Massively Leveraged To Collapse

Peak asset values implies peak credit expansion. Peak credit expansion means peak "reflation"...

What today's pundits and gamblers ALWAYS forget is that when asset values collapse, liabilities remain the same. Home values plunge below mortgage balances leaving buyers stranded underwater with no way out. The lesson not learned from 2008.

Forty straight years of deflation later and these people STILL haven't figured out that debt is deflationary. During the pandemic global debt sky-rocketed. No surprise, today's debtors are praying for inflation which benefits the borrower at the expense of the lender. Deflation, just the opposite - debt service grows over time as wage gains stagnate relative to mounting debts.

Here we see via Treasury yields that the speed limit of this economy has been constantly falling over these past decades as debt burdens mounted. Each recovery exhibiting less vigour.

Now the fiscal multiplier has collapsed to a point that a 20% of GDP deficit is expected to produce a mere 5% GDP "growth" over last year's anemic lockdown GDP.

Over 2019's prior peak, 1.8% annualized.

 

We are seeing typical end-of-cycle indicators with respect to asset values, credit expansion, IPO issuance, and of course "inflation". 

Nevertheless, from a borrower's perspective, this delusion can never end. 

Yesterday's FOMC non-event somehow shocked markets when they learned that the free money party won't last forever. No one saw that coming. A few minor shifts in tone and no change in policy sent the massively overbought cyclical bubble into a taper tantrum.

For three months stonk investors had been ignoring the bond market's message, compliments of ad-sponsored bullshit issued by media outlets that specialize in monetizing useful idiots.

Inflation isn't just transitory, it's already over.

Cylicals are at key support which has not been violated since the election.

The new fantasy is that Tech stonks will now take back leadership from imploding cyclicals. Never mind the fact that Tech stocks remain multi-decade overbought.

The COVID rally is the current era's analog to the post-LTCM Y2K melt-up. Both were driven by coordinated global central bank liquidity:

This week we got news that during May record margin debt expanded once again. Which coincides with a new low in Rydex cash balances.

Which means this society is record leveraged to a fraudulent Wall Street recovery. 

In summary, just as COVID was an ignored warning for an unhealthy society heading down an unsustainable path, so too are all of today's economic and financial signs being ignored.

This society is addicted to debt AND addicted to fiscal/monetary stimulus - a combination that does not work together. Yet, these fools believe they are successfully avoiding reality in every direction. Too dumb to realize how dumb they are. 

In for the surprise of a lifetime aka. a re-test of last year's lows. 

I would be remiss if I did not point out that of the top ten largest "Skew" readings in history (30 years), an astounding seven are in the past three weeks. Four this week alone. The random chance of that happening is 0%.

Skew measures tail risk as imputed from out of the money options. The range of skew is supposed to be 0 to 150. However, all of these recent readings are in the 160 range:

Top ten sorted by skew:

 

Someone always knows something.

The New Permanent Plateau Of Idiocracy

In the biggest asset bubble in human history, this Idiocracy has convinced themselves that prices can't go down, they can only go up. Because to believe the alternative is unthinkable. Which is why as prices go up, IQ must go down...

June 10th, 2021:

Consumer Prices Jump Most Since Lehman 2008:

Over one year from the onset of the pandemic and the biggest asset bubble in human history has reached lethal proportions. Valuations are totally meaningless at this point in time. At the best of times Wall Street predictions have the veracity of a profoundly corrupt Magic 8 ball. Now they are ludicrous predictions regarding post-pandemic profitability built on top of the asinine predictions regarding the post-pandemic economy. 

The only quasi-objective measurement of valuation is market cap over GDP which has reached suicidal levels that portend years if not decades of negative returns for current holders of stonks at these levels.

The period after the Y2K high is sometimes called "The lost decade". However on an inflation adjusted basis it was a lost 15 years:

The U.S. is now firmly down the path Japan took thirty years ago. It's called deflation denial.

Japan has had many false dawns over these past three decades - too many to count. Each one landed them back at the zero interest rate bound. 

For those who want a straightforward explanation of inflation versus deflation - here it is:

Deflation is when wages are going up slower than prices. Inflation is when wages are going up faster than prices. Which do you honestly think we are in? Exactly. We are at no risk of hyper-inflation. Back in the 1970s, the economy was at full capacity utilization and private sector unionization was all time high. Now today, both capacity utilization and unionization are at an all time low. There is no cost of living increase at Chipotle.

Under this current paradigm, there is constant downward pressure on wages - from outsourcing, immigration, automation, and now mass unemployment. Worse yet, monetary policy is solely focused on financial markets which is why there is constant hysteria over the slightest inflation. Our entire society is now enslaved to financial markets.

Those who think that prices can't go down have severe amnesia. 

For example, they've forgotten that home prices collapsed in 2008:

They have forgotten that oil went negative last year. Which is the MAIN reason why the CPI is so high this year:

They don't remember that you can't bid up your own assets. 

Although not for lack of trying.

When this super bubble explodes sending the price of everything down at the same time, then this society will finally understand the concept of deflation.

They will panic. Central banks will panic. 

But it will be far too late, because confidence in Disney markets will be lost. 

Permanently. 

And then everyone will be on the same page. 

Now For The Real Crash

Over the past decade, central banks have imbued investors with a terminal sense of invincibility. To the point that now even central banks have been warning gamblers they are taking on far too much risk. It's all due to what economists used to call "moral hazard". That was before they themselves bought into the ubiquitous belief that printed money is the secret to effortless wealth:

mor·al haz·ard

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

Just remember:

"No one warned me"

May 6th, 2021:

Those of us skeptics of Disney markets have been largely silenced. The perma-bid to this market has steam-rolled skeptics to the point that short interest is at record lows and hedging has been rendered impossible. Which is a recipe for a bidless market. Usually when selloffs take place it's the shorts and hedgers who are the FIRST ones to step in and buy. This market will have no buyers below the margin calls. 

This moral hazard described above has been fully evident since the pandemic crash one year ago. Investors didn't hesitate to buy the dip and add massive amounts of leverage. Here below we see via margin debt that post-Lehman de-leveraging lasted two years to recover the prior level. During the pandemic last year, it took a mere two months to recover the pre-pandemic level of debt. Investors had no fear during the selloff.

Recall that in late 2018 (Christmas) Trump demanded the Fed reverse their tightening policy to bailout the stock market. Which they did in early 2019. That time the market was down -20%. This time, we need not expect Biden to demand a market bailout. He's not one fraction as corrupt as Trump. Which means that stonks could be down well over 30% before the Fed panics. At which point the damage will be done. An epic global margin call across all risk asset classes at the same time. The Fed will have their hands full just getting the Treasury market back under control. Which was a multi-week ordeal last year. By the time T-bonds are back under control, the other risk markets will be a smoking crater.

The locus of risk will be Emerging Markets which have been feasting on debt since the pandemic began.

And of course the corporate debt market is extremely vulnerable to crash due to the massive increase in corporate debt during the past year. Worse yet, the GOP controlled Congress revoked the Fed's ability to buy corporate bond ETFs in the future.

We need not expect a bounce this time around:

Investors have been lulled into complacency by a somnolent Disney market under the full control of HFT momentum algos. Volume is now at a year's low. Lower than it was between Christmas and New Year's:

New S&P highs are diverging massively from this new all time high in the index. 

Deja vu of last year: 

The Fed's own Financial Stress Index is at the lowest level since the market peaked in 2007. What one might call a contrarian indicator of "risk".

Retail bears are at a three year low for the second week in a row:

The only "warning" sign is the fact that option skew reached a new all time high this past week. An indication that "someone" expects a Black Swan event to occur:

In summary, this is officially the biggest circle jerk in human history. Those gamblers who spent the past decade cultivating a firm conviction in bailouts for the rich will be shocked to learn that another one is not forthcoming. There will be no appetite for bailouts when this MASSIVE FRAUD explodes. 

"Without warning"

"The best part of a pandemic is when junk stonk issuance explodes"

The Continual Descent Into Squalor

The American Dream has been reduced to a farce now. This society is addicted to zero sum gambling, because it's their best chance to escape penury. Apologists for exploitation call it "consumer choice". However, the system is now only running on mass ignorance on a biblical scale...

Buyer be unaware.

 

Like frogs in boiling water, aside from a few racial protests there has been really no pushback against this system of economic oppression. Chalk it up to rampant con artists constantly brainwashing the sheeple that this is the "best" system ever invented and anything else would be inferior and "socialist".  This handy pejorative "socialist" now means anything that would reverse decades of ever-increasing economic exploitation. Historians will puzzle over a populace illiterate enough to believe this grand lie all the way into the deepest depths of depravity. The hardy folks of the 1930s were not nearly as gullible. After 2008 the conservative movement was struggling to garner support for its exceptional failure, so along came the alt-right movement to tie conservatism to economic nationalism using ideological gymnastics. Mainstay conservative policies of  mass immigration and free trade were inverted into immigration bans and trade wars. Leave aside the fact that the U.S. sponsored China's entry to the WTO in 2000, and the lucrative reality that the outsourcing mania that ensued was to the primary benefit of U.S. multinational profit. Who cares, that's the past. The ideologically malleable Trump was the alt-right's best shot at America's "Brexit" from Globalization, however the gambit failed. It turns out that the country that invented Globalization has a hard time abandoning it. We can blame the Deep State for sabotaging Trump's efforts, and forget that it was his own economic advisor Larry Kudlow and others of his ilk who were ardently in favor of free trade all along. Historians will have a hard time separating fact from fiction from the useful Idiocracy that now believes the History Channel is for hot rods and aliens.

Useful indeed. Four decades ago companies provided good full time jobs, full healthcare coverage, and employer pensions. Today, most private companies provide no pensions. They found them too expensive to manage so they put the entire burden of retirement on their employees. Which is why most 401ks are under-funded and massively over-allocated to risk. Add in 0% interest rates resulting from decades of mass outsourcing and a record over-valued stock market to complete the retirement mass delusion. If state and local pension plans are falling far behind their funding goals, what chance do non-professional investors have?

On the healthcare front, amid exploding premiums, fewer and fewer companies provide full healthcare coverage, so they have shifted that burden back to employees as well. Unfortunately, due to adverse selection  health insurers don't like to provide individual coverage. Which is why Obamacare was needed to fill the ever-widening gap left by employer health care. The same system that Trump did everything possible to destroy in the years ahead of the pandemic. 

The higher education system has morphed into nothing more than an exorbitant social stratification system by which the ultra wealthy buy access to the country club for their offspring. For the rest there's four years of binge drinking interrupted sporadically with brief hours of Adderall-assisted rote memorization. Followed by a lifetime of debt serfdom. The good jobs are solely for the well-connected few who attend the best schools.

Which gets us to the surfeit of junk jobs. Underemployment is the major economic crisis of our time, which is why few economists ever discuss it. A new index called the job quality index is finally tracking the inexorable decline in the quality of jobs. Far worse yet, is the fact that today's consumption Borg have now conflated rising wages with "inflation", which they've been taught to believe is always bad. Imagine trying to pull out of a Third World poverty trap when the moronic populace at large believes that higher wages are bad for the economy. Not an easy feat. How do you convince people who are addicted to bullshit to break their intellectual death spiral? It's like telling them to stop eating sugar cereal and guzzling sugar water. Corporations have no use for an educated populace.

All of which is why the  pre-Reagan American Dream has been winnowed down to a Third World gambling festival. 

We are all gambling now. Some people have no clue, because they've been gambling their entire life and didn't know it. These are the ones who assume the future will be just like the past. For some reason the continual descent into squalor described above didn't capture their attention. So what's their plan 'B' for when all this goes sideways? They don't have one. Leveraging their lifestyle to the maximum at all times is the only thing they know.

The massively overvalued stock market is this society's last vestige of "prosperity". Little do they realize that it has no more value than what the last fools will pay while pretending to be wealthy. It is entirely cleaved from economic reality. The late great Bernie Madoff may as well be fudging the Dow's daily close for all it represents. He was clearly a man only a few years before his time. 

All of this points to a society that is sky-diving without a parachute. The gap between the wealthy and the poor is going to close. Just not in the way anyone expects.

So from that standpoint, the "system" worked. 

Highway To Hell

Central banks have fully euthanized gamblers. Which means that the most lethal market in world history is now the most boring market in U.S. history. From a two way trader's point of view Trump was 10x more exciting than Biden who's acting like he's the real president. In the "good old days" Trump would have shellacked this market a long time ago. Biden never talks about stonks. He's so worried about people and the economy, he never makes time for monetary bailout junkies...

This week Bitcoin lost Trump's endorsement as a viable Ponzi scheme. When Trump calls something a scam, that means it's radioactive. If he had only played the DonnyCoin to the maximum it would be beating Dogecoin right now. He would already have the $80 billion he will need for his next campaign run. But he's an old school con man and hasn't kept up with digital Ponzi schemes. 

It feels wrong to agree with Trump on anything, nevertheless, in this case he is right. The dollar has already lost 98% of its value over the past 100 years due to the effects of inflation. And yet it's still legal tender and a functioning currency. Bitcoin recently lost 50% of its value in 10 days. It took ten years to reach $1 trillion in market cap, and ten days to lose $1 trillion in market cap. 

It's important to remember that the crypto trade is inherently part of the patented Zerohedge fake inflation trade. The strategy of brainwashing useful idiots into buying up your assets so you can sell at a massive profit. You have to wonder how long their base of morons can keep this up.

If we use 2018 as a guidepost, then this crash still has a ways to go. However, based upon the Google "Crypto" search mania, if this is far worse than 2018, then it could be heading towards zero.

Because that is exactly what it's worth.

Also on the topic of inflation, the story of the week is the Fed preparing markets for the tapering of easy money. 

As we see below, bond yields are heading lower, front-running the Fed decision to tighten policy. Which is the exact opposite of what today's pundits expect would happen. They assume that the Fed is keeping a bid under the bond market, but in fact the Fed is keeping a bid under reflation expectations. And that bid is now coming out, causing bonds to rally and yields to fall.

It's only been over a decade of this exact same cycle repeating again and again, so how would they remember?

Here we see a close-up of bond yields vis-a-vis high flying cyclicals:

On the topic of soaring cyclicals, I noted on Twitter that the last time we saw Gamestop at these levels was early March. Which is when the Russell 2000 peaked along with NYSE new highs:

This week we learned via the Ameritrade MOV index that gamblers kept the pedal to the metal in May in risk assets. Albeit they reduced their stock exposure by a small amount.

IMX MOV Index Ticks Up In May

Last week we learned that retail bears reached a three year low, which lines up with the spike in the Ameritrade index above:

EM currencies have followed the exact same pattern as the last global rally that ended in early 2020. I am still of the belief that they will figure prominently in a global RISK OFF scenario. 

In summary, the monetary bailout cycle is over, however due to moral hazard, gamblers will have to learn that lesson the hard way.

Because while Trump exceeded his authority in 2019 to demand a Fed bailout for stocks. Biden will never do that.

 

Unfortunately for true believers in financial fraud and easy money, this joy ride has no exit.

Disposable Society

This society is lazy, corrupt, denialistic, and more importantly they don't want to change. So what to do but recycle greater amounts of insanity while pretending the future will be just like the past...

No matter what level of abnormality this society embraces, those who question it are the ones who are deemed abnormal. Imagine not propagating the fantasy that this will have a happy ending. Anti-social. It's up to our mainstream purveyors of denialism to keep this dual track fantasy running smoothly. The left informs us that the past will be canceled and replaced with a centrally planned monoculture. The right promises us that the disasters that led us to this juncture can be fixed by doubling down on the same ideology of greed and fraud that created them in the first place.

History will say they were all dumb assholes trapped in their own echo chambers of self disinformation. 

The combination of the Trump tax cut and the pandemic bailout has put the U.S. firmly down the path of MMT: Modern Monetary Theory. The monetization of chasmic deficits. Those calling for exploding inflation are ignoring the fact that Japan has been down this path already. Nevertheless, the scale of these deficits is unprecedented and it indicates a society willing to do anything to avoid reality. We should never underestimate the lengths they will go to in order to avoid short-term inconvenience at any cost. 

Which makes long-term predictions impossible, except to understand that the detonation of their financial weapon of mass destruction will likely lead to even greater forms of insanity. And anyone who questions it will be deemed unfit for  the asylum.

At this juncture the majority of Republican governors have now canceled the ancillary Federal government unemployment programs - including the ones supporting the self-employed and long-term unemployed. Ironically they have greater confidence in the Biden recovery than Biden himself. Unlike Trump who constantly over-stated the strength of the economy, Biden is constantly informing people that this recovery has a long way to go.

And of course he is right. Based upon payrolls, the Wall Street recovery is years if not decades ahead of the economic recovery. Here we see that ALL of the Trump payroll gains were rolled back by the pandemic:

If we use oil as a proxy for economic activity we see that Energy demand is eight years behind this "recovery":

GDP is a useless indicator because year over year it's distorted by last year's lockdown. However, the CBO predictions for 2021 indicate a 1.8% annualized growth rate vis-a-vis 2019. At the cost of a 20% Federal deficit. Truly asinine. 

All of which is why this society is plowing their savings into the Casino, because they are confident that the past 100 years of history will repeat into the indefinite future. And at peak Boomer retirement, no one can tell them any different. 

I showed this chart on Twitter showing the inflation adjusted Dow. Real returns peaked in the 1980s and 1990s. Since then it's been a non-stop monetary bailout featuring record low interest rates and now MMT madness. One would have to be a dedicated denialist to assume that this brief foray above the Y2K breakout line can be sustained at record valuations and record money printing. Picture what happens when the numerator is going down and the denominator is going up, at the exact same time.

Everything has been poured into this epic con job - the economy, the future, the Federal budget, the Fed balance sheet. And yet it's still losing momentum and running on the glue fumes of monstrous lies. 

In summary, this is truly a gambler's market now. Those who are fully invested in denial will find their future returns are deeply negative. The cost of believing in a fantasy propagated by an inherently corrupt society.

For those who buy low and sell high and ignore the relentless bullshit emanating from rampant assholes, it won't be so bad. 

It will probably look something like this:

All Aboard The Fraud Supernova

There is a level of widely accepted fraud in this era that is far beyond anything we've seen in our lifetimes. It's amazing what criminality people will ignore when markets are rising. And what they shockingly discover when they fall...

Back in 2016 prior to the election, Trump predicted that Obama's "Big, Fat, Ugly Bubble" would explode when Obama left office. But when that didn't happen, Trump got to work making it much bigger. Then it exploded on his watch in 2018.

We can see via the Global Dow that the Trump bubble peaked in 2018 after a 14 month rally. The peak coincided with the implementation of his tax cut. While the S&P 500 made a new high in September of 2018, global markets essentially went down the entire year. Then the S&P imploded and met them at the bottom in Q4, until Trump demanded a Fed bailout. 

Acquiescing to Trump's demands, 2019 marked a Fed easing of policy - three rate cuts and a $trillion in quantitative easing to quell the repo crisis caused by the tax cut and resulting deficit. All of which led up to the pandemic implosion. Now, Biden's post-election rally equals Trump's post-election rally in magnitude, but in half the time. 

In four years Trump tweeted over 150 times about the stock market. Biden never talks about the stock market, because he knows it's a bad idea. 

Looking at the chart above, we see that Trump built upon the Obama rally and now Biden is building onto the Trump rally. In the meantime, leverage and risk have continued to grow. In 2018, Trump killed the Fiduciary Rule which requires investment advisors to disclose conflict of interest and otherwise steer their investors towards responsible investments. Once they were off the hook from taking into account their client's best interest the fraud genie was out of the bottle and has grown inexorably since that time. Now we live in an age wherein Reddit pump and dump schemes are defended in Congress as democratization of markets. Crypto currency schemes are going mainstream. And SPAC issuance is out of control and riddled with fraud. Unlike IPO's SPACs are lightly regulated which is why they are ideal for con artists looking to take advantage of the public:

Preparing For The Deluge Of SPAC Litigation:

“In a traditional IPO you can’t show a [financial] forecast and you can’t talk about the future of how you want to do things, you’re just not allowed … Because the SPAC is a merger of companies, you’re all of a sudden allowed to talk about the future … when you do that, you have a better chance of being more fully valued.”

Then there are today's pump and dump celebrities: Cathie Wood, Elon Musk, Mark Cuban, Chamath Palihapitiya, Dave Portnoy. These are people with massive followings who use Twitter to drive all of the various pump and dump scams. 

In a sign of the times, this week, Miami is hosting the largest crypto conference in history. Over 50,000 attendees are expected. 

"Miami is hosting the largest-ever cryptocurrency conference this week in a sign that what was once dismissed as a passing fad is now going mainstream"

This chart shows that the losses in crypto equal 10 years of market cap gains:

In a zero yield, zero sum game, fund managers unshackled from Fiduciary duty, are now seeking yield by taking ever greater risk. After all, they need to make money in every type of market, and over-valuation is not THEIR problem. 

We can be certain that there is a level of shadow leverage beneath the casino that will make 2008 seem minor by comparison.

The latest trend is to turn insurance companies into massively levered hedge funds:

“There are some people out there who take these assets, they assume the insurance regulators won’t pay that much attention to them. And they swing for the fences"

In summary, the Millennials who were protesting Wall Street one decade ago, are now massively levered to record Wall Street  fraud and criminality.

You can't make this shit up.