All Clear Pump And Dump

Either policy-makers know what's going on and are turning a blind eye to extreme risk, or they are as dumb as a brick. I am going with the latter hypothesis. Suffice to say, this will be the Super Bowl of crashes...

"It seems like asset bubble warnings are emerging everywhere you look these days...a growing legion of retail investors are challenging Wall Street orthodoxy and sending shares of previously unheralded stocks into the stratosphere...Trendy bets are all over the place, with cash pouring into assets from solar power and cloud computing, to exotic new investment vehicles like special purpose acquisition companies (SPACs)"

So what’s behind all the speculation? In a nutshell, the global pandemic. Policy makers have rolled out trillions of dollars in stimulus to cushion the economic blow, money that could well end up pumping asset bubbles

With even the riskiest debt now paying less than ever, investors are chasing every catchy extreme in search of the next big payoff"

"As the craze for SPACs, special purpose acquisition companies, on Wall Street continues to play out, the “Mad Money” host turned cynical, saying the market has been “flooded with cash to the point of absurdity.”

SPACs are similar to IPOs, except the money is raised up front and then the acquisition target is selected. The theoretical benefit of a SPAC is that it lets public investors get in on the ground floor of investment. Think of it as public venture capital. However, the private companies that are the targets of acquisition are usually extremely speculative and often have no revenue or earnings. This shows SPAC issuance by year. So far 2021 (bright red line) has double the issuance of 2019. The light red line is an extrapolation based upon current issuance. 

In hindsight today's sleeping regulators will realize that junk SPAC issuance was a key contributor to collapse, as it sucked liquidity out of the market. 

Of course this all ends badly, but this time policy-makers won't have the tools to repair the economic damage. What we are already witnessing is the convergence of fiscal and monetary policy, with oversight by a fractured Congress. The consequences of a bubble explosion now could not be more extreme. Collapse of wealth and income is inevitable especially for those high income households who do not see this coming. Those who are lower income and/or have minimal market exposure will be less impacted by impending asset deflation. 

It seems like ages ago but recall that last week was a total gong show - every major broker had multiple outages during the week. Last Friday, the casino ended at the lows of the week camped at the 50 day moving average. However, in retrospect it was a bear trap, because the market vaulted back up to all time highs this week. Fast forward one week later and all concerns over last week's dislocations have been forgotten. Never mind that the set-up is the exact same as last February - a bear trap bounce at the 50 day followed by a whiplash bull trap all time high:

And what caused this massive ramp to new all time highs amid mass trading outages? As I reported earlier this week, Robinhood saw record app downloads last week, peaking on Friday at 600,000 in one day. For the week, 2.1 million new downloads

"The platform "experienced record growth during some of the most challenging days operationally this past week as Robinhood continued to lead the industry in app downloads last week by a wide margin"

But the story gets even crazier because it wasn't just Robinhood that saw major trading app downloads last week:

Week over week, Fidelity app downloads increased 900%, E*trade was up 720%, Ameritrade 575%, Schwab 339%.

Across all platforms combined, broker app downloads increased 300% last week over the prior week.

So we need not wonder why the market was bid this week. All it took to garner a mad dash into risk was RECORD Nasdaq down volume on a mere 4% decline in the S&P 500. Higher down volume than Lehman. 

A minor preview of what is coming:

Meanwhile, bulls will be happy to know that Yellen completed her inquiry into last week's gong show and she concluded that Disney markets are "resilient". Mind you, resilient and frenzy are not normally words that make sense in the same sentence:

Gamestop is a reminder of what happens in EVERY pump and dump and Ponzi scheme. The early stage "investors" make a lot of money and get interviewed on CNBC, while the vast majority of people get left holding the bag. 

Our middle son made another $250k last week in Gamestop and then he put it all into SPACs. I almost shit a brick. But I've been informed the old man doesn't know what he's talking about.

FINRA just posted margin balances through December. What we see is that gamblers were deleveraging into the top one year ago in February 2020. However, since the pandemic, they have been loading up on risk. These margin figures are lagged of course, however, one would be delusional to believe that the spike in trading accounts we saw last week did not further increase leverage.

Who knew that all it took for rampant speculation was a global mass death toll and shutdown of the economy?

In summary, there are rampant bubbles, ignored warnings and market glitches. The response from policy-makers is "all clear" and the reaction from traders has been record trading app downloads and record leverage. 

No, they don't see it coming.

And no, the old man is not wrong. 

The Crack High Boom And Bust

As biblical irony would have it, socialism for the middle class will be the trigger that explodes socialism for the rich...

The key question every gambler wants to know is what will be the "catalyst" for exploding human history's largest monetary asset bubble. Great question. The answer is now obvious - the same thing that burst every other market bubble - higher interest rates...

"There is no means of avoiding the final collapse of a boom brought about by credit expansion" - Ludwig Von Mises

Way back in 2018 I predicted on my prior blog (PonziWorld) that Trump's tax cut would monkey hammer global risk markets due to the "crowding out effect". A concept that economists used to comprehend but which they've now abandoned in favour of unlimited profligacy. Crowding out simply means that the U.S. government is borrowing large amounts of money which raises interest rates and boosts the dollar. The increased deficit sucks in money from around the globe. As we see above, that is exactly what happened in 2018. Now, the same thing is happening with Biden's pending stimulus plans of $1.9 trillion which is in addition to the $.9 trillion passed in late 2020. U.S. bond yields are rising, and the dollar is rallying. Here we see the inverse dollar with last March's dislocation in the middle of the chart:

Today's economists and Wall Street forecasters are of the view that this is a new bull market in a nascent recovery. In order to propagate that view, they have conveniently forgotten that there was zero de-leveraging from the last cycle. Which if it were true would be the first time in U.S. history that an economic cycle seamlessly extended to another cycle without any deleveraging of risk. A bull market built on top of another bull market.

Here we see U.S. corporate debt (% of GDP) after every other recent recession returned to roughly the 40% baseline. We are to believe that won't happen this time. Or if it does, it will be painless. 

The alternative view which I propose is that stimulus gimmicks have merely postponed the day of reckoning. The COVID crisis has clouded both the economic outlook and economic judgement. If this stimulus passes, then for the second year in a row, the U.S. deficit will be 15% of GDP. Yes, you read that right. Had this much money been borrowed in the Great Depression, it would have been a minor recession. And maintaining that level of borrowing in subsequent downturns, the dollar would be worthless by now. It's this society's infinite profligacy that has fooled the majority into believing this is all just recovery as usual. Debt is now conflated as "GDP". 

I have long predicted a middle class bailout, and that is exactly what is taking place right now - even faster than I thought it would arrive. However, due to the COVID lockdown, the reflationary impact is still muted. By the second half of 2021 that will not be the case. Bond yields are not waiting around to price in rising inflation. Looking at the reflationary timeline, this current rise in bond yields and dollar rally are necessary and sufficient catalysts for bubble explosion and global credit crisis:

Where this all gets interesting of course is the fact that this week is the third anniversary of Vixplosion. Back then as now markets had been melting up into the tax cut, however as soon as the tax cut came into effect, global risk exploded.

In my view of the market, the Vixplosion in 2018 is the left shoulder of a three year topping process, and this impending implosion will be the right shoulder.

The World ex-U.S. best depicts my view of this topping process. Notwithstanding untold trillions of global monetary stimulus, the rest of the world in dollar terms is only now back to the levels of three years ago.

In summary, the consensus view is that this is the beginning of a new bull market. Whereas my view is that it's the end of the longest bull market in U.S. history. And therefore when today's useful morons realize they got conned into buying a market top again, there will be "societal acrimony" on an epic scale.

And the days of socialism for the rich will be over. 

All Time High On Stimulus Crack

Picture the most brutal crash in history from all time highs that "no one" sees coming. Because that is what is going to happen...

The biggest risk to the casino happens to be the exact same factor that every Wall Street analyst currently uses to rationalize today's bull market - WAY TOO much stimulus. Unfortunately, today's gamblers have happily overdosed on monetary and fiscal crack, and of course lethal doses of bullshit, their other major addiction.

Which is why they have no chance of seeing this coming. 

There exists a belief globally that no amount of stimulus is bad for markets. Every central bank operating independently of every other central bank now believes this to be true. Speculators are merely along for the joy ride. 

Far worse yet, is the fact that every government wants their own currency to be suppressed relative to every other currency. A concept that in aggregate is impossible. Nevertheless, due to the global pandemic depression, there is now a race to the bottom for global currencies. The most common way to suppress a currency is to lower interest rates and flood the markets with new currency aka. Quantitative easing. 

Consider this message yesterday from the Reserve Bank of Australia:

"Reserve Bank of Australia chief Philip Lowe praised the country’s quantitative-easing program and warned it would be premature to consider withdrawing monetary stimulus when global peers are extending theirs"

The RBA extended its bond-buying program Tuesday to avoid a spike in the currency, following in the footsteps of the U.S. and Europe in prolonging stimulus."

Central banks are now locked in a vicious cycle of increasing monetary stimulus in order to keep up with other central banks. All while global asset prices go vertical.

In addition to insane amounts of global monetary stimulus, in the U.S., Democrats are pushing for a second much larger fiscal stimulus coming a little more than a month since the last stimulus was passed. Recall that Tech stocks were stumbling at the end of 2020. However, then the stimulus bill was passed they took off again.

Coincidence?

Early last week, legendary investor Jeremy Grantham warned that this latest stimulus is the cherry on top of the global financial weapon of mass destruction. Since that warning, the plan has been moving forward at light speed:

"He said the "sad truth" about the last federal coronavirus relief package enacted in 2020 was that it didn't increase capital spending and didn't increase real production but certainly flowed into stocks"

Of course Grantham is not the official spokesperson for all of the families that actually needed that money in order to eat. Nevertheless, the point he makes is the same point I make all the time - soon policy-makers will face the hard choice between markets and the economy. If Grantham is right, that choice is near at hand, because this crack up boom is about to go bust.

I put this chart on Twitter today showing that the global Nasdaq just reached a new all time high. These are the riskiest momentum stocks in the world. The index is now 30% above the 200 day moving average, which means that even a garden variety pullback to support would mean a crash. The index has been above the 200 dma for nine months. There has been no major RISK OFF event since the rally started almost one year ago. 

All of which means that global RISK OFF is no longer an option.

Who did this?

My opinion is that last week's mini crash and 60% vol spike was the warning. And gamblers ignored that warning and instead bought the dip. This next leg down will be brutal.

Semiconductors have already left the party. Tech won't get far without semis participating in the rally:

Tony Dwyer of Canaccord lays out the lethal consensus viewpoint that will obliterate gamblers - a "correction" is overdue, but the bull market is just getting started.

“A mistake people could make here is by becoming overly negative in anticipation of a correction,”

He lists monetary and fiscal policies for a positive backdrop and the benefits of low interest rates.

“You want to add exposure into weakness,” Dwyer said. “We’re early in this economic recovery.”

We may be early in this recovery, however, the bubble from the last cycle never popped. The belief that it will keep growing to infinity is a first order fantasy. 

aka. Wall Street consensus

Currencies have likewise rolled over deja vu of last year:

The Global Dow would concur - "correction" has begun:

Appropriately, this delusional market is now being led by pot stocks.

The Last Pump And Dump

Today's gamblers are right about one thing - this is not a bubble, this is a super bubble...

In retrospect this era will be viewed as the biggest pump and dump in history. Nowadays, market manipulation is not just accepted, it's expected. After all, central banks do it all the time. The S&P 500 couldn't have reached this level without them.

Record IPO and SPAC issuance on Wall Street

Record short squeeze pump and dump schemes

Record crypto bubble

Vaccine biotech bubble

Cloud internet/Virtual economy bubble

In Elliott Wave terms, it's no coincidence these bubbles are all taking place at the same time. Because they are all part of the same bubble in social mood. Speculative fever is merely rotating from one asset class to another, leaving a trail of imploded bagholders in their wake. The SEC is too busy scrutinizing trading restrictions to realize the market is already falling apart in real-time. Every day for the past week all of the retail brokerages have been experiencing intermittent outages particularly in the morning. Why? Because of the ludicrous trading volumes.

The media coverage of these various pump and dump schemes invariably focuses on the few winners while assiduously ignoring the multitudes of losers. A bias that helps to fuel the "FOMO" fear of missing out on a pump and dump. The number one rationalization I hear all the time is that yes this is a bubble, but similar to the Dotcom bubble this can go on for years. The people advancing this argument were either not trading during that era, or they have amnesia. Yes, the Dotcom bubble took place over a period of years, however, widespread retail participation by neophyte investors only took place AT THE END of the bubble. At the beginning, most people were skeptical of buying revenueless internet stocks having no real business model. By the end they had contagious FOMO and were valuing companies based upon "eyeballs" aka. monthly active users of free web sites. I remember it well.

This particular everything bubble really took off over a year ago in October 2019 when retail brokers all reduced their commissions to zero. From that point forward, the number of new brokerage accounts accelerated. Then when the pandemic hit, new brokerage accounts exploded. However, this past week new accounts have once again reached new records particularly on Robinhood, which ironically has been experiencing major outages and has levied trading restrictions:

"Robinhood led the industry in app downloads last week by a wide margin, according to JMP Securities’ analysis using SimilarWeb app data. The free stock trading pioneer had more than 600,000 people download its app on Friday, compared with 140,000 on its best day in March during the Covid pandemic-fueled market rout last year."

Robinhood added more accounts this past Friday than all of the other major brokerages added during the entire month of January. Yes, you read that right:

"E-trade had its app downloaded nearly 220,000 times last month, according to SimilarWeb data. TD Ameritrade nabbed nearly 370,000 downloads and Charles Schwab had more than 75,000 downloads. Fidelity had its app downloaded 340,000 times"

Among the various bubbles, Bitcoin peaked back in early January just after Scott Minerd of Guggenheim investments gave it a $400,000 price target. From the January 7th high at $42k, Bitcoin fell -30% and bounced off the 50 day moving average. It appears to be a spent bubble deja vu of late 2017 when Jimmy Altucher predicted Bitcoin would reach $1 million by 2020.

 

Next comes the short squeeze bubble masquerading as populist uprising. What is touted as the masses occupying Wall Street is in fact merely a late cycle short squeeze deja vu of 2008. Gamblers are bidding up heavily shorted left for dead cyclicals under their belief in a fictional recovery. The more the stocks go up, the more they are deluded by their own capital misallocation.

This short squeeze will contribute to the extreme velocity of impending decline. 

Here we see via Gamestop what happens to EVERY short squeeze stock once the shorts have covered. 

Wholesale collapse. It's not just shorts who got burned, it's latecomer longs who got demolished as well.

“With volumes in all the hot stocks collapsing, silver attack met by margin, Robinhood having to seek fresh collateral at a rampant speed, the signals that the retail mania could unravel rapidly are aligning,”

The heavily shorted retail ETF peaked last week and is down 25% this week:

This week the Reddit mob attempted to organize a silver pump and dump, but it imploded after only one day.

Not a good sign for the number of fools left to follow. 

Arguably the biggest bubble of 2020 was the green energy, solar, electric vehicle craze. This bubble kicked off one year ago with the widespread divestment from fossil fuel energy. Then, when Biden got elected this bubble went parabolic.

Looking at the largest Alt-energy stock by market cap, we could make the case that this EV bubble is also running out of gas.

Pun intended.

Then of course there is the Virtual Economy/Technology bubble. This bubble which includes Cloud internets, semiconductors, software stocks, MAGA cap stocks etc. has been extremely persistent. Likely because in terms of total market cap it's the most ubiquitously owned bubble in the S&P 500.

Like every other bubble, it's merely a bubble in asset inflow momentum.

When this bubble explodes, it will be spectacular.

BTFD: Buy The Fucking Depression

In order to fulfill their mission of illusion, central banks NEED investors to ignore all risk and continue to allocate capital as usual. Investors have come to believe that volatility is a buying opportunity. Which is why even as the magnitude of each crash has grown, the increasing dislocations have been assiduously ignored. This blog exists to point out the many obvious ignored reasons why there is no happy ending to this tale of immoral hazard...

mor·al haz·ard

"lack of incentive to guard against risk where one is protected from its consequences"

Here we see the risk adjusted S&P 500 as imputed by price / volatility. In markets, volatility is a proxy for risk. The VIX is always elevated in bear markets, as it is now. However, compliments of the central bank Jedi Mind Trick, we are now in a "bull market" making recent new highs, attended by recession-level volatility. Something we've never seen before. For a reason. Investors are convinced they can get bailed out of any magnitude of crash.

We are about to put that fantasy to the ultimate system test.

"Gambles said this could cause a “systemic event” if brokerages begin to fail, highlighting Robinhood’s trading restrictions in various stocks last week. The commission-free trading app introduced the new controls after receiving a $3 billion security deposit request from the National Securities Clearing Corporation on Thursday, its CEO Vlad Tenev revealed on Monday.

However, Gambles also suggested that there could be a systemic risk from the hedge fund side."

 

What this chart above foretells is the end of the line for monetary euthanasia. The papering over of economic depression using massive amounts of liquidity. Those buying into this con job are happily oblivious to the economic devastation wrought by COVID. Four times as many jobs have been lost globally as were lost during the Great Recession. The S&P / VIX above visibly depicts the unprecedented amount of risk investors are willing to accept due to their lethal faith in central banks. 

“This has been the most severe crisis for the world of work since The Great Depression of the 1930s. Its impact is far greater than that of the global financial crisis of 2009,” said ILO Director-General Guy Ryder. The fallout was almost equally split between reduced work hours and “unprecedented” job losses, he said.

In addition, and more lethally, investors point to depression-level interest rates to justify ludicrous valuations. Stocks can no longer be properly valued in this Disney environment, because forward profit estimates now have the veracity of a Magic 8 ball. Which is why fundamentals no longer matter. All that matters is the daily drip feed of central bank dopium into the arms of monetary heroin addicted momentum chasers.

Unfortunately, zero interest rates - in addition to inducing infinite stock prices, also means that conventional monetary policy has no economic impact. Hence, the erstwhile "economy" is now entirely dependent upon the U.S. Congress, and the weak majority held by Democrats.

When this all explodes unexpectedly, the bailouts that follow will not be market friendly. They will be targeted at the middle class. They will be inflationary, and they will cause a paradigm shift in the investing landscape at a time when the market is scraping rock bottom. At that point, it will be impossible for central banks to both monetize the chasmic deficit aka. "GDP", and lubricate markets back to all time highs. The paradigm shift to middle class reflation won't allow it.

Which means that gamblers will be trapped owning bankrupt stocks in a dead-end stock market, which will be extremely volatile. They will be end-of-cycle bagholders, in the Wall Street tradition.

Over the past three decades, Japan has already amply proven that none of this stimulus chicanery works. They've also proven that central banks buying stocks directly doesn't offset zero economic growth.

December 2020:

 

This is what we can expect when this charade ends - a big sideways chop and many false promises. 

Until such time as policy-makers figure out that there is no such thing as free money.

 

"Which Stonks Should I Buy In A Meltdown?"

This is the type of cogent analysis you won't get anywhere else in Disney markets. While most of the world is focused on the Gamestop pump and dump "revolution", they are ignoring the true Ponzi risks growing by the moment...

However, a few of us understand what is at stake:

"The stock market turned into a spectacle to rival Super Bowl LV this week, as retail investors and hedge funds faced off over GameStop stock. Tom Brady and Patrick Mahomes will have a hard time providing as much entertainment to viewers around the world as this latest step in the gamification of financial markets."

Every bubble is associated with redistribution, and much of the alpha that professional investors boast about is nothing more than timing gains that are redistributions from other parties. The current populist moment in financial markets, like many other populist moments, will only serve to amplify that redistribution toward the rich and informed, all the while suggesting that it is doing the opposite."

This last point can't be overstated. This so-called populist movement to "democratize" markets is merely going to make a handful of early pump and dump specialists extremely wealthy at the expense of the fools that follow. For every one person enriched by these schemes, there will be multiple losers, none of whom will be interviewed by CNBC.

Getting back to the key point of this post, the inevitable meltdown of Disney markets. When this meltdown gets fully underway - which may well be the case already - we won't have time to reflect on the various dislocations. Therefore, we must think about these things ahead of time. I fully expect that most of these predictions will come true, however the timing will be the hard part, which I leave to the reader to discern.

First off, this event will put Disney markets to the ultimate system test, and they will fail. Market structure has been eroding for years, ignored by regulators.  Whereas the casino almost came unglued last Spring, the violence of this decline will break the market. First off, algos will step back from the market, taking liquidity down to zero. Brokerages will go offline. ETFs will implode. Circuit breakers which are meant to slow market decline will prevent traders from selling their positions and therefore prevent markets from clearing. Panic will ensue. At 2:00 pm each day margin clerks will liquidate gamified investors. Selling any positions they can, indiscriminately. Which means that no "stonks" will be safe havens. 

The magnitude and leverage of this bubble will test central banks to the breaking point. It took five weeks for CBs to get the crash under control last March. It will take a matter of several weeks again this time, however, the velocity of this crash will be far faster and far more violent. The market bottomed at -35% last time, this time we should expect a larger drawdown before they get it under control. Unlike last year, the market will not rocket straight back up. I expect some chopping and retest around a bottom as panicked investors sell. Then eventually a slow tentative rally will ensue. Confidence in Disney markets will be destroyed.

We should expect a currency crisis to erupt and spread globally due to the massive dollar carry trade that was set loose by the Federal Reserve promising to keep U.S. interest rates low indefinitely. The record dollar short trade will get monkey hammered. 

Along with a currency crisis will come an end-of-cycle credit crisis. Facing massive losses, over-leveraged lenders will step back from the market. Ponzi borrowers - which were bailed out last Spring will go into eventual default, unable to roll over their debts. The blood will be in the water.

Recall that Republican Senator Pat Toomey demanded that the Fed relinquish its special corporate bailout powers in the last stimulus bill. Which means that this time around the Fed will not have the ability to buy corporate bonds in the secondary market. Which will leave the corporate bond market open to wholesale collapse. 

As the meltdown spreads to the far corners of global assets, no major asset class will be spared. Deflation will be extreme. Policy-makers will respond with more monetized fiscal stimulus, however the effects won't be felt for months. 

The unemployment rate will explode.

Throughout this dislocation, t-bills and money market funds will be safe havens on a relative basis. And gold of course will be the ultimate safe haven, although it too will experience "volatility". I believe gold will go down initially and recover ahead of other asset classes.

Gamble at your own risk.  

Going forward, policy reforms will be market unfriendly - higher taxes on the ultra-wealthy, and the inevitable reregulation of Wall Street. The stock market will trade in a wide trading range for the foreseeable future, as policy focus turns to the long neglected economy.

All that said, from crisis arises opportunity. In the days to come I will be combing through the IBD (Investors Business Daily) innovator 50 list to determine which growth stocks to buy on a "dip". What could be the buying opportunity of a lifetime. Clearly green energy will be a key space for the coming decade, and this pullback may be a golden opportunity. From the ashes of the Dotcom bubble arose many of the Tech leaders of today. Those who bought Amazon at the nadir are long since retired. 

Those who think all this can't happen are ignoring the fact that it is already. Coincidentally, this coming week is the third anniversary of the 2018 Vixplosion, when Trump's tax cut blew up in their faces.

The set-up is identical:

Jan. 26th, 2018: BofA Risk Indicator At Cusp of Sell Signal

Jan. 22nd, 2021: BofA Risk Indicator At Cusp of Sell Signal

Good times.