Hyper Asset Inflation Hyper Asset Crash

Monetary policy is no longer helping the economy and the fiscal multiplier has collapsed, so the ever increasing firehose of "stimulus" is having its primary effects on markets...

The greatest risk we face - and one that none of today's pundits are discussing is the fact that ludicrous amounts of stimulus are now needed to move the economy. Stimulus that is having far more impact on markets than the economy. This is a risk that policy-makers have implicitly accepted and of course casino gamblers could not be happier. However what it all means is that the inevitable reversion to the mean will be a devastating crash AND there will be no stimulus safety net. 

Here we see from a chart of cyclicals that long-term bond yields have just now reached the 2009 lows. And yet, all of today's pundits are panicking that bond yields are too high. Why? Because back in 2009 at this level of deflation, cyclicals were down -80% from the highs, whereas now they are up 180% from the lows. Again, all of today's monetary policy is now fixated solely on markets, and because this stimulus is having a dwindling effect on the economy, we now have a case of epic over-valuation and a moribund economy.

Policy-makers are pushing markets inexorably towards an epic crash with no economic safety net. 

The reason why all of today's economic analyses are clueless is because economists are using year over year % gains to measure improvement in the economy. When the baseline is the worst depression in 90 years, year over year comparisons are meaningless. They need to compare to 2019 as their baseline, not 2020. For example, on GDP, the Congressional Budget Office puts calendar year 2021 GDP growth at 6.3%. Goldman Sachs estimates 2021 growth at 8%. However, using 2019 CBO numbers as a baseline, the TWO YEAR growth rate is actually 3.8% which is 1.9% per annum. Somehow, 2% GDP growth and 20% growth in national debt, doesn't sound as good. It implies a fiscal multiplier of 10% - spend $10 of government money to get $1 of GDP. 

We see this type of disingenuous data mining all the time. Here we see that the most recent CPI came in at 1.68%. And yet according to Zerohedge, we are on the verge of becoming Zimbabwe. 

What we have isn't sustained inflation, what we have is asset inflation due to rampant speculation, feeding back into the economy, where it's doing far more harm than good. 

For example, we are told that a lumber shortage has caused lumber prices to skyrocket, which is now tanking the housing market. 

Here we see housing starts (black) with lumber prices (red). Housing starts today are far lower than during the housing bubble, yet lumber prices today are far higher:

Of course monetary policy is now ENTIRELY skewed towards markets. At the 0% bound, there is no room to cut rates to help the over-levered economy. In addition, quantitative easing is solely intended to give risk asset markets the feel good fake wealth effect. The theory is that the economy will eventually catch-up to epic over-valuation. Someday, over the rainbow. 

Unfortunately, there is no such thing as "free money". This is a lesson that today's pundits, the public, and the Fed still haven't figured out. By attempting to monetize the Biden deficit, the Fed is now driving reflation expectations higher. Which means they are in a box - they can keep buying bonds and driving bond yields higher until global risk assets implode, or they can stop buying bonds and watch the over-supplied t-bond market go bidless, imploding risk assets. Either way they have effectively lost control of the bond market. 

This article from Mohammed El-Erian gives the long version of what I just said. And no, the Fed did not just "thread the needle". They bought a one day short-covering reprieve from higher bond yields. 

Here we see the Fed balance sheet and T-bond prices. In the deflationary phase  of 2020 massive bond purchases held up the bond market. Now, in the reflationary phase, the massive doses of liquidity are having the predominant effect of driving up reflation expectations, which is crushing the bond market.

This past year the Fed expanded their balance sheet by $3.5 trillion, mostly buying long-term Treasury bonds. And yet prices have collapsed. What should they do now, buy more?

El-Erian:

"Trying to calm the yield concerns by signaling more purchases of securities, thereby risking yet another leg up in inflationary expectations"

Of course we've seen this movie before but never when the impending outcome was this dire. We saw headfake reflation in 2008, 2011, and 2018. The Dow drawdowns were -55%, -20%, and -20% respectively. 

What it comes down to, is that in order to appease financial markets, the economic bar just keeps getting lower and lower and lower, while asset markets keeping going higher.

This is an asinine divergence that can only end one way. When everyone agrees it's an asinine experiment. In the meantime, they need to get conned by asset inflation and the attendant bullshit, one, more, time...

PEAK SUGAR HIGH

There has never been more combined fiscal and monetary heroin coursing through the veins of Disney markets as there is right now. The Fed's plan is to allow markets to "run hot". So be it...

Yet again we are reminded that today's monetary policy is solely aimed at managing markets at the economy's expense. Most of today's critics blame the Fed for this policy, however these apologists for corruption should be aware that the majority of today's wealthy have no complaints whatsoever. Regardless of who gets the blame, what so many of today's pundits call "running hot" would have been a deflationary depression at any other time in U.S. history. Now that debt is fully conflated as "GDP", the Fed must at all times be mindful of market reaction regardless of the level of long-term unemployment. Now, the market IS the economy. Once again, long before any of the long-term economic damage can be repaired, stock market overvaluation and bond market decimation will require stimulus reversal. 

Today however, the Fed was again dovish meaning they are choosing to allow risk markets to "run hot". Clearly they have no fear that risk assets are becoming overheated. That fear is reserved for moribund economies. 

One might ask, why are Tech stocks bid in light of the Biden stimulus and the Fed easy monetary policy. After all, aren't Tech stocks inversely correlated to interest rates? Yes they have been inversely correlated for months, however one must keep in mind that this week and today in particular is peak stimulus. The point at which the majority of stimulus checks are deposited into brokerage accounts. In other words, lucky gamblers got both their stimulus check AND a dovish Fed on the same day. MAXIMUM monetary and fiscal heroin.

And yet amid record combined fiscal and monetary policy, the S&P 500 eked out 11 points on the day. The Powell curse was avoided today and all it took was $1.9 trillion in stimulus. Needless to say, when the sugar high wears off, I remain somewhat skeptical as to what happens to overheated risk markets.

And, as always us skeptics of Disney markets are in the minority.

“The younger you are, the more I’m begging you to take an aggressive stance on something speculative”

On Cramer's speculative buy list for newbie gamblers he has both Snowflake and Gamestop. Two things that go great together. 

This morning even Cramer was saying that the SPAC market is totally out of control. He says this amount of issuance is going to crash the market at some point. Junk overload.

This marks one year and counting without a RISK OFF event.

In summary, today's Fed actions combined with stimmy overdose just cranked the stock/bond ratio to full level '11'. Meaning an unwind is now unthinkable for trapped gamblers. 

They better hope it's going to infinity, because that is now their consensus bet. 

Another Wall Street "Recovery"

The lesson that apparently very few of us learned in 2008 is that you can't trust proven criminals. For president or any other trusted occupation...

The reason that my predictions around the economy diverge massively from those of Wall Street economists, is because we have very different definitions of "recovery". For financial managers, recovery means that corporate profits and asset prices are back at all time highs. My old fashioned definition of recovery means that the average person feels that things are actually getting better. In this day and age, those two goals are diametrically opposed, so we need not hold out imminent hope on the latter.

After the 2008 meltdown, economists declared the recession was over by June 2009. However, for many households, the economic pain went on for many years afterward. Then as now, the 2008 recession created massive numbers of long-term unemployed workers, on a scale never before seen in U.S. history. For Wall Street, the recovery was almost instantaneous, as it was this past year. 

"The Labor Department’s technical definition of “long-term unemployment” applies to someone who’s been jobless for 27 weeks or longer — a bit more than six months."

In the January jobs report, that was 40% of unemployed folks. That’s not even taking into consideration the people who’ve just given up and left the labor force altogether."

Here we are all over again. Wall Street is busily declaring that the "recovery" is well underway. And for the middle class, the same long-term hangover effect is now in place. Of course this time around we have massive and dramatic stimulus for as far as the eye can see. However, the current unemployment stipend of $300/week works out to roughly $7 an hour. So, for a minimum wage worker that amount gets them back to the poverty line. For high wage workers, that amount plus their normal state unemployment is a pay cut. There is no reflation in either of those scenarios. 

This ongoing deflationary morass is corporate paradise. It's deflation combined with jobless consumers. Cheap capital, cheap labor, and pain-free layoffs at public expense. 

Notice that today's ebullient claims of recovery assume interest rates will remain at emergency levels indefinitely, as will QE, and the Federal debt will continue to explode. What in previous times would have been called a total fucking disaster, is now called "recovery". With each iteration, the bodies get stacked up like cord wood. 

As Japan has proved, this can go on for a very long time. Japan has the largest debt as % of GDP in the world, and yet which currency is considered the ultimate safe haven? The Yen. When markets go into meltdown mode, the Yen is the asset class of choice. And the second safe haven is the Ponzi dollar, third the negative yielding Euro. 

I am not a conspiracy theorist, because I don't consider greed to be a conspiracy. However, we should be aware that the beneficiaries of this 9-11/Lehman/COVID permanent economic Shock Doctrine don't EVER want it to change. So we need not assume that the economic "reforms" I listed recently, are pending. One should ask themselves, how can an economy that is systematically oriented towards making the richest people consistently richer ever create "reflation" for the middle class? Obviously it can't. For the ultra-wealthy, the marginal propensity to spend is extremely low. Most of their wealth gets saved. Which is a major reason why government stimulus is no longer stimulative. The money goes from the Federal Reserve to the U.S. government to the stimulus recipient, to the corporation, to the bottom line, and out to the Cayman Islands. It doesn't get re-invested back into the economy. Almost half of it goes to stonks to front-run imminent reflation. 

Which is also why the velocity of money has collapsed. Banks are happy to sit on excess reserves and earn interest from the Fed. At peak household debt, the stimulus money is not circulating back into the economy. 

The consistent theme that has accelerated over the past decades is for monetary policy to be hyper-tuned to financial markets at the expense of the economy. As interest rates have plummeted during this period, the general consensus for what is a "hot economy" has declined inexorably, and along with it capacity utilization and full time employment. As I've said, this hyper-sensitivity to "inflation" is due to the massive amounts of debt. It has effectively lowered the speed limit on the economy to the zero bound. 

Currently we are told that bond yields are too high, and the economy is over-heating. What they mean is that the financial markets don't like to see big wage gains, so we need to shut down the reflation party before it becomes too inclusive. 

Stepping back for a wider perspective, decades ago futurists predicted that the society of the future would work less and spend more time on recreational pursuits. For decades they were wrong, but after the stagflationary 1970s, the inexorable decline in inflation, full time jobs, and interest rates brought their prediction to fruition. COVID and the virtual stay-at-home economy merely accelerated the trend that was already in place.

The future has arrived:

"Automation, in tandem with the Covid-19 recession, is creating a 'double disruption' scenario for workers," said the report published Wednesday in Switzerland by the World Economic Forum, which warns that inequality is likely to increase unless displaced workers can be retrained to enter new professions."

For the first time in recent years, job creation is starting to lag behind job destruction"

Got that? For the first time ever, technology is now destroying more jobs than it creates. The secular trend of increasing employment that has been in place since the industrial revolution began, is now reversing. 

Now, before everyone jumps off a bridge, I don't personally view this as entirely bad news. I think that the next generation needs to devote their time and training to professions that are less likely to be automated. I think for many older people who are pre-retirement this implies part time work in conjunction with time spent on other interests. I am also optimistic that with Trump we achieved peak Assholism with respect to the policy of robbing the middle class to pay the rich. No one can say we didn't try hard enough. 

What about universal basic income? I think it will be basic but it will not be universal, it will be means tested. And hence it will not be inflationary. Again, corporate paradise. Part time workers subsidized by an unlimited balance sheet. Think $10 minimum wage and $5 basic income. Something along that lines. 

From an investment standpoint, all of this means that we are entering the long sideways. Meaning buy the dips and sell the rips. As far as imminent dollar destruction is concerned, Japan is 31 years and counting with the world's most printed safe haven currency.

What does this have to do with explosion? 

Nothing. It's still well on track, the masses are still going to shit a brick as expected. And then like the Japanese, NO ONE will trust the stock market. 

That will be the time to buy. The rule in all pump and dump schemes is that you can rent delusion, you just can't own it.

Of course there will be re-regulation of Wall Street, but it will come far too late to save the usual bagholders. Those who STILL trust Wall Street and their bullshit recoveries, deserve their certain fate.  

We are very late in the pump and dump cycle:

Stimulated Prosperity

One year later and central banks have succeeded in creating human history's biggest pump and dump scheme. They couldn't have done it without Reddit, Robinhood, and comatose regulators. The over-stimulated losses will be astronomically unaffordable in the worst economy since 1930. All of today's economic predictions are now riding on the biggest bubble in human history...

One year since the steepest depths of the March 2020 crash and what has changed? Gamblers are throwing their third stimulus check into the casino this week in order to bid up their stimulated prosperity:

"During the “hope” period, between March and November, healthcare and technology stocks soared at the expense of financials, airlines and others hit by contracting economies and travel bans. The two sectors now comprise 42% of global equity market capitalisation compared with one-third before the pandemic hit."

On the chart below we see that at the February highs last month, the one year Nasdaq % gain equaled the melt-up in Y2K. As we see, the uptrend line was never broken. The "bear" market of last year doesn't even register on the weekly rate of change (lower pane), that's how fast the rotation from cyclicals to Tech stocks took place. 

Now, deja vu of Y2K, markets are reversing out of Tech back into cyclicals. Gamblers are under the firm belief that cyclicals can take over from the Tech/healthcare sectors that now dominate market cap. Unfortunately, the Dow's outperformance into this top is the greatest in history, going back 100 years. Only today's copious fools would believe this will continue, which is why it goes unquestioned.

This is a far deadlier set-up than what occurred in Y2K. 

Broadening top:

"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."

"Retail investors are continuing to jump into the market in droves even after the dust has settled from the GameStop trading saga."

How to explain to the grandchildren that a massive pump and dump scheme was the reason traders flocked to the markets at the end of the cycle?

Fear of missing out.

"Do you have fear of missing out on all this wild trading going on this year? Would you buy a FOMO fund if someone offered it to you?

Some investors are betting you will."

There already is a FOMO ETF, it's called XRT. Gamestop is its largest holding.

Of the three major rallies in the past five years - two of which already failed, this one is by far the fakest, and least questioned. 

The global Dow has been decade overbought for four months now. Looking at this chart one would have no clue that this is the weakest global economy since the Great Depression. Job losses are four times worse than the 2008 Great Recession. 

What all of today's "experts" have forgotten is that monetary policy no longer stimulates the economy, it only stimulates markets. On the fiscal side, the U.S. economic multiplier has collapsed to the point at which a 20% of GDP deficit is only producing 4% GDP growth in 2021. As the third stimulus gets distributed this week, risk markets are once again running on glue fumes. Policy-makers have succeeded in creating the biggest divergence between fantasy and reality in history.

Large even by today's dumbfuck standards. 

The top performing sector making new all time highs this week happens to be micro cap stocks - the junkiest stocks in the entire market.

In summary, when the largest financial WMD in human history explodes at the new permanent plateau of delusion, "without warning", the financial dislocation will be epic. 

And the sheeple will no longer trust stimulated prosperity and the "experts" telling them to believe in it.

All it took to achieve record complacency was a global pandemic depression, and record printed money, the secret to effortless wealth. 

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: