The New Widowmaker Trade

Bulls have been panic buying the reflation trades out of a fear of rising inflation. Now that their own asset inflation is showing up in the lagged economic data they are freaking out over "inflation". The irony can't be overlooked. Too bad no one can warn them they are victims of a hoax perpetrated on themselves.

Again.

Betting against deflation in Japan is called the widowmaker trade. And now it's a widowmaker in the U.S. and Europe as well. 

For over 30 years various speculators have bet that all of the stimulus gimmicks deployed in Japan would create inflation and blow up the JGB market. They were wrong, and the speculators were the ones who exploded, not the Japanese bond market. Not only has the JGB yield stayed pinned to 0% despite debt over 200% of GDP, but the Yen is STILL regarded as the world's safest currency. Every time global markets implode, the Yen rallies. That has much to do with the fact that the Yen carry trade is a very popular RISK ON currency swap - borrow in Japan at 0% and buy higher yielding currencies with massive leverage. Then, when markets go RISK OFF, those high yield currencies get monkey hammered sending capital flying back to Japan to make the margin call. The same thing will happen to the U.S. dollar. It's now a ticking time bomb.

It's clear that most investors and pundits are in denial that the U.S. is now in Japanification. Which is why they are betting it all on reflation trades. They are engaged in the new widowmaker trade.

It speaks to tremendous arrogance to follow the exact same path as Japan and yet to expect a different result. It's no wonder Japan has been stuck in deflation for three decades. The World is constantly inundated with the deflationary forces emanating from China and the other Asian tigers all competing for the exact same commodified manufacturing work. Worse yet, COVID accelerated the virtualization of the economy. The trends that were in motion due to Globalization were put on steroids during the pandemic - working from home, shopping online, contactless payments etc. We now have the economy that futurists predicted decades ago - one that needs far fewer people. Underemployment is going to be with us for an indefinite amount of time. Our policy-makers have no solution for it, other than to provide a basic income stipend to the unemployed.

In addition to structural deflation, there is the fact that record U.S. debt now precludes any strong inflation impulse. A true spike in inflation would collapse the bond market and ignite another credit crisis, which would be extremely deflationary.  During the 1970s stagflationary period, the U.S. was the world's largest creditor nation. Now, decades of trade deficits later, the U.S. is the world's largest debtor nation. All of this debt would need to be wiped out before a sustained inflation could take place.

What things will look like on the other side of the impending rioting is another question. The crystal ball doesn't see that far. However, needless to say, that when the sheeple realize they got massively conned again. There will be a truly fundamental paradigm shift in economic ideology in the United States. And it won't be friendly to capital. Those who believe otherwise are now engaged in the widowmaker trade. The first of many false dawns to come.

The crowded trade of 2021 is assuming this line will go up forever:

Lehman Deja Vu

This is the golden age of bullshit because there has been no accountability for lying assholes for far too long. Unlike 2008, I predict the rampant con men in this era won't be seeing another bailout...

The greatest lie the masses have been told in this era is that the shortest bear market in history, 16 days, corrected the longest bull market in history, 11 years. Hence this is an all new bull market. In order to believe that asinine lie we must also believe that decade high inflation is attending the beginning of a new cycle. Apparently some people can't remember back as far as 2008 when we were told the same lies. 

Then as now, this will be a lethal delusion.

May 12, 2021:

"The increase in the headline CPI rate was the fastest since September 2008"

September 2008 of course was the Lehman collapse. Up until that time, despite all of the collapsing dominoes (Bear Stearns, Fannie/Freddy, WashMu, Merrill Lynch etc.) everyone thought the Fed had everything under control. Even the Fed thought everything was under control. But of course it was merely an illusion that had been brought about by the ample stimulus they were providing to markets. They were artificially suppressing volatility and then it exploded at a time when "inflation" was cycle high driven by the Fed's own policy:

Back then there was plenty of inflation hysteria but nothing like what we are seeing now. This year's high CPI numbers have been amplified by the "base effects" of last year's low price readings. Which is why when we look at the chart above, the oil price at $140 in 2008 had only slightly more "inflation" impact than the $65 oil price today. The CPI reading under these post-lockdown conditions is extremely misleading.  As we see above, one year ago in April crude oil dipped negative for the first time in history. On a closing basis, the price is up almost 1,000% year over year from the daily closing lows. 

Copper recently hit a new all time high, which garnered significant media attention. However, when we look at the price of copper divided by the CPI we see that it's far more subdued than it was a decade ago. Which indicates that this recovery is weaker than the post financial crisis recovery. 

In addition, it's already rolling over because the CPI is lagged whereas the copper price has been skyrocketing lately. As the CPI data catches up with recent prices this indicator will roll over even faster:

We are very likely seeing peak "reflation" now:

The Gold / CPI ratio is another indicator calling bullshit on this entire fraud.

Just as it did in 2008 when inflation hysteria was at a cycle high:

There are those who have a vested interest in having everyone believe that prices are going to sky-rocket aka. salesmen trying to convince people to buy now instead of later.

What we have witnessed over the past year is a rotating buying panic from toilet paper to Tesla stock, to Ark ETFs, to cryptos, to reflation trades, and now of course commodities. On the East Coast there is currently a buying frenzy at gas stations due to the pipeline outage. Deja vu of the toilet paper shortage last year, which of course was temporary.

Much of this inflation hysteria of course is politically motivated, to discredit Biden's economic policies. However, it's all going to backfire when these reflation trades explode with extreme dislocation.

We live in the golden age of bullshit. And it's going to end exactly as it should - amid mass surprise and soiled underwear, followed by biblical rage at the asshole class who believe it's their right to lie constantly.

In summary, is this a good time to be long cyclicals?

Not really.

License To Explode

The weak unemployment report was taken as a clear sign for gamblers to keep the pedal to the metal, because that's what the Fed will be doing - cramming markets with monetary dopium until they explode...

There have been four Hindenburg Omens in the past two months. Three in March, one last Thursday and very likely one today although we won't know until tomorrow. I said there were three so far on Twitter, but it's actually four. This pattern is very similar to last year where there was an early cluster and then a late cluster right before the wheels came off the bus. The Hindenburg Omen means there are a significant (>100) number of new daily highs and lows at the same time indicating pockets of speculation in a disintegrating market. Many pundits are dismissive of the Hindenburg Omen. The assholes who dismissed it last year were quickly entreated to a -35% shellacking. But this time will be a ground and pound they will never forget. What they deserve for being pump and dump pimps who never learn their lesson. 

The question on the table: is this third wave down for Tech/Momentum stonks? Because if it is, then it's about to get interesting.

Step back for some economic perspective:

This is the headline that facilitated the Dow's new all time high Monday morning:

It should be abundantly clear to everyone that Fed policy is only lubricating markets and doing nothing for the actual economy. How today's gamblers arrive at a conclusion of inflation when the job market is no longer functioning is a tale of greed over logic. The $300 /week Federal unemployment stipend is at the core of the delusion. It's the equivalent of $7 per hour. Granted, it's enough to disincentivize a low wage worker from returning to McDonald's, but for anyone who makes the median wage, it's a pay cut when combined with the state UI benefit. In other words, contrary to popular belief there won't be any hyperinflation coming from a $300 per week unemployment stipend. 

Due to these record monetary distortions it appears that bond yields are now becoming inversely correlated to the economy which is something we've never seen before. Since the jobs report was released on Friday, the bond market has been selling off whereas normally it would be rallying. We can infer this means that the bond market fears this narrative of "inflation"  as well - inflation that is now inversely correlated to the economy. Today's pundits will say this points to "stagflation" similar to the 1970s. However, back in that era, capacity utilization and employment were at all time highs. Now, they are at all time lows. What it all points to is an over-sensitivity to minor price movements in the economy, which is causing outsized moves in asset markets. Where even the whiff of price increase sends the cyclicals soaring far beyond what the underlying fundamentals would suggest. Led of course by the commodity sector. 

In other words, the Fed sees a weak economy, so they are hell bent on increasing stimulus. Speculators see the massive stimulus and assume it's having a massive effect on the economy so they bid up asset prices far beyond reasonable valuations. In the meantime, the real economy is languishing due to all of the various re-opening bottlenecks that are preventing full recovery.

So no surprise as bonds sold off the cyclical trade went parabolic again today, but then it rolled over later in the day. The question on the table is this the long awaited reversal of fortune?

If so, then hardcore believers in free money will soon learn the meaning of careful what you wish for, because the Fed warned them last week they have license to explode. And it would be awfully embarassing if they tried to pretend they didn't know. There's no  Black Swan" event for idiots to hide behind this time:

In summary, all of the GOP governors who are now canceling jobless benefits for unemployed workers, should be sounding the alarm about this sham recovery and the monetary euthanasia, instead. 

But since they are all monetary addicted bailout whores themselves they will instead learn the hard way.

Last year was just the warning. What comes next will be the lesson of a lifetime. 

Deflation Is Coming Hard And Fast

The vast majority of today's pundits are of the belief that inflation is the theme of 2021. The reality will be the binary return of deflation. And no, it's not going to be friendly to Tech stonks this time around. Those pushing the fake inflation narrative have their own agenda to pump up asset prices. Today's pundits propagating this inflation narrative are useful idiots along for the ride. All of them are building us up to the biggest asset crash in human history...

 

It speaks volumes of our grifter society that today's market pundits are solely fixated on asset inflation while ignoring the morbid state of the underlying economy. Today's borrowed "GDP" is 20% Federally borrowed money, hence it's 100% fraud. And yet, today's economists make no adjustment for the magnitude of the deficit. It can grow to infinity as far they are concerned at a rate 10x the growth in the "economy". All of which points to Japanification, which is something they will all vehemently deny. After all, they've been predicting a "return to normal" continuously since 2008 amid 1000 year low interest rates.   

What they all don't realize is that Japanification implies ZERO long-term inflation. Meaning that this spike in inflation we are now seeing is partly due to COVID supply bottlenecks but mostly due to the buying frenzy that it has unleashed. In other words a speculative demand side frenzy has temporarily cornered the market for various commodities, which will be resolved by inevitable crash. 

What's the difference between pushing a fraudulent Ponzi crypto and pushing a false economic recovery narrative? The difference is the second one is going to wipe out millions of people economically and financially. Nevertheless those involved in these two types of scams both have the same agenda - to enrich themselves at the expense of everyone else.

This is capacity utilization in the U.S. economy. It has been falling for forty years straight - during the entire ascendancy of the Reagan revolution and its widely ignored underemployment crisis. Each cycle seeing more lives destroyed by mass layoffs. 

Conservatives STILL to this day believe that free trade is the key to prosperity. But which country has benefited by far the most from U.S. free trade? China. Because they don't believe in free trade. Now they have the jobs, the factories, and the intellectual property that was eagerly handed to them by U.S. companies.

U.S. free trade policy created a global hegemon that is now challenging the U.S. for global dominance. It's no wonder Trump easily took over the Republican party. He repudiated the entire disaster.

One of the gifts that keeps on giving from "free trade" is the importation of deflation from the Third World. Which means that when THEY decide this inflation scam is over, it will be over. And those who are oblivious to the working people doing the heavy lifting in these squalid and oppressive global conditions, are the ones who don't see this coming.

And that's the way it should be.

At the end of this fiasco, even the dumbest morons will realize that the low prices at Walmart are totally unaffordable.

And after that the non-economists will get it too.

Achieving The Apex Of Stupidity

Sane observers want to know, when do we reach the apex of stupidity? It's a great question, however in a society of limitless idiots all surprises are to the upside, until it all explodes unexpectedly...

"No one saw it coming"

Filed under careful what you wish for, monetary heroin addicts have reached the inevitable point of stimulus overdose. Central banks have Ponzified markets to the point that now there are no "safe havens" in risk markets. Every asset class is massively overvalued and waiting its turn to spike and collapse like a cheap tent. Those who think that the S&P 500 will be spared, were not investing 13 months ago. The process of alleviating these newbies of their misallocated wealth is well underway... 

"Dogecoin, the cryptocurrency branded after a viral dog meme from years ago, has a market capitalization of about $86 billion following a six-month climb of nearly 25,000 percent"

A joke crypto is now worth almost two Ford Motor Companies. You have to wonder why anyone goes to work anymore, when they can become millionaires by hanging out in Reddit chat rooms.

What we have now is a society of digital grifters roaming from one scam to the next.  

Under the surface of this post-pandemic Ponzi scheme, the bodies are stacking up. It seems ages ago in late 2020 that pundits were breathlessly extolling "The Money Tree" Cathie Wood and her Ark Fund Ponzi ETFs. Then they crashed. Gamestop was the big story in January of this year, then it crashed. SPACs were the hot topic in February, then they crashed. The Nasdaq implosion in March took down the virtual economy stocks, plus Biotechs, Fintech, EVs/Solar, and pot stocks. That kept the assholes quiet for a few days. But then the BTFD team piled back into their favourite Tech stonks in March according to the monthly report from Ameritrade. In other words, after the Nasdaq crashed, home gamers INCREASED their risk exposure and their margin leverage. But it didn't help because those broken bubbles have languished and are now clinging to the March lows while the "inflation" trades have rocketed higher.

It's a tale of two markets. Both of which carry their own massively ignored risk. One market is skyrocketing higher, the other is imploding. What fairy tale to believe now? The red line will catch up to the black line and continue on to happily ever after. Record NYSE highs (lower pane) will expand to infinity.

In my estimation, below is the most bearish chart on the internet right now. It shows that the "high beta" cyclicals aka. Financials, Industrials, Transports, Retail, Energy stocks have closed above their 50 day moving average every day since the election. A record across two decades.

These stonks have now priced in paramount delusion aka. The Post-Pandemic Investment Hypothesis. The asinine belief that a locked down economy emerges far stronger than it was previously. The only question being why don't we lock down every other year? A belief held by today's predominant class of supertards who have stampeded anyone with an IQ greater than a shoe size. 

Elon Musk, who is making his SNL appearance tonight, has put himself at the center of this mass Ponzi scheme. A key beneficiary of Cathie Wood's Ponzi empire, a key proponent of DogeCon, and a major buyer of BitCon. His own Ponzi stock makes no profit other than the one collected via carbon offsets from other car companies and from trading BitCon which has the carbon footprint of Pakistan, a country of 200 million people.

Tesla makes no money from selling cars.

In other words, Tesla gamblers must prepare for the reality that nothing changed in the past year except that other car companies are catching up to Tesla on EV technology and are way ahead on making cars.

Minting DogeCoin billions out of thin air is Elon Musk's and Jerome Powell's only remaining advantage.

Because they are both on the way to becoming a spent farce. 

The Asshole Bubble: See It, Or Be It

The unfounded belief in U.S. "inflation" is now the most crowded bubble in human history. And for that we can thank this era's ubiquitous assholes whose job it is to herd the sheeple into unwise investments...

Needless to say, they can't afford to be wrong again this time.

The U.S. is attempting its first bailout of the middle class in history. However, it's coming under attack from the right who believe that only billionaires and stock investors deserve monetary subsidization. Therefore the economic recovery is now caught between two competing ideologies - the supply side and the demand side. While that's not getting resolved, the gambling class is doubling down on faltering recovery. Because per the Iron Law of Disney markets, the more the economy disintegrates, the more gamblers expect further and dramatic monetary expansion.

Which will be the epitaph for this era:

Search the internet for "Employer bias against long-term unemployed" and you will find article after article discussing this well known structural employment issue. Now, the COVID lockdown and attendant re-opening has finally exposed this latent disaster for everyone to see - an economy unable to re-open due to the mismatched needs between laid off workers and employers.

This article from 2014 gives a great summary of the problem. Not only is there a societal bias against the long-term unemployed, there is a bias against the unemployed period. Which is not a great problem to have in an economy that is world famous for its mass layoffs to meet the corporate earnings quarter.

"Studies found strong evidence that employers’ willingness to consider applicants dropped like a stone after the candidates had been unemployed for six months. The companies actually preferred candidates with no relevant experience to those with a background in the field but who’d been out of work for a stretch"

Corporate leaders haven’t always viewed unemployment this way. Traditionally when the economy improved and created new jobs, businesses would look to the ranks of the unemployed to fill them. Until the mid-1980s, the term “layoff” actually referred to a temporary job loss — and employers were expected to rehire these workers as soon as the economy turned up again"

This chart shows that it takes years to clear the long-term unemployment backlog. And most of that "resolution" comes as a result of workers dropping out of the workforce and "retiring" early.

Anyone who has worked in corporate America knows exactly what the problem is - HR departments are scanning only for exact qualifications. They are more interested in specific skills than attitude and aptitude, so they filter out anyone who does not have the exact qualifications. They're not willing to take a chance on someone who needs to be trained or who has skills that are deemed "obsolete". I saw this all the time during my IT career. Not only do they want the exact system and platform, they want you to have experience with the latest version. 

Low wage establishments have a somewhat different problem. They don't pay high enough wages to retain employees, so they are constantly churning through a marginally attached workforce that is roaming constantly from one employer to the next. 

This battle between the Reaganite supply side which has been ascendant for forty years and the newly resurgent Keynesian demand side which has implemented the most humane unemployment program in U.S. history will be the frictional theme of this "recovery".

The demand side is worried that if the unemployment programs end early, the long term unemployed will be stranded without income and no way of getting back into the workforce. Mass homelessness will be the end result. The supply side is worried that if they don't punt everyone off of unemployment, then employers won't find their ideal candidates in the haystick of the mass unemployed. The fact that entire families will be obliterated, is collateral damage. 

Now we face a situation where policies differ from state to state. Many states are once again requiring mandatory work search, which was suspended during the pandemic. And some red states (South Carolina, Montana) have already decided to  prematurely end the Federal pandemic assistance programs that Congress passed in March. Meaning they are going to have a major homeless problem in the near future. 

I highly doubt blue states will take the same path of curtailing extended unemployment. All of which points to an extremely uneven recovery and an economy that languishes well below its potential output. In other words, until HR departments and corporate management decide to loosen up their hiring criteria for the first time in modern history, we will be reading about the "critical labor shortage" and the mass unemployment problem on the same pages at the same time. And of course the two sides will be blaming each other constantly. 

Getting back to the casino, due to today's disastrous jobs number, the stock market ended higher once again led by cyclicals. Why? Because belief in fake inflation is now the last super bubble. So it doesn't really matter what bad data rolls in, these people are now wed to the belief in inflation regardless. It's at the very core of their 2021 investment hypothesis.

Recall that year over year March 2020 through April 2021 was the best 12 months for stocks since the 1930s. So what to do but plough massive amounts of money into stocks after the best year on record.

After all, flows follow performance. 

The Dow is entering its 60th week of making new highs. 

A good time to be ploughing record amounts into stonks? We will soon find out.

The Perfect Crash Hypothesis

This society has stumbled upon the perfect formula for unforeseen meltdown on an epic scale. The only question is, who gets the credit when it explodes - the people who built this time bomb or the masses who bought it? Suffice to say, this society of spoiled, decadent assholes is about to learn the lesson of a lifetime for trusting known psychopaths and their fabricated predictions for the future...

What happens when you combine record over-valuations, a hobbled economy, record corporate debt, record stock market leverage, record IPO issuance, a collapsing Tech bubble, a maxed out Fed, and end of cycle inflation? 

You get mass complacency. What else?

This is the perfect formula for "unforeseen" meltdown. It combines all of the elements of fraud and delusion this society demands. A populace desperate to be lied to is finding no shortage of con men to meet their needs.

Which is why the Federal Reserve just issued this "CYA":

"The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event"

While broader market spillovers appeared limited, the [Archegos] episode highlights the potential for material distress at [nonbank financial institutions] to affect the broader financial system”

Cue Ark ETFs which are trading like a brick. The combination of non-stop rotation from deflation trades into cyclical reflation trades along with Wall Street's relentless IPO supply dump are a recipe for disaster.

Here we see the flagship Ark Innovation ETF (weekly) is back at key support and volume is rising. 

One of the many sectors in the Ark portfolio that are now going bidless is the Solar/Green Energy sector:

We see via IPOs that another successful pump and dump cycle has ended. The Millennials were bilked by the exact same psychopaths they were protesting one decade ago. 

From Occupy Wall Street to Imploded by Wall Street - it took ten years to democratize fraud. 

Full credit, these useful bagholders took down decade high IPO issuance in a mere four months. A round-trip back to Ramen noodles in record time. 

The platform that was almost imploded by the Gamestop pump and dump just added nearly 10 million new crypto users since that debacle. Crypto is Gamestop x 100. 

Here we see what I mean about complacency:

It's abundantly clear that most people don't factor in market risk when they invest. These people are flying blind, duped by bullish headlines.  

This anniversary week of the 2010 flash crash is the fourteenth up week in a row for the Dow Transports, which is the longest sequence in half a century. 

In the words of the Fed, a "re-pricing event" is no longer an option.