Bernie Madoff's Market

There are no bullish arguments for this market. Everyone knows it's massively overvalued. The arguments for owning stocks right now are straight out of the gambler's playbook - you have to be in it, to win it. As in gambling, a few will win, most will get wiped out. There are no rational arguments for owning this market, which is why this is a con man's paradise. Bernie Madoff would be proud of a generation carrying on in his footsteps...

Looking back, no historian will be able to understand the level of madness taking place right now. Speculators are playing their own corner of the markets while being oblivious to the overall systemic risk accumulating in the background. No one is looking at the big picture as far as how all of this unprecedented risk seeking gets unwound.

Unlike last year, central banks will have far more trouble getting things under control this time around. For several reasons:

First off, interest rate policy is already at the zero bound. which means that the Fed has no policy tools to reinvigorate the economy. Secondly, quantitative easing has already been massively overused and has created extreme over valuations. Which works great on the way up, and is catastrophic on the way down. Contrary to popular belief, there are no "value buyers" below this market. In addition, unlike last year, margin balances are at an all time high, which means that mass margin calls are lurking directly below the market. The rotation to Tech stocks that saved the market last year is already imploding ahead of time. Corporate debt (% of GDP) which was already at a record last year, has grown astronomically year over year. But the biggest risk, is the fact that this year the Fed will be highly constrained on their "special bailout programs" compared to last year. Already Congress has taken away their power to buy corporate bond ETFs in the secondary market. This won't be viewed as a pandemic rescue, this will be viewed as a rich man's bailout and we can be confident it will be extremely unpopular. 

A week ago I predicted that cryptos would be the first bubble to burst. And of course that was the story of the week. Since that post, Bitcoin has had two legs down and two weak rally attempts. It's now halfway between the 50 day and 200 day moving average.

I showed this chart on Twitter yesterday:

The NYSE Composite "Reflation trade" has tagged the upper trend line every month of 2021 so far. Each double tag has sent it back to the lower trend line which is also the 50 day moving average. Each new high has attended greater risk and greater complacency.

If the crypto crash continues, a massive margin call will be waiting at the lower trend-line this time around, 100x the size of Gamestonk in market cap. Also, if the Nasdaq begins its third wave down, then the sum of all risks will coalesce from an all time high, which is my base case scenario:

For most of today's gamblers, price is their sole indicator. So with the Nasdaq at all time highs, they are of the belief that there is no point in de-risking. Of course this is an asinine argument. It implies that the market can't crash from an all time high when it did so just last year, in the most violent high/low crash in history. Featuring five limit down gap opens - more than the entire prior decade combined. 

Now, they are making the same mistake all over again. Granted, most of these people were not even investing a year ago, so how would they know?

This is the weakest breadth at a Nasdaq all time high we've ever seen. And it's attended by the largest Rydex bull/bear asset allocation we've ever seen. And of course the highest margin debt:

In summary, this is the most overbought and overbelieved market in history. Bulls can't afford to be wrong. Unfortunately, the irony of markets is that when everyone believes it's the beginning of a new bull market, that means it's the end. 

Don't forget, this week is FOMC week aka. "Fear Of Missing Crash". Should be a good one - they will tell us that this Ponzi scheme is 100% under control, with interest rates at 0% and no margin of error. And the sheeple will believe them, right up until the day they realize they got conned. Again. 

This meltdown will make last year's gong show seem like a good time. 

 

ALL WARNINGS IGNORED.

COVID was the wake up call to this society to change their ways. So what did they do? They hit the snooze button and doubled down on the status quo. What comes next will make last year's main "event" seem like a picnic. Mother Nature is stalking this bloated species like an invisible predator. She doesn't need a climate conference, she has denial on her side...

Today is Earth Day of course. However, to most people it's just another day to take the blue planet for granted. So I thought I would dedicate this post to discussing my views of the environment and the great reset that began last year, from an economic standpoint. One of my recurring topics prior to the pandemic was my uncontrolled rage at the denial of global climate change by people who are in denial about everything. Climate change being the least of their worries. My opinion is that if this deep reset via COVID - which is orders of magnitude beyond anything imagined at any climate conference - doesn't work, then nothing will. 

First off, tonight I went to dinner at one of these new Chipotle style healthy fast food restaurants. There were two disposal containers on the way out of the store - one for recyclables and the other for trash. The sign made it clear that almost everything could be recycled. So one would think that the recycle bin would be full and the trash bin empty. It was the exact opposite way around. The trash bin was full of recyclables and the recycling bin was completely empty. To me this epitomizes a society of entitled assholes who take far too much for granted. They're zombies on auto-pilot oblivious to their descent into squalor. 

My entire hypothesis is that in 2020 the "great reset" commenced - not by today's "elites", but by Mother Nature by way of a fairly innocuous virus in the grand scheme of things. In the event, we all know what happened. Mass pandemonium and stay at home gambling. A make-believe recovery based upon unprecedented stimulus. And a lethal belief that this is the beginning of a whole new cycle.

In other words, full Japanification.

What took place over the past year was a climate activist's wet dream: An entire populace was locked down and commuting to work was entirely replaced by telework. International air travel was halted. Major pension funds and endowments divested themselves of the fossil fuel sector and poured their wealth into the green energy sector. Oil demand dropped to a one decade low. Exxon was kicked out of the Dow after over 100 years. At one point last year, Tesla's market cap exceeded that of the entire Energy industry. COVID massively accelerated the changeover to green energy, by years if not an entire decade.

In addition, many sectors of the economy were blighted by the virus and the ensuing pandemonium - Energy, airlines, restaurants, hotels, small businesses, conferences/caterers etc. However, the distortions created by central banks have put a massive bid even under the most blighted sectors of the economy to the extent that the most shorted sectors have substantially outperformed the market. These false signals of recovery are luring investors into a cyclical dead end recovery. A mega boom and a mega bust. Except in this case, financial markets will lead the economy in both directions. 

We are to believe that the post-pandemic debt-riddled economy will be far better than the pre-pandemic economy which had no restrictions. This is the next bubble to pop. 

Of all of the fake recoveries, this is the fakest one so far...

In summary, today's gamblers have bought hook, line, and sinker into a falsehood of recovery spun by central banks aided and abetted by the financial services crime syndicate and the profoundly failed economics establishment. 

Their love of all things fake has caused them to mistake the virtual simulation of prosperity for the real thing, this time on a biblical scale:

Some would say that it was a coincidence that oil prices went negative last year on the day before Earth Day. However, in my opinion it was all part of the widely ignored wake up call. The type of which this denialistic society specializes in ignoring. 

For my part, I'm not worried anymore. Because it's not my turn. The denialists will be doing the worrying from now on. They are now an endangered species and central banks can't save them from natural selection.

Nothing Matters Until It Explodes Spectacularly

Most people are not willing to call an end to this idiot bubble, because they don't want to stand out in the crowd...

What we've learned in this era is that when people see ludicrous speculation in markets they merely assume it will become even more asinine before it ends. Hence, it conveniently has no known end point. So we're told.

Stop me any time...

First, let me set this up - back near the top of stock market in early 2007, the housing bubble was already collapsing in many parts of the country and investors were already realizing that subprime loans were a disaster in the making. So ironically as the crisis escalated and investors backed off of subprime mortgages, Wall Street cooked up even riskier leveraged bets in order to juice returns and entice investors:

March 30th, 2007:

Wall Street Cooks Up Even Riskier Exploding Subprime "Innovations"

"With the subprime mortgage crisis making investors wary of collateralized debt obligations, or bonds secured by other bonds, Wall Street is cooking up even riskier deals offering bigger returns to lure hedge fund investors"

That same year when the Fed began lowering interest rates, the global hunt for yield accelerated which allowed Wall Street to sell ever riskier subprime-loaded time bombs to money managers desperate to meet their annual return targets. In July of 2007, the CEO of Citigroup Chuck Prince was asked his thoughts on the escalating subprime crisis. He said he believed the Fed had it under control and therefore his bank was going to keep "dancing while the music is playing".

Now we are hearing the same rationlizations today being applied to Ponzi schemes:

"Dogecoin is now valued at more than $50 billion, exceeding Ford Motor Co. and many other companies with extensive histories...Stock market operators who have been around for a few cycles know the sentiment implications of something like Dogecoin: time to grab the canned goods and head for the bunker"

As former Citigroup Inc. Chief Executive Officer Chuck Prince infamously said in 2007 right before the subprime mortgage bubble burst and caused a financial crisis, the music is still playing, so you have to keep dancing."

The author goes on to claim that it was rational to keep gambling in 2007 and 2008 amid escalating levels of risk. He admits that when the crash took place, the people who were most off guard were "the experts", whereas many "perma-bears" had already predicted the inevitable outcome. In other words, since no one can predict the exact day when insanity will end, gambling up until the very day of meltdown is the rational choice. However he admits that if people had known the extent of what was coming, it would have made sense to de-risk ahead of time. But he claims that the extent of meltdown is also  conveniently unknowable ahead of time. 

Call it the monetization of practiced ignorance. It can come as no surprise that the financial media who are now forced to cover joke-memed crypto currencies must find a rationale for this insanity that ensures a perma-bullish outcome. Otherwise, their subscriber base would collapse like a cheap tent. One wonders how many more times the general public will look back fondly at all of these dunce "experts" and the dumbfuck media and laugh at their corrupt excuses for ignoring conflict of interest. I will go out on a limb and say this is the last time.

Here we see that the magnitude of the Ponzi Crypto bubble exceeds the size of the subprime bubble and is 100x the size of the Gamestop debacle. It will be extreme irony if the Crypto Ponzi bubble peaked the very same week that Bernie Madoff died. So far, that indeed does appear to be the case.

This chart best combines all of the excesses of this era into one exploding weapon of mass destruction. Crypto searches on Google have exploded to an all time high this week. Which is deja vu of January 2018. And of course the combined magnitude of crypto market cap and stock market margin balances far exceeds what attended the 2018 explosion:

I wrote an essay on the impending Bitcoin/Blockchain collapse, but it's too long to include this time around. So without all of the background technical jargon, here is my overall hypothesis regarding the long-term instability of Bitcoin and crypto currencies:

My overall hypothesis regarding price stability is that speculators drive prices higher due to the liquidity/scarcity  constraints designed into the Bitcoin network. Miners react by adding additional computing power to the network, which takes place on a lagged basis. This time lag between supply and demand is a prime opportunity for price manipulation aka. pump and dump schemes. In time, the mined supply increases to match demand. At that point, the price momentum slows and then reverses, at which point speculator demand vanishes and the miners are left selling mined Bitcoin into a bidless market. At that point, the price very rapidly resets back down to the marginal cost of mining which is defined by the underlying cost of server capacity and electricity. In other words, miners arbitrage away all excess profit from the crypto network as one would expect from basic economic theory. Unlike gold production there are no major barriers to entry for crypto mining. The cost of these bubbles and busts accrues to latecomer speculators.

In addition, miners can easily switch from one crypto currency to another, so they pick up and move to whichever crypto currency offers the best profit margins. At present that is no longer Bitcoin. Which is why the Bitcoin hashrate collapsed last weekend when Dogecoin went vertical. The same thing happened in 2018 when all of the other cryptos started outperforming Bitcoin. As a consequence the Bitcoin transaction fee has exploded back to levels not seen since January 2018:

I posted this chart yesterday on Twitter:

A couple of weeks ago I described the blockchain death spiral hypothesis, which posits that in a large enough crash, miners will leave the Bitcoin network en masse which would prevent anyone from buying and selling Bitcoin. For long-term holders this may not seem like a problem, but for hedge funds and leveraged Robinhood home gamers it's a huge problem.  If  speculators have illiquid holdings, then brokers will sell whatever other liquid collateral is available. Which is why asset correlations converge at 100% in downside panics. One could imagine that having $2 trillion in illiquid crypto sitting in speculator accounts could have massive spillover effects in other markets. The Bitcoin price could be collapsing and yet it would be impossible to sell Bitcoin, so everything else gets liquidated instead.

On that note, I will point out that Ethereum has the clearest wave count. As we see it's trending in correlation to Momentum stocks which have entered their third wave down. 

In summary, it could turn out that Bernie Madoff perfectly timed two cycle end explosions. 

We haven't heard this in a while...

Pigs To The Slaughter

In what can only be described as human history's biggest mass con job, central banks have systematically desensitized gamblers to all risk. They are now cycle high fat, dumb, and happy. I call it monetary euthanasia...

Compliments of central bank alchemy, the shortest bear market in history yielded the best one year market gain to an all time high in market history. In addition, inflation expectations are the highest since the end of the last cycle, retail investor speculation is cycle high, and now we learn that the market is two decade overbought. 

All late cycle indicators peaking at "the beginning of a new cycle". 

One of the indicators I haven't shown recently, shows the ratio of mid cap stocks to the large cap Dow. What we see is that mid caps peak relatively early, they underperform for a while and then they burst higher at the end of the cycle due to short covering. In addition, commodity stocks (second pane) outperform at the end of the cycle and of course inflation expectations are highest at the end of the cycle:

This fraudulent recovery which is based solely upon asset inflation has seen some ludicrous moves in asset prices. However, few sectors are as insane as the retail sector which was blighted by the pandemic. And yet, it's the top performing sector over the past year. This entire sector has been "Gamestopped" higher amid record store closures.

Which has fulfilled the circular mirage of "recovery" based upon capital misallocation. 

Another thing you don't see at the beginning of a cycle is cycle high IPO/SPAC issuance:

Herein lies the problem:

Over the course of this 12 year continuous monetary bailout cycle, investors have become more and more complacent. I use a ratio of NYSE down volume over up volume to show the degree of panic selling.

Back in 2008 when it was the end of the cycle, panic selling peaked. Subsequently, we have seen lower peaks over the course of the cycle. We are to believe that the lowest level of selling in the entire cycle marks the beginning of a new cycle.

Sure.

What we are about to witness is 12 years of pent up selling, which will make 2008 look like a picnic. 

And then everyone will know what we know. It's the end of the cycle. 

And this is no time for bullshit from the same proven assholes who lied last time. 

This Orgy Of Excess. Is Leveraged To DogeCoin

We still don't know why the cryptos crashed. It could be that the last fool was found. Like Gamestop, cryptos are uniquely suited to the Congressionally approved Ponzi investment strategies hatched on Reddit...

The intended design behind Bitcoin and other cryptos is to create scarcity. As price moves higher, the amount of supply becomes increasingly constrained by the mining algorithms, difficulty level, and available hashrate/computing power. Therefore, liquidity becomes constrained as well. These were precisely the conditions that attended the massive Gamestop short squeeze. However, the scarcity factor for Gamestop came from the fact that hedge funds had borrowed the shares and were forced to buy them back. Low liquidity is a critical requirement for parabolic price moves, but unfortunately it cuts both ways. Which is why Bitcoin is known for its two way volatility. It will never be a stable currency. It's a speculative toy. The rest of the cryptos are even worse. There are now over 6700 cryptos and they are proliferating like rabbits. The fact that they are all 100% correlated should serve as a warning sign to speculators. 

New "flash loans" are allowing crypto speculators to use cryptos as collateral to buy other cryptos. In the same way that 2007 era subprime CDOs were built upon other subprime CDOs creating  instantly exploding CDO "squared", which had the shelf life of a rotten banana. 

We now have a similar thing in Crypto Ponzi schemes: 

“In a way, flash loans make everyone a whale” said Nikola Jankovic, community manager at flash loan provider DeFi Saver, referring to the crypto industry nickname for large investors who are often able to move markets by themselves."

Leveraged cryptos are the ultimate form of speculation. It's the crack cocaine of gambling, so it should come as no surprise that the crypto bubble is one of the last and largest speculative bubbles to burst.

Ponzi King Mike Novogratz warned last week that we are seeing a blow-off top in crypto speculation:

"I've seen a lot of weird coins like dogecoin and even XRP have huge retail spikes, which means there's a lot of frenzy right now."

"In the next week, certainly we could have some volatility because of the excitement around Coinbase."

Indeed, we have already started to see some volatility. I showed this chart below on my Twitter feed which overlays the Google trends search term "Crypto", onto a graph of the Global Dow. As we see, they peaked simultaneously in 2018. This time, crypto searches peaked back in February with the Nasdaq and is having a double top now with the Global Dow. We also see that margin debt peaked in early 2018 when the crypto bubble exploded. This time however, a "washout" in crypto could have carry-over effects into mainstream financial markets. Why? Because now, BitCon has gone mainstream and is the "most crowded" hedge fund trade of 2021. In addition, Robinhood now allows stock gamblers to buy cryptos on their platform.

It's the equivalent to linking the U.S. banking system to the subprime housing market in a speculative housing mania. It's a bad idea, considering there is now record margin debt AND crypto is a $2 trillion market cap - almost three times larger than in 2018. It's a disaster wanting to happen. 

The way I see it, the same way Gamestop fueled a manic reach for risk that exploded in February, the Coinbase IPO fueled a manic reach for risk that is peaking now. 

The question on the table is if a $20 billion pump and dump scheme almost crashed the market, what does that portend for a $2 trillion pump and dump scheme that is 100x larger?

Feb. 17th, 2021:

April 17th, 2021:

“It’s reminiscent of GameStop” 

Indeed.

Buy And Explode

Up until now, the buy and hold 100% indexed strategy has vastly outperformed hedge funds, market timing, and in particular "value investing". Per the rules of Japanification, buy and hold is about to come to a disastrous ending. And along with it the standard advice given by all of today's investment advisors...

Zero percent interest rates were the warning that all of today's stock market gains are a Ponzified illusion. Contrary to ubiquitous belief, printed money is not the secret to effortless wealth. 

Market academics who take a "value" approach to markets will say that today's astronomical valuations imply forward returns that are zero for decades into the future. Wouldn't that be nice? A market that holds its gains at a permanently high plateau giving the same risk free return as cash, with the potential for upside acceleration. In other words, the most bearish interpretations of today's asinine valuations merely portend the same return as sitting in cash. Their academic view is that these Ponzi markets are a risk to FORWARD returns. 

Unfortunately, that's not how it works in reality. Markets don't hold extreme over-valuation through recessions and depressions. What will happen is that ALL of this prior decade's gains will evaporate in a very short period of time. And instead of forward returns being impinged upon, unhappy campers will find that it was all of their prior illusory gains that have been obliterated.

At that point, people will start to question the wisdom of throwing good money after bad. After 1929 the market lost 90% into 1932 and then it took 25 years to get back to break even. Not everyone has that kind of time. 

As a side note, today's academics who talk about "valuations" in a market supported by a 20% Federal debt accumulation fully conflated as "GDP", are every bit as corrupt and delusional as the Wall Street assholes selling SPACs by the hundreds. It's clear now that the system will have to explode spectacularly before today's sheeple realize that neither economists nor financial "experts" can be trusted anymore. 

Personally, I don't expect the 1930s scenario to play out to that extreme again. I see more of a trading range market. Central banks will do everything to prop up the market, however the damage will be deep. And the financial damage will flow out to the economy, in a feedback loop that portends far lower corporate profits in the future. Which means that ALL of today's rosy economic predictions are now leveraged to Bitcoin. Faith in the system is what is about to implode. Two-way volatility will be epic.

That said, when the majority lose their faith in Ponzi markets that will set up a tradable buying opportunity. Not mind you based upon a return of the masses but solely based upon central bank alchemy. In other words, the market will trade between panic and liquidity. What does this have to do with the economy? Absolutely nothing. Ignoring the sturm und drang will be prerequisite to eking out a return in roller coaster markets.  

Think about it another way, what remains of today's professional pension managers i.e. state and local pensions have fallen drastically behind their investment targets, which is a direct consequence of zero interest rate policy for over a decade straight. No actuaries predicted an entire decade of zero interest rates. As a consequence, these pensions are now onboarding far too much risk which is pushing them to the verge of wholesale insolvency with respect to future payouts. If these professionals with their actuaries can't manage money on a risk adjusted basis in this fraudulent environment how is a home gamer going to do it? We have a crisis in professionally managed pensions, but home gamers on auto pilot have figured out that mass ignorance was the solution all along.

Sure. 

In summary, the buy and hold retirement that today's investment advisors are selling to their clients, is 100% fiction. It's the natural result of corporations eliminating company pension plans and shifting all burden for retirement onto people who don't know what they are doing. It's become a con man's paradise predicated upon extrapolating the past 90 years of market returns into the indefinite future, while conveniently ignoring the experience of the Great Depression. During the 1930s, there were ten bull markets (+20%) and ten bear markets (-20%). One a year on average. Buy and holders didn't break even again until 1955.  

Ironically, the only people who can profit from Suze Orman's advice to dollar cost average going forward, are the ones who ignored her advice to date.

Another irony is that the reason why so few people see this crash coming, is because dumb money flowing into the major indices has kept them pinned to all time highs, while beneath the surface both the economy AND the broader market imploded.

A Ponzified feedback loop of self-delusion.

Chain Reaction

Here is my prediction for how the global margin call unfolds. Bearing in mind that this is all very subjective. Gamble at your own risk...

First off, late this past week Suze Orman warned of an imminent crash. As a registered perma-bull, she clearly is not an alarmist and so for her to see great risk means that the risk must be asinine stupendous. However, in the tradition of the buy and hold investment advisor profession, Orman never recommends selling stocks. The advice she gives is what one would give a twenty year old. Dollar cost average in the future. For those who are closer to retirement her advice is useless with regards to protecting them from risk. Investment advisors only ever recommend buy and hold. They never attempt to time the market. 

If Orman is right, then all she did was add to the prevailing angst and confusion. The vast majority of people won't get out if the crash is imminent. 

Here's what to do: Nothing

Getting back to the point of this post, Millennials are now massively leveraged to imploding Tech bubbles, cryptos, and junk stocks. So their gamified portfolios are the locus of maximum risk. 

I believe one of the first bubbles to explode will be crypto currencies, given that they have an established history of exploding. These are the only markets that are open on the weekends and as I write Dogecoin has already dropped -50% and is staging a weak bounce. Third, I've noticed that Ethereum is currently 90% correlated to the Nasdaq. Of the major cryptos, Ethereum has been outperforming Bitcoin recently as it often does at an impending reversal. 

After crypto Ponzi schemes, the next weakest link is Chinese stocks. Biden's China policies are merely continuing Trump's four year aggression. I predict it will all backfire spectacularly. 

U.S. markets and the Nasdaq in particular are extremely exposed to Chinese Tech stocks which are trading like bricks. These will be the first stocks to test the March 2020 lows and they will drag down many U.S. Tech ETFs along with them.

The next most vulnerable trades are all of the various bubbles that formed in 2020: EVs, Biotechs, Work from Home, Cloud Internets. In other words Ark ETFs.

The Work From Home stocks have the clearest corrective wave pattern:

Biotechs are the next sector that will retest the March 2020 lows.

When all of last year's Tech bubbles final explode along with crypto, Chinese stocks, and Ark ETFs, then Millennials will get margined out en masse. Nasdaq volumes will skyrocket beyond anything we've seen before. Brokers will go offline for hours at a time.

Volatility will explode and vol targeting algos will dump S&P futures day and night. It took central banks three weeks to get markets under control last year, this year it will take at least as long, but the carnage will be an order of magnitude greater.  

It will be a massive clusterfuck, beyond anything previously imagined.

Hard to believe, I know.