SUPER CYCLE MELTDOWN PREVIEW

The January Gamestop debacle, the February Nasdaq crash, and the March hedge fund margin call should have warned gamblers as to the magnitude of what is coming. This year has already seen far higher volumes and far more brokerage outages than all of 2020. Last year's meltdown set a new record for the fastest high to low crash in history. This year's crash will beat that one by a country mile. Central banks, momentum algos, hedge funds, and over-leveraged newbie gamblers have collaborated to create the perfect recipe for a bidless meltdown of biblical proportions. One thing they all have in common, is that they specialize in ignoring obvious risk...

When Congress held hearings on the Gamestop debacle their sole concern was that brokers had blocked access to the pump and dump. They had no interest in the fact that every major retail broker was taken offline by the massive volumes. Of course that event caused an even greater rush of newbie investors into the casino. When the Nasdaq peaked and crashed in February, the down volume made last year look like a picnic. You don’t have to be a genius to predict what’s coming, but you do have to be able to fog a mirror.

We see via the IMX (lower pane) above that the decline off of the head of the head and shoulders top, got bought with both hands. And we now know that the most popular stocks were Tech stocks. However, one must ask what happens to down volume in this next decline?

It will be cataclysmic. 

Two weeks ago, several institutional brokers (Morgan, Goldman, Credit Suisse, Nomura) fought each other to dump stock from a single shared hedge fund client "Archegos", at any cost. They liquidated all of the holdings at any price to raise cash.

Now picture what happens when that liquidation process is repeated a hundred times over. This time around massively levered Robinhood newbies will be pitted against hedge fund managers who are on their way to new careers bagging groceries. One thing they have in common, they all over-own the largest mega cap Tech stocks.  

Another trade that got very crowded recently is the Yen carry trade. In times of financial turmoil, the Japanese Yen is viewed as a safe haven. However we just learned that hedge funds are shorting Yen at a two year high. They are extremely confident the one year+ RISK ON party is only getting started:

And yet we see here that dollar/Yen is extremely overbought and is already rolling over deja vu of February 2020:

Many people are of the belief that Bitcoin is the new safe haven. Safer than gold. Which is why it's now the most crowded trade on Wall Street:

We also just learned that cryptos took in record inflows during the first quarter: 

"Inflows into cryptocurrency funds and products hit a record $4.5 billion in the first quarter, suggesting increased institutional participation in the once-maligned sector"

When they say that the dumb money comes in at the top, in this case the dumb money are the hedge funds, which waited until it was up 1,000% off of the 2020 lows to finally go ALL IN.

Ever heard of a blockchain death spiral?

Bitcoin evangelists will claim that it's a purely hypothetical event, however it has almost happened several times already. The idea is that if the price of Bitcoin crashes below the cost of mining each Bitcoin, then miners will leave the network en masse and the overall network will grind to a halt. Meaning anyone who owns Bitcoins can't sell them. Regardless of whether or not an outright network halt occurs, the congestion on the network could increase to a point at which there is no liquidity and hence no way to get out. Back in 2018, when Bitcoin crashed, the transaction fee to buy and sell a single Bitcoin reached a ludicrous $34. In other words, Bitcoin liquidity dries up when it is needed the most. When sales transaction volumes spike, miners leave the network.

This inherently unstable Bitcoin design is somewhat similar to high frequency trading in the stock market. Both HFT and momentum (CTA) algos remove liquidity when volatility explodes, because they are programmed to reduce leverage based upon the level of volatility. Which is why flash crashes are so common in today's market. There is no one on the other side of the trade.

It's called volatility targeting and it's a disaster waiting to happen. 

Which gets us to the chart of the day: This week so far has seen the lowest market volatility since the February 2020 top.

A Bollinger band squeeze is an explosive volatility event that takes place when volatility reaches a new six month low.  

Bollinger Band Squeeze:

"While it can be a real challenge to forecast future prices and price cycles, volatility changes and cycles are relatively easy to identify. This is because equities alternate between periods of low volatility and high volatility—much like the calm before the storm and the inevitable activity afterward."

Indeed. 

In summary, Robinhood/Reddit gamblers and hedge funds are all massively leveraged to the exact same Tech stocks and Bitcoins. The recent low volatility has created a feedback loop of ever-increasing complacency and leverage. Global gamblers have not even the slightest clue what is coming. 

When the global Nasdaq was at this level of decline one year ago, we see that bearish sentiment was much higher than it is today:

Due to central bank sponsored moral hazard, gamblers have now onboarded a lethal level of risk. 

Bitcoins, Treasury shorts, Yen Carry trades, Tech stonks, Biotechs, they are all the same trade now called "RISK ON". And it won't matter which asset class crashes first, because they are now all 100% correlated via margin calls. Margin clerks generally sell the strongest assets first. Which means that if they can't sell Bitcoins, they will sell Apple instead.

Conditioned To Implode

Central banks have gamified markets. Social mood has been reverse engineered to suck in as many risk takers as possible. Clueless newbies, propagating self-delusion, are right about one thing - this is nothing like Y2K. In this era there is 10x as much monetary heroin as there was back then. For addicted gamblers, the temptation to self-destruct is overwhelming...

One thing all of today's daytraders, gamblers, and 401k zombies have in common. They all believe that printed money is the secret to effortless wealth, and they've hit the motherlode. 

Before I get to markets, I want to revisit the delusional assumptions that abide this fraudulent "recovery". First off, given the insane amount of combined stimulus, it's impossible to know the state of the underlying economy. It's impossible for economists to pinpoint the true beginning and end of the recession, because it's been papered over with 27% of GDP stimulus. Regardless of whether or not this is  a continuation of the longest cycle in history, or we just experienced the shortest recession in history, what we know for certain is that for the first time in U.S. history there has been zero de-leveraging at the end of the cycle. Which is the key factor that separates this event from 2008. What until COVID was the longest expansion in history, is now officially the longest period of time between de-leveraging events. That distinction only matters if you're a bankster whistling past the graveyard. 

Which is why in his annual shareholder letter Jamie Dimon posits that this debt-fueled "expansion" is only getting started. His unwritten assumption is that we are now Japan and therefore debt no longer matters.

The debt cassandras are wrong again:

What Dimon is describing is what I penned several weeks ago in what I called "The Wall Street recovery". It's another recovery for the rich at the expense of everyone else. Which means that it will not feel like a recovery for most people. 

Dimon's critical miscalculation is to believe that the entire world is now Japan. Unfortunately however, Emerging Markets don't have reserve currencies and the ability to borrow infinite amounts of money. 

We are already seeing the beginning of a deflationary impulse out of China as they tighten up liquidity. It's the key difference vis-a-vis 2008 when China pulled the rest of the world out of recession:

"Credit curbs will drain liquidity from the stock market and pressure sectors with high valuations"

Can the U.S. borrow insane amounts of money from the rest of the world, explode global interest rates and global currencies AND pull the world out of recession? Surprisingly not. 

Which gets us to the markets. 

First, I will recap the first quarter. Markets got off to a vertical start in January fueled by stimmy 2.0. It was all going gangbusters until near the end of the month when the Gamestop pump and dump scheme almost imploded the global financial system amid record Nasdaq volume and widespread broker outages. 

For some reason, that near disaster inadvertently caused an even bigger inflow of gamblers to the casino. The last week in January saw a 500% increase in Robinhood downloads to 2.1 million. However, other brokers saw even larger increases after Gamestop imploded:

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

All of that new money rushed into markets and pushed the Nasdaq to a new all time high in mid-February, and then it imploded giving back three months of gains in three weeks. 

Then began a rally back in what is so far a three wave correction, fueled by stimmy 3.0. In other words, it's Groundhog day. Bulls are ready for new all time highs, except we see there are major breadth divergences developing on the right shoulder:

In addition to the divergences you see above, we have now learned via Ameritrade's proprietary investor movement index, what gamblers were up to during the month of March:

"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."

March summary:

"For the fourth month in a row, exposure to equity markets increased in TD Ameritrade client accounts. During the March period the IMX increased 8.74%, or 0.66, from 7.55 to 8.21."

As the summary describes, gamblers put most of their money into Tech stocks in order to BTFD.

Now, we see below that the IMX is at the highest level in three years. Far from capitulating in early March, gamblers doubled down on the Dotcom 2.0 Tech wreck.

What could go wrong?

Now, compared to mid-February, the stakes are much higher. Nevertheless, bulls are recycling the same lies and bullshit that didn't work the last time. This time, there is no stimmy 4.0 to bail them out. This time, Nasdaq new lows will explode. This time NYSE new lows will also explode, as cyclicals will not save the broader market as they did in February. 

This time, gamblers will come to realize they bought the dip for the last time. In Elliott Wave parlance what is coming is known as a third wave down. It means panic mode. 

And it most likely means a re-test of last year's lows, just to make sure everyone wants to own over-valued stonks, in a global meltdown. 

Sadly, the myth of central bank invcincibility dies at the hand of the margin clerk. 

Slaves To Deception

In the future this era will be the benchmark for mass deception and willful delusion. When the people finally realize that today's economic "experts" specialize in creating poverty, the spell will be broken. In the meantime, central banks will continue to do what they do best - create wealth inflation for the ultra-wealthy...

It's that time of year when we are updated on how many synthetic billionaires were minted by central banks in the past year. We are informed that the best way to solve exploding global mass poverty is to inflate the wealth of the ultra wealthy. 

You have to be a chimpanzee to believe it. 

"A record 493 people joined Forbes’ World’s Billionaires list this year—meaning the world on average gained a new billionaire every 17 hours"

"Jackpot"

One thing all of Wall Street's financial "innovations" have in common is that the insider owners of financial assets benefit at the expense of the general public. Whether we are talking about stock buyback cashouts, over-priced IPOs, or fraudulent SPACs - this era's stock market version of subprime mortgages. Wall Street couldn't survive if they couldn't sell packaged crap into public markets.

And for that to work, they need mass deception. When corporations eliminated company pensions they adopted the do-it-yourself retirement plan. Whereas previously professional money managers managed pension money, now everyone regardless of their financial education manages their own retirement. It's a con man's paradise. And at the center of it is the insider cash out scheme known as the stock market. 

Over the past decades the stock market has eclipsed the shriveled economy in terms of the public's perception of national prosperity. Since 2008, that trend has gone into overdrive as the moribund economy was stuck in low gear and the only perceived "upside" came from financial markets. The fact that stocks were benefiting at the expense of the economy never came into question. Instant gratification became more important than sustainable long-term wealth. 

We can blame central banks, billionaires, and all of the other "elites" for this mass deception. But make no mistake, the aging public is fully bought into this delusion now. The elderly take their income primarily from capital markets and for this super bubble to end now and expose the underlying economic fraud would be quite devastating. This is PEAK Baby Boomer retirement, hence it must also be peak delusion.

So it is that under the rules of Japanification, today's failed economists and failed policy-makers can kick the can down the road over and over again without any perceived consequence. 

The price that is paid however is in the fact that each recovery becomes weaker and weaker. Which means the divergence between asset prices and the economy grows larger and larger. Today's Madoff-acolyte central bankers can only "save" the bubble by making it bigger.

On the credit side it gets even riskier. As global debt explodes, absent deleveraging, the economic speed limit must go lower and lower. What only a decade ago was considered a crisis level floor for interest rates is now considered a crisis-level ceiling for interest rates. Therefore, it's very useful that today's financial con artists have trained the chimpanzee public to believe that the slightest increase in "prices" aka. wages, portends instant hyperinflation. We are slaves to the bond market now, and the entire financial class questions none of it. 

If all of this sounds desperately stupid, it's because it is.

Make no mistake every single economist and policy-maker who does not question this level of deception now, will have ZERO credibility in the near future. Especially when the sheeple realize today's "experts" specialize in getting us into poverty, not out of it. 

And then we will learn that there are no developed economies anymore, there are only developing economies now.  

Misleading Indicators

For Millennials, this will be their first time getting muppetized by Wall Street. For everyone else, this will be their last. The full force of post-2008 criminality is now at work...

In the spirit of Police Squad, oblivious central banks have never cared who got exploded by their liquidity driven pump and dump schemes. And for Wall Street, monetizing useful idiots is their main line of business. They will continue selling gamblers down the river, until the last muppet is found. Or until the casino breaks, which is one and the same. This new quarter's year-over-year look back period to a pandemic-imploded economy is a con man's paradise.

There are two types of muppets buying into this biblical scale fraud right now. There are those who believe that the longest bull market in U.S. history (11 years) was corrected by the shortest bear market in history (16 days). And then there are those who believe that the longest bull market in history is just getting started. Which one is the greater fool is obvious. Both.

The Dow broadening top has been fully realized. According to the most recent NAIIM active manager survey, the smart money is out and according to the AAII retail survey, the dumb money is ALL IN.

"It is a common saying that smart money is out of market in such formation and market is out of control."

Zerohedge just forwarded another piece of Wall Street propaganda claiming that we will now see the greatest economic boom of our lifetimes. It's all part of the narrative that this is the stock market buying opportunity of a lifetime. Of course nothing could be further from the truth. Does anyone really believe that the old ways will instantly bounce back after the worst pandemic in 100 years? Relative to last year, it may SEEM like a major improvement, but everyone isn't going to now take two trips to Disneyland to make up for the one they missed last year. The head of IATA (International Air Transport Association) recently predicted that global air travel in 2021 will be at 38% of 2019 levels under their most optimistic scenario. And overall, the service sector remains blighted due to mass small business closures. A recent Fed survey indicates that 30% of U.S. small business may not survive 2021. Long lines at Olive Garden won't produce an economic boom in an economy that is firing on 4 out of 8 cylinders. 

 

Consumer sentiment should serve as a warning that there has been substantial damage to this economy:

Over in retail land, there was yet another year of record store closures in 2020:

And yet, below we see the massive disconnect via the retail sector which has been ground zero for record short covering. 

How can this happen? Easy, forward earnings estimates have never been murkier and year over year comparisons look fantastic. Everything from economic growth to Wall Street profit predictions are now benefiting from massive % increases on an annualized basis. All of which is allowing a mountain of fraud to take place. 

As another example, we are told that cars are to 2021 what toilet paper was to 2020. Everyone needs to stock up in case there is a shortage of F-150s. 

"To better illustrate the strong demand dealers are experiencing, Erich Merkle, Ford U.S. sales analyst, pointed out that the company's retail sales are up 23.1% over a year ago. "

Sales went from zero to 23.1% of zero. It was the biggest increase in history on a percentage basis. Sadly, not everyone gets the joke. The autos index went nowhere for 13 years and then exploded this year due to the pandemic: 

On a macro level consider the U.S. growth rate this year will be as high or possibly higher than China's for the first time in DECADES. Which sounds great - U.S. growth is expected to clock in at 6% year over year. However, relative to 2019, U.S. growth is up 4%, which is less than 2% compounded per annum, whereas the deficit will be up 20% of GDP. All of a sudden Goldman's asshole predictions don't sound so hot. 

Globally, it gets even worse. Economists are calling it a "two track" recovery. One in the U.S., based on well-cultivated smoke and mirrors, and the other outside the U.S. based on unmistakable collapse:

This is the third and weakest fake global recovery since 2008:

Worse yet of course, the U.S. deficit is now driving up borrowing costs across the globe. Not a good situation when global debt in 2020 skyrocketed due to the pandemic:

"The U.S. bond tantrum is sending a chill through indebted countries which have for years paid less to borrow more."

Nash says the “canary in the coal mine” is the developing world, already feeling the impact of rising costs to borrow in U.S. dollars."

In summary, we have been warned, and the warning has been ignored. 

And the speculators who ignored the warning are about to be imploded by misleading indicators and the assholes who propagate them. 

The Secular Bull Market Is Over

This current rally is a 100% stimulus-driven sugar rally. The first, but by no means the last. The boom and bust cycle has begun. The U.S. is about to learn the hard way what Japan and China have already learned. You can rent delusion, but you can't own it...

My assertion is that the ninety year secular rally from the early 1930 lows ended in 2020 with the COVID pandemic. Unfortunately, most people never got the memo. It makes perfect sense that this fifth wave blow-off top was by far the fakest and most fraudulent rally of our lifetimes. One could make the case that the secular bull lasted for one more year, however, this will be a lethal rally. A bull trap of multi-decade proportions, awaiting those who didn't know when the party was over. No one in the future will believe that a pandemic that blighted the economy could fuel a manic risk on stock rally.

Sheer lunacy is lethally contagious. Far more dangerous than COVID. 

Unfortunately, the sheeple have been conditioned to expect the future to be the exact same as the past. Now we are seeing the full divergence of fantasy over reality. 

 

In 2020, the U.S. became 100% Japanified. Meaning that the economy and markets are now fully dependent on dramatic and ongoing stimulus. This means that the U.S. is now locked in a perpetual boom and bust cycle similar to Japan and China. This rally from the March 2020 lows is merely the first sugar rally, but by no means the last. This year, the U.S. national debt will grow four times faster than borrowed "GDP". Yes, you read that right. Currently, most of Wall Street is betting that the secular bull market in bonds is over. Nothing could be further from the truth. Per the rules of Japanification, U.S. long-term bond yields will soon be heading to zero, although not necessarily in a straight line. First, the two most crowded trades of this era - long stocks, short bonds - must be reversed. The volatility will be epic.

 

Of course, most people don't see this coming. Why? Because this era represents the pinnacle of Wall Street fraud and the pinnacle of Main Street gullibility. It's sheer arrogance to believe that the U.S. will escape the same fate that met Japan and China while taking the exact same path of stimulus dependency. Arrogance, stupidity, gullibility. Call it what you want. Most people today don't see anything wrong with this current level of widely accepted deception, because this is by far the most corrupt and decadent society in U.S. history.

Back in late 2014, erstwhile hedge fund manager Hugh Hendry called this stimulus-driven delusion "imagined realities". Meaning it's all just sugar-addled gamblers front-running false narratives. In this era, mass deception has been fully normalized. When Congress held hearings on the Gamestop debacle, their only concern was that everyone had equal access to the pump and dump scheme. In this era, we have democratized access to fraud. 

Japan's stock market peaked way back in 1990 (not shown). They have been in a sideways boom and bust cycle ever since, and yet they still lack the fortitude to reform their economy. At this point in time given the global COVID depression, it's possible that it's too late. A possibility that the U.S. will soon contend with - a global poverty trap. Competitive currency debasement. 

China's stock market peaked back in 2008. Since then they've been in a boom and bust cycle similar to Japan. Each boom and bust weaker than the previous one. 

Of all of the rallies in U.S. history, this one is by far the fakest and most fraudulent. You pretty much have to be brain dead to believe in it. Hence it goes largely unquestioned. When this fraud ends, this society will realize that the "experts" are the con men, and the cassandras were right all along. 

At which point their incipient mental breakdown will be fully realized. For those considering a new profession in therapy, bear in mind there is no market for telling people to grow the fuck up. I've tried.

THE SUM OF ALL RISKS

Only by extrapolating the past into the indefinite future can today's financial Ponzi schemers ignore this stupid level of risk. Fortunately for them, their job is made easy by the fact that the sheeple only want to be told that the future will be exactly like the past. They are not capable of believing anything else. 

Of course when this epic mass deception spontaneously explodes "without warning", that will be a different question. 

What follows is a summary of the risks that have been growing to extremes over the past year since the March 2020 low:

First and foremost global markets have been fully "Gamestopped"  by central banks. Meaning we are watching a continuously rotating pump and dump from one sector to the next. Last year, the crowded trade was Tech stocks. The narrative at the time is that we were in a secular bull market for the new virtual economy. Gamblers flocked en masse to the "Money Tree" Cathy Wood and her Ark investment ETFs only to realize it was a mirage. Tech is only part way through its bear market. Wall Street deserves a lot of credit for collapsing the Tech bull market, because when Biden was elected they said the deflation trade is over and the re-opening reflation trade is the next bull market. We went from having a massive Tech bubble to now having a massive cyclical bubble. Based on the exact same specious narrative that valuations don't matter. Valuations mattered in Tech, and they are starting to bring down cyclicals. 

You know the financial system is fatally weak when a pump and dump scheme in a pissant stock can almost crash the system.

"We have come dangerously close to the collapse of the entire system and the public seems to be completely unaware of that"

The first leg down of the Tech wreck saw record Nasdaq down volume. A minor taste of what is coming. 

The next widely ignored risk is Japanification - the use and abuse of stimulus gimmicks as a proxy for a real economy. This is a synthetic recovery currently running on 27% combined fiscal and monetary stimulus. It's the full virtual simulation of prosperity. Today's bulls have no thought or concern for the chasmic and ever-increasing deficit. Worse yet, the fiscal multiplier has collapsed, meaning that fiscal stimulus is having an ever decreasing impact on the economy. In the tradition of Japan, the economy is now dependent upon continuing massive deficits. It's not "stimulus", it's life support. 

While fiscal policy is having a lessening impact on the economy, monetary policy is having no effect on the economy. Monetary policy's only use now is to juice markets. At the 0% bound, there is nowhere to go with interest rates, which means there is NO monetary safety net for when this mega bubble explodes. This stimulus dependency has led to stimulus overload in the markets. All global risk assets are now massively overvalued. Another risk is that the Fed has now lost control over Treasury bond yields. They can't rein them in because more QE will cause inflation expectations to rise. This week saw the largest stock to bond rotation in a decade. And yet bond yields STILL rose on the week. Bond yields will continue rising until the stock market explodes, led by Tech stocks. 

Speaking of rising bond yields, back in 2018 Trump's tax cut caused U.S. bond yields to rise which monkey hammered Emerging Markets. Now, the same thing is happening due to Biden's stimulus package and the impending Infrastructure program. It's sucking money out of global markets back to the U.S. and driving a massive dollar rally. It will be extreme irony when this next meltdown originates in China, as it did in 2015 with the Yuan devaluation. 

No discussion of risk would be complete without the discussion of margin leverage and overall extreme speculative appetite. Global gamblers are under the belief that central banks are invincible and hence there is zero hedging taking place right now. Complacency is rampant, and there is a stupid amount of risk being chased. Nevertheless, the dominoes are already falling in SPACs/IPOs, pot stocks, Chinese stocks, work from home stocks, Biotech, cloud internets, Fintech, and electric vehicles.

Of the three major rallies in the past five years, this rally has been the narrowest in terms of new highs participation. This is a sign of a market that is under constant churn and sector rotation. Each sector getting pumped and dumped until there is nowhere left to hide.

Another risk that Cramer raised earlier this week and then forgot about later in the week, is the MASSIVE amount of stock issuance coming to market via SPACs and IPOs. As he put it, this glut of supply is already overloading the market, and it will keep coming until the market breaks. SPACs are this era's subprime, they are riddled with fraud - and deja vu of 2008 regulators are arriving too late. 

"The SEC is looking into potentially illegal activity related to SPACs, according to people with knowledge of the inquiry"

Imagine getting this far down the page without talking about massive unemployment. It speaks to the total alchemization of markets that the economy is always a distant consideration. One year from the pandemic onset and there are still five years worth of jobs missing. Non-farm payrolls are at 2015 levels. Due to Globalization, the U.S. economy is now in a state of structural deflation. Which means that profits are now taking a disproportionately large share of GDP, and wages are taking a record low amount of GDP. Wages can't rise due to the high unemployment and extreme global deflation that is being imported. Neither political party currently has a plan to acknowledge this issue, much less fix it. See stimulus dependency above.

Another risk that is seldom mentioned by today's Madoff-acolyte financial pundits is the fact that corporations have been gorging on debt for the past year. Unlike every other cycle in U.S. history there has been no deleveraging during this recession. We are to believe that this *new* cycle will merely pile on to the debt super bubble from the longest cycle in U.S. history.

Sure. 

In summary, getting back to the first topic of fragile markets. In momentum markets such as these, the buyers are above the market, and the sellers are below the market. Central banks have ensured that everyone is on the same side of the boat - they just sponsored human history's biggest short covering rally, led by beaten down retailers which may or may not even be in existence a year from now. One year from the March lows and due to the massive margin leverage that has accumulated in the meantime, the machines can no longer handle a RISK OFF event. They will step aside, and the market will go bidless. The margin clerks will be in charge and stonks will be sold at any price to raise liquidity aka. "cash", which will soon be in very short supply. 

Last week we got a preview of what's coming. 

Stonks will be dumped by brokers at any price. Why? Because if they don't, another broker will front-run them out the door to avoid the billions in broker losses that were reported this week.

$10 billion from one minor hedge fund. 

The biggest risk of all of course is what I call "bailout risk". Which means that when the middle class gets wiped out in stonks again, the amount of rage will be quite unfathomable.

After all, who told them this was the beginning of a whole new cycle?

Inflation peaks at the END of the cycle, that's Econ 101. These people can be conned over and over again. 

April Fools

The difference between 2008 and now, is that back then there was only one Bernie Madoff running amok. This post-COVID recovery period will be viewed as a time when the full arsenal of Wall Street criminality was used against the public. It's a con man's paradise. Biblical meltdown is base case scenario...

First, for some perspective, we should bear in mind that ALL bubbles end badly. There have been no exceptions. Not even Bitcoin, which has already enjoyed multiple -50% drawdowns in its short lifespan. Why people are crowding back into something that has proven to be spectacularly unstable, is not for me to say. Call it the power of eternal delusion.

As relative strength shows (top pane), this thing is running out of gas, despite the fact that it has finally garnered Wall Street's full adoption. Recall that the last massive crash (-80%) in 2017 took place after the CME and CBOE implemented Bitcoin futures. That was the top. Now Goldman just announced they are selling Bitcoins to their base of useful muppets. 

 

Recall that for most of 2020, Tech stocks were deemed the most crowded trade. As we know, that super bubble is already well on its way to re-tracing the path of the Dotcom crash, about one month ahead of schedule. In addition, the Biotech vaccine bubble is imploding. The EV/SPAC bubble is imploding. Pot stocks, Gamestop and Reddit pump and dumps, and of course Chinese stocks. China led the recovery out of the pandemic and now they are leading the decline, as the sugar high wears off. There are more bubbles in this timeframe than we've seen at any time in past decades. All as a result of the central bank sponsored sugar high. The losses are mounting. 

Here we see via the Nasdaq that the Fed's bailout in 2020 looks almost identical to the 2019 bailout:

There is one final bubble that is the most crowded bubble of them all. Far more crowded than Bitcoin. That is the cyclical recovery bubble. This is where all of the new money is now headed in this new quarter beginning April Fools Day. 

Bulls will make the case that the much dreaded end of quarter rotation did not explode the stock market. That the transition from Tech stocks to cyclicals and from stocks to bonds was "seamless". From this point forward, all new money will be flowing in one direction towards the most overbought and overowned bubble still standing. The bubble that now takes the crown from Tech for the most crowded bubble. A sector that is so in favor, that these "beaten down" stocks are now considered momentum plays. From this point forward, momentum quants will be crowded into high beta cyclicals.

It's a disaster wanting to happen.

"As investors continue to rotate their exposure into value sectors, stocks in that corner of the market starting to take on characteristics of the momentum factor, an uncommon combination that bodes well for investors"

“This is the holy grail of quant and Value investing!”

This is the holy grail of meltdown. No surprise, Jim Cramer is all over it. The same guy who said two days ago that Wall Street is dumping too many SPACs and IPOs, and that they will implode the market. Now he advises crowding into cyclicals. His argument is that large funds need more "beta" so they are crowding into cyclicals to get more leverage relative to the economy. 

"Money managers don’t care about the most exciting long-term growth stories … they want the companies that can deliver the biggest upside surprises right here,” Cramer said. “In a booming economy, that means owning boom-and-bust cyclicals"

Boom and bust cyclicals indeed. As this chart shows, boom and bust cyclicals have been crowded since the election. Goldman put out their first call to buy cyclicals way back in October, almost six months ago. This trade is crowded and it's already rolling over, despite becoming the go to stock trade on Wall Street. 

In summary, what we have is another Wall Street recovery masquerading as a Main Street recovery. 

It's an end of cyclical dead-end.

There is no way out for those who believe in it.

The momentum algos always get out first. This time will be no exception.