Fake Recovery: MAX PAIN TRADE 2021

Of all of the massively overbought and overbelieved fantasies in this era, none will be more painful than the falsehood of recovery now being spun by global central banks...

The pain in the Tech trade is well along and primed to accelerate when the stimmy sugar high wears off. However, this consensus end-of-cycle value rotation will be the most abrupt and painful reckoning in the stock market.

As it was in 2008.

Then as now, gamblers and central banks are oblivious. Drugged by the virtual simulation of prosperity and its acolyte QE.  

In a recent post I posited that reflation is no longer possible under the current paradigm of Global Japanification. The Federal fiscal multiplier has collapsed and the virtualized economy is no longer labor dependent. When the U.S. had a sound middle class and tight labor market, sustained inflation was possible. Now, amid mass unemployment, it's no longer possible. 

There are several major structural changes that would have to take place to change my mind. First and foremost the global debt and asset bubble needs to explode, which will be an extremely deflationary event. Secondly we would need to see increased trade protections as currently the U.S. is importing deflation from abroad. Third, there would need to be a recurring basic income which will merely offset rampant poverty. Generally speaking there would need to be an ideological shift towards more labor friendly policies, and then mass unemployment would have to be alleviated. Of course all of this would take a long time and in the meantime deflation will be extreme.

For major debtholders and those who have over-leveraged themselves to this massive con job, it will be quite painful. On the other side of reset there will be a glut of everything which will take time to clear. Given that as background, suffice to say there is no sustained inflation on the horizon. What inflation exists is commodity inflation feeding back into the CPI, mostly through oil prices.

Given all of that, I see the most painful trade being the unwinding of the record short t-bond trade. When the global RISK OFF crash gets out of control, the Fed will obliterate consensus t-bond shorts. I see long-term t-bond yields heading to 0% by the end of this year. The short squeeze will make Gamestop look like chump change. T-bonds are the only asset class that has a guaranteed bid when this all explodes, and the Fed is already getting nervous.  

TLT (Thirty year bond ETF) has substantial upside over the coming months, and will outperform stocks massively in 2021.

In summary, don't fight the Fed. 

Gamble at your own risk.

Or, you could just bet that this will go to infinity.

Because that is what everyone else is doing.

2021: The Age Of Assholes Is Ending

Social media has provided a false sense of groupthink invincibility around markets. It's a con man's paradise marked by an extremely casual attitude towards fraud and an unquestioned faith in central banks, last seen at the 2007 market top...

July 2007:

"The Citigroup chief executive told the Financial Times that the party would end at some point but there was so much liquidity it would not be disrupted by the turmoil in the US subprime mortgage market."

Per the title of this post, for four years straight we were ruled by greatness seeking Neo-Nazi Qanon acolytes. Now we are overrun with left wing cancel culture snowflakes re-ordering reality to ease their accelerating mental breakdown. The one inexorable bond they have in common, they are all assholes. Granted, one year ago it looked as though COVID was the reality check. COVID accelerated the demise of the legacy economy. It collapsed carbon down to 1993 levels, and it ended the reign of McDonald Trump. Then, Biden ushered in the era of the middle class bailout, however somehow the stonk market came along for the ride. A turn of events that Karl Marx himself would have never predicted. Here is a downtrodden, beleaguered middle class gambling their Willy Wonka ticket in the casino to garner a bigger payout.

Skeptics of Disney markets be on the lookout, asset inflation is imminent:

I've read many articles recently talking about the hyper-inflation about to be unleashed by Biden's stimulus. Now we learn that almost 40% of the stimulus money is heading for the stock market in order to front-run inflation. The rest will be spent on credit card bills, past due rent, hookers, and blow. None of it will be "reflationary". 

I will go out on a limb and suggest that credit crisis is priced in to empty shopping malls and empty stores:

Of the money headed for stonks, most of it will go into various Reddit organized pump and dump schemes. The rest will go into Tech stocks so that large institutions can finish cashing out of the most crowded trade of 2020. It's called distribution, and it means dumping large amounts of unwanted stocks on late cycle bagholders while they still believe every dip should be bought. 

"Retail investors are likely to flock towards meme stocks with their stimulus money, as they are more likely to take on risk for a potentially big reward."

Reddit traders are also paying close attention to Cathie Wood, CEO and CIO of ARK Investment"

Of the pump and dumps listed in the linked article above, not even one of them is near a new all time high GME, AMC, RBLX, PLTR, TLSA, RKT, AAPL, IPO, AMD, NIO

Stimulus scams are sky-rocketing, however, this era's biggest scams have ETFs associated with them. And in the case of Reddit pump and dumps, Congressional oversight to ensure equal access to all retail bagholders.

Business Insider: The Accelerating Economy Is Biggest Market Risk

"Tech had its time in the sun. The group has had the strongest annual average return since 2007 of all 11 S&P 500 sectors and led the overall market in three of the last four years"

The dichotomy between the smart money and the dumb money grew to an epic divergence this week. 

Here we see that active managers have taken down their risk exposure to last March levels, and before that December 2018:

On the other hand, the retail sentiment American Association of Individual Investors (AAII) shows bears near cycle lows.

The arrow points to this month last year:

The weekly chart of momentum stocks shows the similarity to last year, and the year before that. 

Deja vu of Y2K, the Nasdaq peaked a month ago and the cyclical heavy Dow is now leading. This is now the largest one year gain for the Dow since 1933. 

This is the largest one year gain preceding an all time high in market history.

In summary, it's getting very late in the pump and dump cycle.

FOMC: Fear Of Missing Crash

The dumb money has only one thing going for them - printed money and a lifelong commitment to pursuing effortless wealth...

Recall what Hugh Hendry said about Disney markets and those who place their faith in them:

"The enlightened chose the red pill, and so are convinced that they understand everything which has become illusory about today's markets...They know that today's central bankers are spinning a falsehood of recovery; they steadfastly refuse to be suckered in by the euphoria of a monetary boom; and they are convinced that they will therefore be spared the consequences of the inevitable crash. Everyone else, currently drugged by the virtual simulation of prosperity and its acolyte QE, will be destroyed"

Any questions?

It's that time again, when all of the big central banks are reporting their money printing plans for the future. Today it was the ECB's turn to surprise investors with a bigger money printing plan than expected. 

So far, this week is the exact inverse of last week. Last week the market was crashing from Monday to Thursday and then it rebounded Friday which set off this week's rally. In retrospect, last week was a bear trap. This has been the biggest five day rally since Biden was elected four months ago:

This is where it gets interesting.

Last March, Tech stocks became multi-year oversold and then bounced on a Friday. This current rally off of one year oversold conditions is the analog of last year's rally with a couple of minor differences. First off, this decline was larger in % terms than last year. And this rally has so far been one day longer and has reached a more overbought level (lower pane). However, clearly relative to the all time high, this year is a weaker retracement:

Moving on to the Nasdaq 100, we see a similar picture from last year. However, we see that down volume on the Nasdaq was epic this year meaning that dollar volume is already far greater than it was in all of March last year. And yet so far the price damage is far less than the full extent of last year's decline:

Of course, what is driving the Dow and S&P to new highs are cyclical stocks which are the INVERSE of last March.

Cyclicals are multi-decade overbought (top pane). A routine retracement back to the 200 dma is now a deep bear market away.

We learned this week that only six stocks out of 30 account for all of the Dow's gains year to date. Because the Dow is price weighted versus market cap weighted, Goldman Sachs alone accounts for 36% of the gains. 

Only four stocks confirmed the Dow's all time high on Thursday:

Europe is now leading this global headfake rally, however we have reason to believe this latest fiscal stimulus rally is running on the same glue fumes as the Trump tax cut rally:

Outside of Europe, the global market that is most interesting is China where deja vu of 2015, Chinese policy-makers are doing everything possible to prevent a meltdown. Back in 2015, they banned short selling, they halted the market for days at a time, then they banned institutions from selling. Nothing worked. The total loss was -60% and the rest of the world was accidentally imploded. 

A cautionary tale for those Millennials who assume central banks are invincible.

"Chinese stocks fell more deeply into correction territory despite state-backed funds, known as the "national team," intervening to ensure stability"

The Chinese stock market has dropped sharply from recent record highs over concerns that equities are overvalued and exposed to the impact of rising US bond yields."

What was it that imploded global stocks in 2015 and 2018? Rising U.S. interest rates:

The Last Sugar High

The cyclical heavy Dow made a new all time high today unconfirmed by every other major index. This is setting up to be the largest and most unexpected crash in history. Overbought and overbelieved by a society of stimulus addicts high on monetary and fiscal heroin running at a combined 30% of GDP. Easily enough to kill someone...

First off, I revisited my 2021 predictions last night, and aside from the fact that this rolling crash has not yet taken down the Dow and S&P, my predictions are right on track. Since I wrote that prediction back in early December, the Democrats have taken full control of Congress, TWO massive stimulus bills have passed, and the vaccine is now in widespread distribution. 

Had someone told me that all of those reflationary events would occur, I would surely have predicted extreme reflation at this point, absent the larger crash. However as of this writing I am even more convicted of impending deflation. The final crash will be the last nail in the deflationary coffin. 

The U.S. is now Japan in the economic sense, which means that absent major structural changes to the economy, no amount of fiscal and monetary stimulus is going to create lasting reflation. Even this most recent stimulus package won't give more than a few weeks of economic sugar buzz. From a markets standpoint, it's already priced in several times over. 

There are several problems with the economy right now, in addition to the obvious COVID lockdown hangover. It's becoming abundantly clear that U.S. government stimulus is no longer stimulating the economy. As I've pointed out, the U.S. is borrowing 20% of GDP to have a 4% growth rate. That implies that the Keynesian economic multiplier is now negative in absolute terms and fractional in relative terms. Historically, the fiscal multiplier as one can discern from its name, was expected to create GDP in excess of the amount that was being borrowed. 

There are many reasons why this could be happening, but the most obvious reason is that the government is merely replacing activity that has been lost in the private sector with essentially subsistence welfare checks that represent consumption absent production. COVID erased five years of job growth, and fiscal stimulus is attempting to paper over it. 

Below we see what I call "Honest GDP", it's nominal GDP - the deficit. Stripping out unemployment checks and one time stimmy payments, economic activity is back where it was five years ago. Meanwhile, a 20% budget deficit implies that much of this borrowed money is now going to foreign imports where it will do nothing for GDP:

According to the Krugmanite doctrine, budget deficits never matter. And according to Republicans, deficits only matter when Democrats are in office. One thing they both share in common is that they have been assiduoualy ignoring the Faustian bargain that comes along with a reserve currency. Because if they admitted it existed, they would have been duly discredited a long time ago. 

The assumption that deficits don't matter, is predicated on the belief that interest rates will never rise and the economy will remain in a perpetual state of deflation. If interest rates rise significantly and worse yet permanently, then the U.S. budget would be crowded out by debt service. Currently, the U.S. is borrowing 400% of its GDP "growth", so making the interest payment is easy, since it's all borrowed money. Imagine what would happen if interest rates rose sharply AND the government could not repay its lenders by borrowing more money? As long as the real economy never recovers we don't have to worry about this accelerating debt load, we can remain in deflationary purgatory and rejoice like idiots that deficits don't matter. 

One of the consequences of all this debt is that now the economy is hyper-sensitive to inflation. THIS (1.7%) is the runaway inflation that the majority are currently worried about.

Soon it will be time to raise the Fed funds rate and be glad that honest GDP never went positive. This is how Japan ended up tethered to the zero bound:

All of which is also why dollar destruction is NOT imminent. Below we see that the velocity of money has collapsed, which is another sign that the economy is structurally damaged:

"The velocity of money is a measurement of the rate at which money is exchanged in an economy. It is the number of times that money moves from one entity to another...Simply put, it's the rate at which consumers and businesses in an economy collectively spend money...High money velocity is usually associated with a healthy, expanding economy. Low money velocity is usually associated with recessions and contractions."

The other major factor impinging on this recovery is the fact that COVID accelerated the automation of the economy. People are now used to online shopping, takeout dining, online dating, online classes, working remotely. Go into stores and you can have contactless shopping via self-checkout. All those people who used to work in restaurants and retail can now sit at home, smoke pot, and play Xbox, while collecting stimmy checks. Because what other choice do they have? We are facing a potential lost generation in the aftermath of the virtualization of the economy. The inevitable consequence of "free money". 

Getting back to the casino:

Two things happened today, first deja vu of the first House vote, Tech stocks opened higher today and then rolled over closing at the lows of the day. One should be asking why were Tech stocks up at all today given the impending stimulus vote? Clearly Tech shorts were covering ahead of the vote, knowing that if it failed, Tech would have screamed higher, and cyclicals would have exploded. Crisis averted.

Ironically, the Tech trade would be the right trade for the deflationary times to come, IF it were not already a collapsing bubble:

 

I maintain that the Dow's new all time high today is setting up to be an historically massive headfake, as this current divergence with the Nasdaq is deja vu of Y2K:

"In early 2000, the view, like today, “was that equities were not interest rate sensitive any longer and that the business cycle had been repealed”

“The lesson here is that near or at market peaks, it is common for the Nasdaq to first succumb to the overhyped inflation fears and the rise in bond yields, and after the mega caps slip, the Dow follows with a lag”

Contrary to what we are told by Wall Street this is not "early cycle".

The comedown from this last sugar high, will be biblical.

The End Of Stimulated Prosperity

It's abundantly clear that some people don't know when the pump and dump is over...

In the day to day sturm and drang it's easy to forget where we are in the implosion cycle. The permanently optimistic bulls have a way of convincing everyone that these dislocations we are seeing in markets are nothing to worry about.

Cathy Wood whose Ark ETFs sucked record capital inflows into the all time Nasdaq highs in February before falling -35% into deep bear market, is out this week soothing her trapped investors with happy talk. She says that high interest rates are great for Tech stocks so she has been doubling down on Tesla and other speculative momentum favourites. Her impending new price target for Tesla is expected to be at least double the all time high from February. She is the Mary Meeker of this era.

Over in SPAC land despite last week's monkey hammering, fake hope springs eternal. The number of listed SPACs now far exceeds the 2020 previous record.

Rising bond yields have been unkind to growth stocks. Their impact on the special purpose acquisition companies has been downright cruel. The SPAC boom has become the Spacpocalypse. Nobody should be surprised.

Tech stocks are bouncing back from yesterday's drubbing ahead of the final fiscal stimulus vote expected Tuesday night or Wednesday morning.

Here we see that after the first House vote on Feb. 27th, Tech stocks imploded lower at the 50 dma. Now the second House vote is at the 200 dma (red line). In the lower pane we see that overall Nasdaq breadth is languishing at the March 2020 super crash line.

In my opinion, Tech stocks will soon be re-testing the March 2020 lows. 

So that takes care of Techland which is hanging by a stimmy vote. But now what about this final mega bubble, fake reflationary recovery? It stands to reason that reflation expectations will peak with the vote itself. After which, it will be the most crowded trade of 2021, featuring a big crowd and a non-existent exit.

"Bond bearishness hit a record level last week as investors piled into short bets on Treasuries."

In summary, anyone who still believes that crowded trades work, hasn't been paying attention to markets in 2021.

100% Smoke And Mirrors For Everything, Alex

Over the years many people have told me that no one can predict the future. These are people I don't trust very much anymore. After the money printing insanity, comes the "we didn't know this would happen" bullshit...

None of this is about predicting the future. This is about predicting that the most asinine economic ideas in history will end badly. And that the blind followers of this gambit will be obliterated. Sure, we could choose the path of mass ignorance. We could pretend that monetary alchemy comes with no consequence. But can we really choose to ignore the truth? Can we watch the same movie over and over again, and STILL forget the ending? That takes a special mental deficiency not all of us possess. 

All of this stimulus-driven chicanery follows the path of exploitation which is the hallmark of globalization. There are winners and there are losers. The winners keep winning, and the losers keep losing. Those are the rules, and the system is rigged by continual monetary intervention on the behalf of the ultra-wealthy. Those are the people who are continually selling stock to retail bagholders in what will come to be rightly viewed as human history's biggest pump and dump. Gamestop is merely a miniature version of what is taking place in the S&P 500. In the same way that Bernie Madoff was jailed for his pissant Ponzi scheme while the real criminals got a free bailout for imploding the global financial system. 

One must ask themselves, at what point did modern democracy morph into a choice between socialism or slavery? Because that was the seminal fork in the road. Given the choice, I will gladly take socialism over slavery, however, today's conservatives still haven't figured out that it's the better choice. That will be the lesson they learn the hard way. 

Apologists for Ponzi capitalism will assert that it didn't have to be this way, but according to their own rules it did. The middle class has been systematically strip-mined of job security and job benefits for forty years straight. The new book Evil Geniuses does a great job of chronicling the recent decades of economic plunder in all of its sordid detail. A permanent stain on the Grand Old Qanon Party of McDonald Trump.  

All of which criminality exploded in 2008 leading to a perpetual state of deflationary malaise. So along came Trump in 2016 running on the idea of breaking out of the deflationary funk. His idea was to eliminate corporate taxes and borrow as much money as possible to make up the difference. Basically how he ran his businesses into the ground. By 2018, all of that "free money" had jacked up interest rates on the middle class and the market crashed into the end of the year. Fortunately in early 2019, the Fed bailed out the Casino and it was off to the races again with a few hiccups along the way as the Fed was forced to monetize a trillion dollar deficit to placate the overnight repo market. 

Then 2020 came along and we all know that story. I have said before recently that these two back to back bailouts by the Fed look very similar. Here is more proof:

Which gets us to 2021. What the Democrats are attempting right now with this current middle class bailout bill is noble, and good, and for the right reasons, however it violates ALL of the rules of Globalization. Globalization is supposed to be for the rich at the expense of the middle class. Not the other way around. This level of fiscal stimulus is surely going to blow up "the system". For good.

The seeds of destruction are documented in this article published today indicating that China and the U.S. have swapped playbooks from 2008. The Democrats remember early 2009 very well when the newly elected Obama/Biden White House was stymied by a Republican-controlled Congress which severely limited stimulus. Now it's payback time.

On the other hand, the Chinese remember all of the ghost cities that were built after 2008, and they have vowed not to do that again:

"The widening policy divergence is putting strains on exchange rates and could potentially reshape global capital flows"

Unlike many of its peers, including the Fed, China’s central bank has continued to calibrate its policy partially with a view to prevent an excessive rise in asset prices"

It's working. 

Many Chinese Tech companies are cross-listed on the Nasdaq. And they are holdings in some of the most popular Tech ETFs.

Now in meltdown week four deja vu of last year:

China pulled the world out of recession in 2008 with its massive infrastructure projects. However, the U.S. can't become the same engine of growth, because the 20% of GDP budget deficit is sucking capital out of global markets. The first order effect of higher interest rates (bond yields) is a stronger dollar. 

The Democrats remind me of Trump & Co. in 2018, totally clueless as to how global markets work. Janet Yellen reminds me as to how she was in 2015. 

Totally out to lunch. 

A Generational Meltdown

Millennials have turned the stock market into a massive casino. The results will be catastrophic for those who are now betting their retirement on the market equivalent of the Wynn Las Vegas. Multiple generations are now competing for reckless abdication of responsibility...

First, some long-term perspective, in which the worst pandemic since 1918 facilitated the shortest bear market in U.S. history (one month), following the longest bull market in U.S. history, eleven years. 

Or, a supercycle blowoff top: 

In talking to the Millennials in my life, one thing remains clear - the old man doesn't know what he's talking about. Those of us who still remember the painful Dotcom boom and bust and the more painful 2008 meltdown, are unfortunately few and far between. One must be old enough to have experienced it first hand, and still young enough to avoid mental infirmity. The Millennials who were in diapers during the first bust, and elementary school during the second, have absolutely no recollection. For educational purposes, they will now be entreated to a combination Dotcom style Tech implosion, 2008 style credit crisis, and 1930s style unemployment, all at the same time.  None of which they see coming. 

The asinine level of this entire delusion can only be considered in the context of market history. We are to believe that the shortest bear market in U.S. history - a mere one month - corrected the longest bull market in history of eleven years. You have to be brain dead to believe this shit, or just one of today's typical market pundits.

The only way to view this ludicrous fantasy is to compare the length of each historical bear market (since WWII) relative to the preceding bull market:

As I write, the latest stimulus bill just passed the Senate on Saturday, leaving one more vote in the House on Tuesday. Which means that we should be seeing peak reflation expectations priced into markets in the coming week.

This recovery is a true Millennial recovery because it's 100% smoke and mirrors. Including this latest stimulus bill, the 2021 deficit will be 20% of GDP. Debt is the new GDP. It's clear that this society is now stimulus addicted. In the spirit of full Japanification, there is no cogent plan for how to replace the five years of jobs lost during the pandemic. Were it not for the impending meltdown, all of this printed money would be hyperinflationary. Unfortunately, the massively bloated credit market can't take more than a wafer thin mint of reflation before it explodes - a process that is underway already. 

As always, Oil and Energy stocks are leading this late cycle charade, and as we see below, their three wave correction is perfectly symmetrical from the March low:

As always, some long-term context is in order:

In addition, this week is the anniversary of the Dotcom bubble explosion. And as we know, Tech stocks have been down three weeks in a row, for the first time since March Madness 2020. So what to do? Double down on risk:   

Going into this week, we are informed that the Reddit gang has been doubling down on imploding Tech stocks. Because they have what they call "diamond hands", meaning they are invincible to risk:

"Since the market peaked a few weeks ago, retail traders have plowed cash into U.S. stocks at a rate 40% higher than they did in 2020, which was a record year. They’re opting for parts of the market that have suffered the most, doubling down in arguably risky ways with triple-leveraged tech funds and options galore."

Got that? They've been doubling down on the parts of the market most exposed to inflation risk in order to front-run the THIRD massive fiscal stimulus package in the past year. Apparently they don't remember last December when stimmy 2.0 tanked Tech stocks in late December. 

Cathie Wood aka. "The Money Tree" is the 65 year old CEO of Ark Funds - the world's most popular Tech ETFs. Some observers have said that she is the Baby Boomer who invests like a Millennial.

A very apt description, as she too has been doubling down on losses for the past three weeks.

"Based on the firm's daily trading activity, Ark Invest was consistently selling large-cap names like Apple and Amazon to fund purchases of riskier companies like Tesla and Palantir"

Buckle up, because an entire generation - and those who invest like them - are about to get the lesson of a lifetime, at the point in history when they can all least afford it.

"In the broadening top formation five minor reversals are followed by a substantial decline."

It is a common saying that smart money is out of market in such formation and market is out of control. In its formation, most of the selling is completed in the early stage by big players and the participation is from general public in the later stage."

The dumb money always comes in at the end. Why break with tradition?