Too Big To Bail

Global central banks have finally succeeded in creating a bubble of a sufficient magnitude that it can't possibly be bailed out. What more reason to go ALL IN?

The uneven effects of Globalization were accelerated by COVID. The super asset bubble inflated billionaire wealth to all time highs, while it collapsed the incomes of the working class. Policy-makers sensed the system was at risk and rushed in with unemployment stimulus. Nevertheless, the inequality time bomb has been ticking away silently in the background. Picture what happens in a meltdown scenario - the public will be in no mood for private bailouts amid record wealth inequality. In other words, this epic mega bubble has no safety net. Monetary or otherwise. 

Whoever was making massive options bets last week around the FOMC meeting has continued their bets this week. Option skew measures "Black Swan" market risk as imputed from deep out of the money options. 

Of course, most of today's pundits would say this is a meaningless signal with questionable accuracy. They are ignoring the fact that it worked well albeit not immediately in 2018 and again in 2020, -20% and -35% S&P declines respectively. However, these recent skew readings have been literally off the charts. The top of the skew range is supposed to be 150, whereas these current readings have been between 150 and 160. The past four weeks now has nine of the ten largest skew readings in the past 30 years. So what if instead of being a meaningless signal, these readings were telling us that the big money believes this is the end of the super cycle. What if these readings were predicting an epic collapse of biblical proportions?

We know one thing for certain, they would be assiduously ignored. The other thing we know is that ALL of today's pundits now ignoring this signal will claim that no one saw it coming. 

Top ten skew values since 1990 (data begin):

Aside from elevated skew, there is not even the slightest sign of fear in these markets. The Ponzi class has no clue what's coming. As we see via this chart of NYSE selling pressure, this pattern of complacency has been building over the past decade. Last year's pandemic selloff elicited less panic selling than 2015 and 2011, to say nothing of 2008:

Since the "bombshell" FOMC meeting last week, the Tech sector has been leading what remains of this "rally". Today, the Nasdaq made a new all time high, finally breaking above the February/April double top.

Here we see that breadth and new highs are diverging massively at this new all time high:

Looking at the Global Nasdaq we see two melt-up highs since 2010. The 2015 rally is at the mid-point of the cycle.

That 2015 rally and crash was the "Shanghai Surprise" when PBOC liquidity bid up Chinese Tech stocks to ludicrous valuations. Then they crashed -60%. This latest melt-up is the U.S. analog to that discontinuous price "discovery".

This is the new imagined reality:

Cyclicals on the other hand are looking very Lehman-esque these days.

One example is PNC Financial which made an overthrow high in 2008 as well. It turned out to be a bull trap, since the Fed was preoccupied with fighting rising inflation expectations deja vu of today. 

It turns out that those propagating inflation theories back in 2008 were wholesale idiots, just as they are now. But unfortunately, this society doesn't trust anyone who can be trusted. 

Raymond James Financial, same idea.

People had far too much confidence in the Fed and therefore they didn't manage risk. They sailed straight into disaster. No deviation from the set course.  

Of course most gamblers in 2008 didn't get bailed out, they got margined out. Only the people who actually created the entire financial disaster got bailed out.

And now everyone is betting it will happen again.

Because they believe in the "system".

And I am saying, that's a bad bet this time.

This time around someone with deep pockets agrees with me. If 2008 is any guide, it's Wall Street themselves buying this protection. Just as they did in late 2008 flipping from the Big Long, to the Big Short, using credit default swaps, just in time for subprime meltdown.  

Betting their own muppet clients are about to get wiped out by fraud and criminality.

Is this a great fucking system, or what?

There Is No Safe Space From Reality

One thing both the far left and far right have in common is an extreme aversion to reality. Since 2008 central banks have sponsored this vacation from reality by consistently bailing people out of their own stupidity, which has encouraged ever greater stupidity. Now this Idiocracy is painted into a corner with no way out. It was inevitable they would come to believe that markets drive the economy, instead of the other way around. Yet, no one wants to question this paradigm of moronism, because they don't want to look stupid. They believe in the strength of numbers...

The reason why this society doesn't see this ending is because they are now fully addicted to cheap money. This latest global housing bubble is exhibit A of a gambling addiction that has far more fear of missing out than of bubbles crashing. This week, global risk markets had a taper tantrum over the prospect of higher Fed interest rates TWO YEARs from now. What a joke. At any other time in history, these interest rates would be considered a disaster from an economic and financial standpoint. Dire emergency measures indicative of ZERO future economic growth. Today these record low rates are considered an opportunity to ignore valuations and bid asset values to infinity. The value of a perpetuity over 0% is theoretically infinite according to Finance 101. Unfortunately, in the real world there is no such thing as a perpetuity. When the cycle ends, the cash flow on insolvent assets turns negative. The value of an insolvent asset at the end of the cycle is ZERO. Today, as the global economy struggles to re-open amid massive amounts of new debt, gamblers are bidding up their own assets like it's 1929. There is now an entire generation of gamblers who believe that bear markets are a relic of the past. Defeated by free money and infinite leverage.

This week the Fed monkey hammered the reflation trade by merely suggesting that a rate hike could happen in 2023, almost two years from now. Never before has there been such a long runway given for a planned rate hike and yet it still caused a major market selloff. The question on the table is, did it kick off the final meltdown? Gamblers are now caught between the Scylla and Charybdis of a moribund economy and risk assets bid to record valuations in anticipation of strong economic growth. There are two paths this can take - imminent economic collapse to justify low interest rates, OR sustained growth justifying higher interest rates. These monetary addicts want low interest rates and high growth and now they're having a temper tantrum because both does not exist in the real world.

I leave to CNBC, Wall Street, economists, inflation assholes, and politicians to lay out the case for owning massively overvalued risk assets. Basically all of the people who benefit from the monetization of useful idiots. 

Fortunately, I don't have this conflict of interest, so here below is what could go wrong:

First off, now a small handful of massively overbought and overowned Tech stonks must carry this entire market. The Nasdaq has made three attempts at a breakout since February, each time amid weakening breadth.

Here we see via the (inverse) dollar, the $USD is carving out a similar pattern as last year. Basically a headfake selloff followed by a face ripping rally.

On Friday, the global Dow closed below the 50 day moving average for the first time since the election:

The stock / bond ratio is rolling over hard from record overbought:

As bond yields roll over, cyclicals are going bidless due to the FOMC meeting commentary and also due to late week hawkish comments from St. Louis Fed President James Bullard.

FYI, Bullard is giving another speech on Monday.

An astute observer will notice that last June when cyclicals rolled over, the 50 dma and 200 dma were at the same level. This time, the 200 dma is a bear market away and cyclicals have been above the 200 day for an entire year:

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.