Let's get this straight:

Since 2008, global wealth inequality has been getting worse, and now that abject lack of progress just got set back by another decade? I'm no logic expert, but I'm pretty sure that means there will be no "recovery" for the world's poorest. We were making NO progress before, and now we're another full decade behind in making no progress. Rule #1 of navigation, you can't reach a destination by going in the wrong direction. 

So how to fix a global economic depression in a system that generates mass wealth  inequality? According to today's "experts", you put an asset bubble on steroids. Cure a system terminally corrupted by greed by subsidizing epic amounts of leveraged speculation. 

Only one thing can fix this problem wherein Elon Musk sees his wealth grow by 600% in one year compliments of socialism for the rich. Asset explosion.

And despite all of the talk of "reflation", the locus of risk remains the Tech sector.

The reflation trade:

Bueller?

EMs about to get crushed deja vu of 2020:

Yes, it's FOMC time again

Fear Of Missing Crash:

Socialism For The Rich Is Doomed

Ponzi markets are priced for perfection in a pandemic depression. What could go wrong? Having neither the fundamentals nor the technicals in their favour, today's gamblers have fallen back on the extant belief that human history's largest asset bubble can always get bigger. While the smart money is betting that the bubble explodes at all time highs, the dumb money is betting that the bubble keeps growing, and should it explode they will be made whole on their collapsed Bitcoins... 

Amid record wealth inequality and a peak pandemic, Biden must now contend with the biggest post-election asset ramp in U.S. history. Trump's legacy of socialism for the rich...

"Looking back historically, the all-time champion for Election Day to Inauguration Day performance had been the one-term Republican President Herbert Hoover"

Beating Hoover's record is a bad omen. The difference is that back in 1928 the stock market was partying at all time highs and the economy was booming. Whereas now, in this Idiocratic economy, the stock market is booming amid the worst unemployment since the 1930s. We have a DotCom bubble in a Great Depression economy. But, fortunately we have unlimited stimulus and a generation that no longer cares about debt. At the current rate, the Fed, BOJ, and ECB are expanding their combined balance sheets at the rate of $6 trillion annualized. Yes, you read that right. This market is over-stimulated, over-valued, and over-heated.

This week, global markets are going late stage parabolic with the swearing in of President Biden. The only people happier than Democrats that Trump is gone, is the entire rest of the world ex-Russia.

Now that Trump is no longer in office, several economic/financial risks have fallen off the ledger: deflation, gridlock, COVID denial, war with China, Twitter buffoonery etc. However, therein lies the problem - this market has priced out all risks. Biden's election triggered global euphoria at the worst possible time in the cycle. A time when investors should be de-risking. Nevertheless, this Obama, Trump, now Biden cycle must never end.

"With markets at these dizzying heights, everything must go right, but pitfalls are everywhere"

It’s not just stock prices that are at extreme levels.

Ed Clissold of Ned Davis Research noted that traders were exhibiting “extreme optimism” and wondered, “Are there any bears left?”

Technical levels are also at extremes. The 200-day moving average for the S&P 500 is a standard metric to measure momentum. The S&P 500 is now 16% above the 200-day moving average, twice the normal levels even in bullish markets. Other technical levels also are flashing overbought."

Chinese markets in particular have been going bonkers this past week. Some would say it's because Old Joe will be easier on China than Trump. He will certainly be more civilized and measured. However, there doesn't appear to be too much thinking going on behind these markets lately, because Chinese stocks have been going up even as Trump levied one sanction after another on Chinese companies. Meanwhile, this week Janet Yellen vowed to keep the heat on China:

Joe Biden, and the unexpected blue wave gifted by Trump on January 5th, have theoretically ushered in true economic reflation. If so, it portends badly that Tech stocks are STILL leading this rally:

 

Meanwhile, banks are rolling over:

Call central banks because social mood is rolling over and the losses are about to accelerate and spread to other asset classes

The Last Trump Rally

Today is the last day of the epic gong show known as the Trump Administration. The experiment with having the most morally and mentally challenged people running the country has ended badly, as any intelligent person would expect. Which is why no sheeple see this record Ponzi bubble ending...

The Republican party is now fractured into multiple competing factions, and is entirely leaderless. The never-Trump faction jumped ship four years ago and are now guest speakers on MSNBC, where they get paid to denounce their former party. What mainline Republicans remain within the party are now cowering in fear from Trump's rabid mob. Which means that the Qanon mob is now leading the party. A conspiracy of idiots following their reality TV game show host into the political twilight zone. Going forward, in order to galvanize these cult followers into actual votes, the Republican party will be obliged to pay tribute to the Qanon leader and his cult followers. Trump's last remaining advisor is the My Pillow Guy, who informs Trump on all matters foreign and domestic and how to get a good night's sleep. 

We are told that those of us NOT wanting any part in this insane gong show are silently aiding and abetting cannibalistic pedophiles. We can't win.  

Bringing this all back to the economy and markets, history will say that Trump's tax cuts and trillion dollar deficits set the U.S. on an irreversible path towards dollar hyperinflation. For now, the forces of inflation are held in check due to the COVID lockdowns and mass job loss. However, Trump's election tempter tantrum gifted full control of the Federal government to the Democrats. Trump believes so little in conservative values that he preferred to cede all control to the Democrats rather than to admit defeat. Like a five year old taking his ball home. Trump's base, equally vicious and demented, supported him the entire way - now trusting the U.S. election system only when Republicans are elected. Any other outcome is rigged. What used to be useful idiots to the Republican party are now useful idiots to the Democrats. The well-cultivated GOP advantage has now turned against them. Thirty+ years of Faux News down the drain. 

The bottom line is that Trump paved the way for full scale "socialism", which means bailouts for the middle class at the expense of the rich. Instead of the other way around.

What about the Disney market explosion? Good question.

This impending crash will be a big headfake. Right now, the reflation trades are all crowded trades. This crash will clear out the weak hands. The rotation to cash will take place just as the money printer gets started in earnest. I expect the reflation trades - specifically gold and commodities to bottom first and rally the hardest. Deja vu of 2009. 

Recall that this entire Trump mega bubble got started with Trump cautioning that the Obama bubble would be exploded by higher interest rates. Well, as usual Trump had a kernel of truth wrapped up in a load of bullshit. It's HIS bubble that will be exploded by higher interest rates. And as biblical irony would have it, Janet Yellen who was fired by Trump will explode his signature bubble. And everyone who believes in it. 

Fortunately there is no later with this generation. There is only one long never-ending fire drill called "now". Interspersed by non-stop campaigning. 

Which explains how Trump and everyone else got sucked into human history's largest bubble. They knew it exists, but they didn't want to be left behind. The magnitude of a bubble is not measured in terms of dollars, it's measured in terms of numbers of eager participants. In the era of social media, investing has become a group activity. The Borg decides the next trending sector, and the Borg turns it into reality. If they decided white flour is the next hot investment they would corner the wheat market and send it into the stratosphere. Unfortunately, that's not how investing works. Investments are not supposed to be defined in terms of their magnitude of asset inflows.

All I can say is that when Trump goes off to the golf course which he never really left - his signature bubble will explode. And it won't matter what day or hour that happens, because it will be sufficiently cataclysmic to inform even the dullest of observers that this was all a bad idea. 

When it comes to biblical lessons, it's better late than never.

The Fool Or The One That Follows?

Extreme positioning going into a long weekend with the rest of the world going RISK OFF. What could go wrong?

This article sums up the risks at this juncture:

"Call-buying has pushed ‘gamma’ exposure to all-time highs"

"The feverish call-buying is fueling a bullish feedback loop in equities as market makers hedge their positions

“The unwind could potentially be violent given all the excess euphoria. It is more likely a question of when and not if.”

At the top in February last year, option speculation was likewise manic and ignored:

Feb. 26th, 2020: 

Reddit Traders Are Using Options To Manipulate Stocks

"What this moment shares with 1999 is a rising belief that someone else will come along to buy a surging stock at an even higher price, regardless of fundamentals."

"A favorite tactic on reddit/WallStreetBets is to swamp the market with call purchases early in the morning in an attempt to force dealers to keep buying stock"

When this article was published, the market was already exploding post opex - gapped below the 50 day:

Like a toddler on a sugar high, today's gamblers are massively over-stimulated on monetary heroin and fiscal stimulus.

And options speculation in this period far exceeds what took place last year:

This week saw a similar pattern in the Rydex ratio relative to what happened in 2020. A peak in December, then a pullback, then another surge in the New Year. This time coming a month sooner than last year. 

Volume has gone parabolic. And speculation in penny stocks is showing up in the record Nasdaq breadth thrust (lower pane). 

From the first article above:

"Perhaps the most dramatic illustration of the day-trader craze came on Monday, when six stocks priced under $1 per share made up nearly a fifth of total U.S. volume"

Markets were unimpressed with Biden's stimulus package. One thing both parties have in common is that they have not the slightest idea how to create full time permanent jobs. Forty five years of jobs decimation has made that abundantly clear. 

This latest stipend for the mass unemployed is "priced in":

"Reagan proved deficits don't matter" - Dick Cheney

It's Time For Minsky Asset Deflation

We've tried having a soaring stock market while the economy implodes - however most people were left behind. So now it's time to have a soaring economy while the stock market implodes. Try something different for a change...

One can make the case that the imaginary recovery is "priced in".

Wednesday night watching the futures I noticed that the Russell 2000 futures went vertical - deja vu of the vaccine news in November. Something was up. Now we learn that tonight after the close, Biden is planning to go big or go home:

"President-elect Joe Biden is expected to unveil a major Covid-19 relief package on Thursday (evening) and his advisers have recently told allies in Congress to expect a price tag in the ballpark of $2 trillion, according to two people briefed on the deliberations"

Biden's party believes it may have only a brief window to pass sweeping relief legislation and the President-elect has faced significant pressure from some Democrats to go big"

The following is a summary of the past several months of reflationary headlines:

Back in late August the Biden surge in the polls monkey hammered deflationary Tech stocks. Again in October when the Democrats looked liked they could win the House and Senate. And again in early November when the vaccine trials showed 95% efficacy. The Tech melt-up resumed in December during the winter COVID lockdown, however the rally was derailed again near the end of the month when the $900b stimulus was approved by Congress. 

What we notice via the chart below showing these events, is that the Tech/virtual economy bubble has been unstoppable despite many rotations to cyclicals. Now, since the beginning of 2021, both Tech and cyclicals are rising in tandem. It's the best of both worlds - an improving economy AND a massive stay-at-home Tech bubble. Someone is going to be wrong. Which means everyone is going to be wrong. Not only will the economy disappoint the cyclical stock buyers, but the Tech bubble will be final imploded by these constant rotations. The aptly named MAGA stocks (Microsoft, Apple, Google, Amazon), are no longer leading the rally. They have been underperforming the broader market since Biden surged in the polls back in September. Go figure. 

The Momentum Tech ETF which is underweight the MAGA caps has continued to outperform, despite several close encounters with implosion:

Semiconductors are at the happy intersection of Technology and cyclicals, therefore they go up every day regardless of which paradigm is in rally mode - reflation or deflation.

Semiconductors are now at the epicenter of every Tech bubble - Bitcoin mining, cloud internets, autonomous driving, artificial intelligence, video games, 5g wireless etc. etc. 

All of this U.S. stimulus has several implications for the EM trade. First off, it means the U.S. economy will outperform most of the world, and hence U.S. interest rates will be higher. Higher interest rates will boost the dollar at the expense of EM carry trades. In addition, the massive demand for capital by the U.S. government will crowd out Emerging Market credit. 

Here we see that EM currencies are diverging from EM stocks. 

 

The abiding belief since 2008 is that this expansion can continue forever as long as central banks hold interest rates at the zero bound. This delusion that central banks are in full control is well-entrenched throughout the economic establishment - only policy-makers control interest rates. Unfortunately, that is not actually true. Policy-makers can influence interest rates on a short-term basis, however, inflation expectations ultimately determine bond market values and hence interest rates. Bond markets are now starting to realize that this free money bonanza will lead to higher inflation, which is accelerating the end of cycle Minsky Moment. Per the Minsky Financial Instability Hypothesis, asset bubbles are imploded by higher interest rates. Whether those rates are due to policy-makers raising interest rates, or credit markets raising interest rates. It doesn't matter. To the extent that the Fed has given the U.S. Treasury carte blanche to issue new bonds, the Fed has now effectively ceded control of U.S. interest rates to the Democrats.

Nancy Pelosi may as well be the Fed chief now.

In 2020, the Fed monetized a $3 trillion deficit (15% of GDP). Which created human history's biggest asset bubble. This year, they are planning something even larger. We are now witnessing a ludicrous reach for risk at the end of the cycle in a pandemic depression. Something no one has ever tried before. For a reason.

Biden's election is the fifth wave blow-off top to the MAGA Tech rally which started four years ago. The same rally that gamblers believe just got started.