Big Crowd No Exit

This single hedge fund margin call that rattled global markets was a mere warning as to what is coming. Millennials are about to learn the hard way, they don't have to sell any stonks in order to realize irrecoverable losses...

Just remember this, because you will be hearing it a lot:

"No one warned me"

A relatively obscure hedge fund run by a convicted insider trader named Bill Hwang, just caused the largest and fastest single entity margin call in history. In echoes of LTCM, his Archegos hedge fund was massively levered via derivatives that were underwritten by multiple investment banks. These swap agreements were merely cleverly disguised margin loans. The entire house of cards ironically exploded due to a failed secondary stock issuance in one of the massively levered holdings, ViacomCBS, which was underwritten by Morgan Stanley and Goldman Sachs. They were double dipping and inadvertently imploded their own client. That selloff triggered a margin call in which all of the brokers scrambled to unload their positions and front-run each other out the closing door. In the event, Goldman and Morgan Stanley got out, while Credit Suisse and Nomura sustained massive losses.

In the event ViacomCBS and several other stonks got obliterated, including Credit Suisse and Nomura.

Most pundits wrote off this debacle as a one time ordeal, nothing systemic. What they seem to forget is that this COVID melt-up has funded untold numbers of over-leveraged entities. Including record numbers of latecomer retail traders.

Today, perma-bull Jim Cramer admitted that the IPO/SPAC issuance bubble has gotten way out of hand. He also states that the flood of issuance is now the biggest market risk. And it's not going to abate until something breaks. 

"Between the IPOs and the big SPAC attack and the big secondaries, we’re being flooded with stock right now, so the market’s going to struggle until Wall Street turns off the spigot,” the “Mad Money” host said Monday. “Unfortunately, there’s no sign of that happening yet, so you have to keep being careful.”

You can tell that there’s too much supply because many of these deals have started to fizzle,” Cramer said. “These special purpose acquisition companies just keep coming, even though the whole SPAC ecosystem’s falling apart"

With all this new supply, it’s no wonder the fast-growing tech stocks can’t find a bottom"

The first quarter of 2021 has already seen record IPO issuance in $ proceeds for a single quarter. More than full year 2015, 2016, and 2017:

 

These same Tech stocks coming under pressure from SPACs and IPOs are now about to undergo the biggest sector rotation driven outflow in history as the first quarter ends.

In summary, today's over-leveraged gamblers are going to wake up one day to massive irreversible losses. On that day, their broker will indiscriminately liquidate their accounts, thus locking in those losses permanently. 

Their Reddit-ordered goal of never selling one stonk will be realized. Just not how they expected. 

In the event, they will take part in the largest global margin call in history.  

Stimulus 3.0 is now "priced in"

   

A Consensus Of Implosion

Not only are gamblers all on the same side of the boat, but just as they were in 2008, the award winning financial media are on the same side of bullshit. Something about corporate owned media is not leading to truth in financial journalism...

The burden of truth in stock markets is always on those who tell the truth. For the rest there are specious narratives and tall tales of gold in them thar hills. Nothing captures the imagination more than shared speculation and the expectation for a massive profit. It's true that greed is blindness, and this society is now flying blind straight into the ground.

 

Having started investing in the early 1990s, what I came to realize is that those who place their faith in these continuously bailed out markets and the people running them, will inevitably wake up to massive unexpected losses. Do that a couple of times in a row and it starts to lose its appeal. Among the reasons I turned skeptical on central bank manipulated markets is because I had lost trust in Wall Street. Secondly, because I wanted control over my level of risk. Third because I wanted no part in officially sanctioned pump and dump schemes, and lastly because I knew this experiment would continue just long enough to implode everyone who believed in it. What Reddit is doing to Millennials, central banks are doing to Boomers - luring them into a big pump and dump scheme with no exit. Both schemes, officially sanctioned by Congress. The media are just there to facilitate the process and make sure no one gets away.

Unfortunately, these markets and the "award winning" financial journalists covering them, have been entirely cleaved from economic reality. They are now running almost entirely on combined fiscal and monetary stimulus at 27% of GDP. They are fully drugged by the virtual simulation of prosperity and its acolyte QE.

Now we are seeing the exact same Wall Street con job being run against the Millennials. They are the ones now setting the high bar for the ludicrous narratives they are willing to believe, and they are already paying the price for it in margin calls in Reddit pump and dumps, pot stocks, Ark ETFs, SPACs, IPOs, Cloud internets, Chinese stocks, and Biotech. Those investing side by side with that generation are implicitly sharing the same false narratives and hence embracing the same risks of full scale implosion. So far the damage has been limited to the more speculative sectors, but the rot is spreading week by week. What Millennials don't know and haven't been told by anyone, is that they came very late to the party. In fact, this cycle is deja vu of the 1990s when the Tech bull market grew over the course of the decade and only went vertical at the very end of the cycle. The length of the final vertical melt-up ~1 year is virtually identical in both cases. We were told the exact same lie twenty years ago. The longest cycle in U.S. history, would last forever. 

The current abiding narrative is that a new bull market started a year ago after a 16 day bear market - the shortest in history, which corrected the longest bull market in history 11 years, therefore this is still early days for record overvaluation in a post-pandemic obliterated economy. In order to take this view one must either have dementia, total ignorance of history, or as is more common these days complete and total faith in central bank alchemy. Today's mainstream financial sites provide sufficient conflicting opinion to provide plausible deniability for those who seek this latest cozy consensus of unforeseen implosion.

Today's financial media has conflated diversity of opinion with objectivity. What we have right now is rampant conflict of interest coursing through the financial media under the guise of responsible journalism. There is nothing responsible about it.

One of the regulations that should have arisen from the 2008 disaster is that Wall Street which makes its primary income from selling stocks and bonds, should not be permitted to publish their market views in public media and on Zerohedge. Because they can't be trusted. They have an extreme conflict of interest and we are watching it play out yet again in real-time on a Madoff-inspired scale.

Currently these "award winning" financial sites are selling Wall Street bullshit like it's AAA rated subprime bonds in 2008 and the liquidations have already started. 

"Late last week, Morgan Stanley, Goldman Sachs Group and Deutsche Bank unloaded large blocks of shares in Viacom CBS, Discovery and other companies as part of the liquidation of positions by Archegos Capital Management. The sales approached $30 billion in value, people familiar with the matter said, and led to stocks in those companies plummeting. Market participants called the size and speed of these sales unprecedented."

Make no mistake, the regulations are coming and they will not be accretive to corporate profit. 

There's A Hole In The Bucket

The United States and the World are in a poverty trap. And the assholes who got us into it, can't get us out of it. Why? Because they are what's wrong with this economy. They've fully embraced Third World values...

The only book I am reading right now is called "Evil Geniuses", by Kurt Andersen. (This is a New York Times excerpt). For me even that book is on a slow burn, because he basically says what I've been saying since 2008, except far more eloquently. And there were many who were warning about the decimation of the middle class well before 2008. Bruce Springsteen has been lamenting the obliteration of blue collar workers since the early 1980s. During the early 1990s we were told that "knowledge workers" were the wave of the future. However, when the Dotcom bubble boomed and busted, the future exploded amid mass Tech sector layoffs. The protesters at the Seattle WTO convention in 1999 warned what was coming from accelerating globalization, but they were roundly derided as anarchists:

"The way it has used its powers is leading to a growing suspicion that its initials should really stand for World Take Over"

The U.S. was the primary advocate for China's ascension to the WTO in 2000. That event combined with the Y2K/9/11 corporate Shock Doctrine led to the wholesale outsourcing of U.S. factories at a rate of 17 per day on average over the next decade (2000-2012). 

In 2008 the massively levered American Dream exploded. So what to do, this infinitely corrupt society bailed out the exact same criminals who caused the financial collapse in the first place. It was a fatal mistake that has led to over a decade of ever-increasing fraud, now culminating with this epic end-of-cycle con job: A combination Dotcom Tech bubble in a 2008 credit bubble, ending with a 1987 stimulus-driven melt-up, into a 1930s job market. A ludicrous level of blithely ignored risk invisible to those who are no longer capable of recognizing fraud in broad daylight. One constant throughout these decades has been America's inexorable moral decline which has always remained a step ahead of what would have been recently considered criminal activity. Those who don't see this coming are more than happy with this path of least resistance descent into Third World depravity which is now one margin call away from biblical revelation. 

My synopsis of Evil Geniuses from what I've read so far, is that the Reagan revolution was essentially a post-1970s born again fantasy. A nostalgic recycling of the past that conveniently rewrote America's greatest era of middle class prosperity 1950 - 1975, with Third World values:

"Of course, Ronald Reagan didn’t cheerfully announce in 1980 that if Americans elected him, private profit and market values would override all other American values; that as the economy grew nobody but the well-to-do would share in the additional bounty; that many millions of middle-class jobs and careers would vanish, along with fixed private pensions and reliable healthcare; that a college degree would simultaneously become unaffordable and almost essential to earning a good income"

Rather, when we were promised in 1980 the wonderful old-fashioned life of Bedford Falls, we didn’t pay close enough attention to the fine print and possible downsides, and forty years later here we are in Pottersville instead, living in the world actually realized by Reaganism, our political economy remade by big business and the wealthy to maximize the wealth and power of big business and the well-to-do at the expense of everyone else"

Evil geniuses indeed.   

The only real problem I have with the book is that I'm not stuck in the past anymore, I am more interested in what happens now and in the future. Personally I found Andersen's epiphany that styles and fashion haven't changed in 30 years, to be the most shocking and compelling:

"During the twentieth century, each decade had its own signature look and feel. By the late 1960s, the 1950s looked so ’50s, and by the early 1980s, the 1960s looked so ’60s. But then, starting in the 1990s, that unstoppable flow of modernity— the distinctly new continuously appearing and making styles seem old— somehow slowed and nearly stopped...in the 1990s we also stopped creating the fundamentally, strikingly new, perfecting a comfortable Matrix illusion that in some sense the world wasn’t really changing all that much"

Clearly the corporate Matrix didn't want us to be overly shell shocked by the relentless descent into debt penury and squalor. 

Trump ushered in a hail Mary era in which the used car salesmen who got us into this predicament promised they could get us out. My blog is a testament as to how that is working out. The same old greedy assholes recycling the same old false promises. When Sean Hannity is your beacon of truth, you know your best days are long behind you. AC360 a circle jerk of like-minded morons. I watch Bloomberg Asia to get an objective look-back at the U.S., because you can't get the truth anymore in this country. It's all opinionated bullshit. Pablum for weak minded dunces. 

With the advent of Biden we have a turn back towards compassion. However, at the same time as Biden's State Department is promulgating Trump's signature Anti-China strategy, Biden has assigned VP Kamala Harris to oversee the nascent #StopAsianHate movement.

See any connection?

America's accelerating racial balkanization is primarily driven by the fact that the economy itself is inherently biased towards the rich. Those facts are very well documented in Kurt Andersen's book or many other places on the internet. There will be no coming together of the masses until the inherent bias against the working class is eradicated. Only then can this toxic race war that is tearing the country apart be ended. Pitting white trailer parks against black ghettos is merely a useful diversion.

Per the title of this post, the U.S. is now in a poverty trap. Which means that low levels of income preclude investment in long-term economic growth. The country is consuming not only the entirety of current domestic production, but in 2021 20% of consumption is now borrowed from the future. What is left to give back is corporate profit which is running at a record % of GDP. That reversion to reality will be detrimental to stock prices. There is a hole in the bucket, and at present we don't have the will or resources to repair it, so the lying will continue until EVERYONE is on the same page.

And that event is pending. 

  

To be continued...

Peak Crack High: Asinine Levels Of Risk

One year past the March lows and this central bank sponsored crack high has generated record levels of rebalance risk that comes to a head this week:

"One of the decade’s most successful quant strategies is poised for a dramatic March makeover that threatens fresh volatility for a stock market already reeling from the turmoil in technology shares.

 Almost a year after the S&P 500 hit the Covid-spurred low, momentum investors are set to pare exposures to lockdown favorites -- mega-caps and stay-at-home companies -- to join the boom in cyclical equities"

First off, as I said in my prior post and as confirmed above - momentum IS the most successful strategy of the past decade. 

This momentum-based rebalancing means that Tech stocks which are already imploding will undergo the largest rebalance-driven outflow in history.

What could go wrong?

But that is only half the story, because due to the largest one year stock rally in history (to an all time high), this week will also feature the largest stock to bond rebalancing in a decade. 

But don't worry, because according to CNBS, this is good news for stonks. Because in the land of snowflakes bad news is not allowed.

"What happens to stocks is less clear. Normally, stocks would be under selling pressure as big investors rebalance by also reducing holdings because of the stock market’s positive performance. The S&P 500 is up 4.9% this quarter, and the same investors would be trimming holdings in equities as they add to bonds."

It's not unclear what will happen, because this past week for the first time in a year, we saw Tech stocks decline even as bonds rallied. Meanwhile, if bond yields do fall, as this article seems to suggest, which sector will take the hit?

Cyclicals, which are also record overbought:

In summary, in the coming week, imploding Tech stonks will be sold to buy record overbought cyclicals, and cyclicals will get sold to buy Treasury bonds. 

Does that mean that bonds will rally? Not necessarily. If we go RISK OFF, then the global margin call will take down stocks and bonds at the same time. It's called "de-grossing" and it means that when funds that own both stocks and bonds get hit with redemptions, they are forced to sell both. So, while bonds will likely outperform stonks on a relative basis, they may still implode on an absolute basis as they did last March.

Then however, the Fed will panic and bid bonds back up. 

Below is a chart of what happened to bonds last year, for reference:

At first bonds rallied when stocks crashed, but then bonds imploded as well. When the Fed announced QE infinity, the bond market cratered, and stocks were limit down.

It took a few days for the Fed to get bonds bid back up. This time it could take even longer, but I believe they will be successful.

Unfortunately, by the time the Fed gets the bond market under control, it will be far too late for stonks, because the algos and margin clerks will be many days if not weeks ahead of the FOMC.

It's been a fun party, but now the bill for record fraud, and record market manipulation is due.

These Markets Are Designed To Explode

The binary nature of today's risk markets has grown more acute over time. Over the past decade non-stop central bank market intervention has ensured that most of today's hedge funds and algorithmic bots are using trend-following strategies. Latecomer Millennial gamblers have piled on at the end of a decade+ rally. Which means that everyone is on the same side of the boat...

When this all explodes, people will ask the same question they always ask - how did we not see this coming? For most pundits, the crashes of 1929 and 1987 stand out as the most abrupt and violent crashes of all time. However, the crash of March 2020 beat both of those by a country mile. Here we see the number of days it took for the market to go from an all time high to down -30%. Last year's crash was 3x as fast as both of those famous prior crashes. 

There are three well known and well ignored market factors that are amplifying rallies and crashes. One factor is what are called volatility targeting strategies. These trend-following strategies use historical volatility to determine the amount of leverage to apply to the market. As the market climbs, realized volatility naturally falls, so these bots add more leverage into the market top. Unfortunately, volatility is mean reverting so as the market falls, these bots sell at the speed of light. Then there are outright momentum following strategies called "CTAs". These machine-based strategies originated in the commodity markets hence they are called "Commodity Trading Assets". However, they have now taken over stock markets as well. The way they work is quite straightforward - as the market rises they add leverage, and as momentum reverses they sell. The third factor - market manipulation using options - garnered a lot of press coverage during 2020, but the inherent risk was ignored. Using call options, Reddit day traders essentially rent capital in order to manipulate the market higher. Market makers on the other side of the trade are forced to hedge by buying the underlying assets.

Over the past year, market manipulation using options reached record highs:

In the context of record central bank stimulus, these trend-following strategies have essentially taken over the market. Then of course you have the mob of Millennial latecomers who decided to wait for the end of the cycle to discover investing. Jim Cramer and Cathie Wood inform us that these newbies are "changing the way people invest" - meaning waiting over a decade to join the party is the new investment strategy. 

What makes this set-up far more lethal than last year is the fact that central banks are ALL IN, retail traders are on record margin, and the market is far more overbought than it was last year. Also, last year there was a massive rotation from cyclicals to Tech stocks. This year, Technology stocks are leading the decline and gamblers have been buying the dip all the way down. 

Another risk of course is the fact that Wall Street is dumping record amounts of junk SPACs into this market. And they will continue to do so, until the market explodes. It's a tradition, so why stop now?

All of which widely known and widely ignored risk factors will combine to make this the fastest and most lethal "unforeseen" crash in market history.

Risk is binary. When volatility reverses, and leveraged buying turns into leveraged selling, those who are trapped in the casino will be fighting with other gamblers to get out a non-existent exit.

Those who believe that central banks can reverse a bear market in a matter of a few weeks, have never been through a bear market. Their only experience in markets is buying into the end of the biggest bubble in history while believing that it's the beginning of a whole new cycle. Ironically, what the COVID bubble and the Dotcom bubble have in common is that they were both Tech stock blow-off tops coming at the end of the longest expansion in U.S. history. Prior to this cycle, 1991-2001 was the longest cycle. Similarly, what launched the final moonshot into Y2K was the LTCM/Asian Financial crisis and the global central bank liquidity bonanza that ensued. 

Good times. 

In summary, at the beginning of this cycle Millennials were Occupying Wall Street, at the end of the cycle they are getting blown up by Wall Street.

You can't make this shit up. 

At The Brink Of Meltdown

In this post I will be discussing the key technical risks to markets. I will not be discussing the fundamental risks of the blighted economy, mass unemployment, 27% combined stimulus, collapsed fiscal multiplier, structural deflation, record corporate debt, Fed-driven bond collapse, since those are all of the known risks this society views as a fantastic buying opportunity...

 

For the past three months in a row, I've written this exact same post at the end of the month as the S&P 500 tested its 50 day moving average (blue circles). Each time, the bears got rinsed and the S&P (and Dow) made a new high. Each test has marked a different position on the Nasdaq head and shoulder top: left shoulder, head, now right shoulder. Each time bulls have become more complacent and each time more bears have capitulated. 

On the subject of capitulating bears, here we see that AAII (retail investor) bears are now at a one year low going back pre-pandemic. Even as the global Nasdaq implodes in the background:

This chart shows several sentiment/positioning indicators:

In the top pane, I show the monthly Ameritrade investor movement index (IMX):

"The Investor Movement Index, or the IMX, is a proprietary, behavior-based index created by TD Ameritrade designed to indicate the sentiment of individual investors’ portfolios. It measures what investors are actually doing, and how they are actually positioned in the markets."

Here we see that positioning is the most aggressive in three years - since the Trump tax cut.

In the second pane, which is updated weekly, the bulls - bears indicator peaked after the election, then it fell and now it's back to the same level, which is the highest in three years. In the lower pane of course monthly margin balances are off the charts.

Ironically, the net effect of the Biden stimulus which is targeted at the middle class is having a similar effect as the Trump tax cut - it's deflationary. It's raising interest rates and it's sucking in capital from around the world. 

Here we see that in dollar terms, the European Stoxx index is rolling over at the same level as it did three years ago. And the Euro is rolling over as well:

China was the first country to go into lockdown last year, and the first country to recover. Deja vu of last year, in 2021 they are the first country to go into meltdown mode again, this year:

What is really different with this re-test of the S&P 500 50 day moving average, is that this time new lows are climbing on both the Nasdaq AND the NYSE:

Why all of this late cycle deception is a good idea is not for me to say. This society is now dominated by assholes who have gone far too long without being held accountable: The longest cycle in U.S. history and one year of sudden death overtime at a ludicrous cost of 27% of combined stimulus "GDP". Which is why now, pump and dump schemes have become the norm of investing. In the background, the margined out body count rises silently while the winners get interviewed on CNBC. The most popular pump and dump strategies even get their own ETFs, such as "BUZZ", "FOMO", and Ark Innovation.

"Ms. Wood has leaned on television interviews and YouTube videos, which racked up more than 1.5 million views, to put investors at ease throughout the volatility

Even during the recent tumult, investors put more money into most of the funds than they took out"

The Last Bailout

Over the past year central banks went ALL IN to protect gamblers from the downsides of their own greed. Which has created a lethal case of "moral hazard":

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

One year later from the COVID lows, and somehow Wall Street, media pundits, economists, and central banksters have convinced the sheeple that the longest bull market in history (11 years) was corrected by the shortest bear market in history (16 days). You have to be brain dead to believe this shit, which is why it goes unquestioned.

The reason they believe this bullshit is because newbies have never heard of a broadening top. Not only is this a picture perfect broadening top - complete with final overthrow of upper trend line - but per the specification, it was powered by retail participation at the end. It's out of control. And it will crash from an all time high, making it the most devastating "unforeseen" crash in history.

Aside from never ending subsistence stimmy checks, policy-makers are out of ammo. 

In other words, the economy will go from the much feared inflation to extreme deflation in the blink of an eye. Which means that the biggest risk markets now face is bailout risk. Because there will not be enough bailout money to go around.

The locus of risk will be global sovereigns that do not have reserve currencies i.e. emerging markets. The other locus of risk will be major corporations that feasted on debt during the past year in order to fake recovery. One year ago, the Fed was granted special authority to buy corporate bonds in the secondary market. That power was rescinded by Congress in December. Without that special Fed power, the corporate bond market will be bidless.

Bill Ackman will make bank on his short of the corporate debt market, two years in a row. 

Here we see via year over year $ corporate debt change the difference between this fake recovery and all of the others. Whereas every other recovery featured ZERO net debt growth during the recession phase, this "recovery" featured the largest spike in history. Minor difference. 

And looking at the grey shaded recession zones, think about this related specious factoid: due to the 27% of combined fiscal and monetary stimulus, we are told that this was also the shortest recession in history, amid five years of job losses.

We can fully expect the next synthetic "recovery" to feature zero employment.

Getting back to the bailouts, one must understand the level of rage that will emanate from this impending meltdown. There will be no appetite to bail out the rampant assholes who led the public to believe that this was a risk free market. 

Which means that aside from massive short covering rallies, debt laden sectors of the market, and financial stocks exposed to debt laden sectors of the market, will be in deep trouble aka. cyclicals which have been leading the market in 2021 and are the number one consensus trade on Wall Street. 

Think of this past year as a massive one year TARP bailout rally that will inevitably fail now that short interest is at record lows.

The Tech sector lost -80% after Y2K and was dead money for over a decade. Which leaves high quality defensive stocks - utilities, consumer staples which are currently overvalued but can be bought after they implode.

As far as gold goes, I will scale into it over time, but I am in no rush. We can see from the chart that gold is one of the few markets that knows what is coming.

In summary, all of todays economists, financial advisors, media pundits, and central banksters are wrong again, when it counts the most. This time they will lose all credibility. And then the underwear will be mighty stained.

Their fatal miscalculation was assuming that per the Minsky Financial Instability Hypothesis, the Federal Reserve is in full control over interest rate policy - they alone can decide when the cycle ends. However, what we are seeing in real-time is the market is taking that control away from the Fed. 

"Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values"

Getting back to the casino:

The Nasdaq (100) has been working on a two month head and shoulders top, with a very weak right shoulder. Only a handful of the largest cap stocks are still holding it up. 

Since the FOMC meeting last week, cyclicals have been joining the downside party. They have not corrected back to the 200 day moving average since the election.

Today's newbies have never seen a bear market, so they keep buying the dip all the way lower. Now, they are throwing their latest stimmy check away at the casino. There is no sign of capitulation, which is why the market keeps dripping lower. It's heading for the panic moment. Even perma-bull Cramer understands that the noose keeps getting tighter:

"CNBC’s Jim Cramer on Tuesday said the stock market won’t reach a bottom until sentiment finds a low point, akin to how stocks rebounded from the historic coronavirus-fueled plunge last year."

A couple things Cramer gets wrong: First, there is no leadership in this market anymore. Second, this decline will be worse than last year. 

The COVID rally was merely the blow-off top in a decade+ Tech-led rally going back to 2009. Cleverly marketed by Wall Street as the shortest bear market in history.

Looking at the weekly chart of the Nasdaq we can clearly see there was no bear market, there was merely a correction prior to the one year 1999 style blow-off top.