All Signs Point To Crash

Back in 2008 the Fed made the exact same mistake they are making right now - believing that inflation is a higher risk than incipient global meltdown. In that event, the bailout worked. This time will be the hardest landing...

Over on Zerohedge, they have successfully "pivoted" from hyper-inflation last Fall, to stagflation last week, to recession now. Ironically, these are the same people who were mocking the Fed last Fall for saying inflation is transitory. And now the Fed is more hawkish than they are. It's this cabal of Peter Schiff acolytes who have assured this gong show will end as painfully as possible. The ubiquitous delusion is that the Fed can easily pivot back to cutting rates again. 

There's only one problem with that fantasy: the Fed funds rate is at .25%, whereas in 2008 it was at 5.25%. There is nowhere to go on the downside. Therein lies the difference between this blog and all others - I don't assume there will be another happy ending when this end of cycle con job explodes. For that assumption you can go anywhere else where the sole objective is expanding the subscriber base and/or assets under management. 

 

In 2008, in addition to a U.S. 5.25% interest rate reduction (i.e. 21 serial rate cuts), China's economy was still booming. It was China that dragged the world out of recession. This time they are leading the world into recession.

What you notice about this chart is that commodities follow China GDP, not the other way around. There is a staggering difference between China GDP in 2008 versus now. That was their highest growth rate in modern history. 

All of which means that QE alone will not be enough to revive the global economy. What will be required is a combined fiscal + monetary super stimulus similar to what took place during the pandemic. Which will be challenging with a gridlocked Congress in a mid-term election year. When all else fails, I assume they will get it done, however, it won't be nearly as easy as during the pandemic. 

And then there will be the protests and rioting. Why? Because a generation of Millennials is about to get financially wiped off the map. When that happens, one can assume that a TARP style bank bailout will be off the table. Which means that financials will be bidless. All of which means that the "just in time" bailout hypothesis which is propagated by all of Wall Street and most financial pundits, is lethal bullshit. 

Go figure that Wall Street would not predict the wholesale collapse of their own industry.

Those who are not positioned ahead of time for what is coming will suffer TERMINAL losses. Why? Because there will be systemic meltdown of financial markets. Featuring extreme volatility. record volumes, and total lack of liquidity. Culminating in mass panic. 

Unfortunately, the ubiquitous "hyper-inflation" hysteria has caused most investors to be very badly positioned for this impending event. Instead of respecting cash balances, they've been told that "cash is trash". What happened to hedge funds  in commodities this past week is a warning for what's coming to the rest of the market. Going into last week, hedge funds were record LONG commodities. Then came the melt-up in crude oil last week followed by a straight line -30% crash into bear market. RECORD volatility, exceeding 2020. In addition, the nickel market has been shut down for over a week due to volatility. 

These commodity trades are MASSIVELY crowded death traps at this phase of the cycle. Anyone can easily see that the commodity cycle peaked in 2008 along with China GDP above, and is now three wave corrective to a lower high. The pandemic commodity rally was an echo bubble.

But really who knew that a global pandemic and two year lockdown wouldn't lead to stronger global growth?

Not this Idiocracy.

Which gets us to the casino.

Bulls have mistaken post-FOMC volatility unwind for a positive response to Powell's rate hike. When these weekly puts expire or move further out of the money, options market makers buy back stock to unwind their option hedge. For the true direction we must wait until post-OPEX next week.

This market is now eerily similar to the last Fed policy error back in December 2018. Coming off the all time high, the market imploded -12% and then bounced up into the 50 dma. Then it re-tested and bounced up into a death cross. Which is where we are now. As we see, the % bullish is identical: This is the % of stocks that are deemed to be in a technical bull market. When the wheels came off the bus in late 2018 however, it was Trump who commanded Powell to pivot on rate hikes. Whereas this time, there is no chance Biden will interfere in monetary policy on behalf of stock gamblers. And Powell has already shown via the Nasdaq that he doesn't care if stocks implode. The Nasdaq is ALREADY down as much as it was when he pivoted in 2018 (not shown).    

Here we see the extreme moral hazard that is now baked into this "market". In each of the past major market events, gamblers were reaching for hedges. However, in this event with global markets ALREADY in meltdown, there is no reach to hedge. In addition, this is the least likely time to get bailed out due to the Fed's hawkish stance.

This is beyond any level of risky risk-seeking we've ever seen:

In summary, I just nuked a bunch of trolls over on my Twitter feed. Bulls have command over the entire internet and yet they still feel the need to camp out on my site. My number of followers has increased dramatically recently, but I only care about quality not quantity. Today's bulls believe they have strength in numbers. Sadly, in an Idiocracy there is no such thing. Which is why the public is in no way prepared for this inevitable meltdown. 

Lastly, for all you bulls who keep telling me how much money you've made in this bull market, I can't help but thinking you must be related to Cathie Wood. 

LIQUIDITY TRAP

We are at the brink of the fastest demand collapse in history. It's already beginning in Asia and Europe and will soon spread to the rest of the world. The Fed just reduced liquidity in an already illiquid market. Which gets us to the phase of global dislocation that I call "the Gong show"...

No, they don't see it coming. Read any pundit today and all they talk about is "stagflation". However, stagflation was a very rare occurrence that happened only in the late 1970s when the middle class was at its peak. It meant slow growth and inflation, but not recession. The critical assumption is that this Fed will allow inflation to persist when they've already taken steps to ensure that it does not. This Fed is actively pushing the economy into recession in order to squash wage inflation. That's all this is about. Everything else is just background noise. Why? Because the Fed ASSUMES they can manage a soft landing into recession. And that is the lethal assumption. They are pushing the economy towards a liquidity trap. Both in terms of market liquidity which has already collapsed and in terms of economic liquidity:

"A liquidity trap is a contradictory economic situation in which interest rates are very low and savings rates are high, rendering monetary policy ineffective"

From an economic standpoint, monetary policy is now officially ineffective. Yes the Fed can expand their balance sheet, but they won't be able to offset economic demand collapse. This is officially a larger policy error than what took place in September 2008, because back then the Fed had several percentage points of Fed rate to lower. 

Bear in mind that the bond market has been warning of THIS risk all along. There was not one moment even during maximum fiscal and monetary stimulus where the bond market believed that inflation was a long-term threat. Pundits claim that at this same level of CPI the Fed rate should be at 13% as it was in 1980. Imagine if even the 10 year yield was at 8% which is 4x the current level. If that happened global asset markets would be a smoking crater right now. Comparing this period to 1980 is asinine, yet almost everyone is doing it right now. 

As it is the bond market is already warning of recession after ONE rate hike:

This is the Five/Ten yield curve - most inverted since the 2007 recession began. But, the bond market is once again being ignored, by the Fed and all pundits.

The damage is done. The Fed is now ahead of the 2 year by the most since October 2008. What pundits and investors constantly ignore is the happy feedback loop between commodity speculation and inflation expectations. When both are rising they get locked in a death spiral higher. But when they are falling, they are in a death spiral lower. 

Under these asset collapse conditions, "stagflation" is nothing more than a speed bump on a vertical path lower:

But it's not just the bond market that's being ignored right now. 

China and Hong Kong are imploding in real-time. Not just their  stock markets, their economies are imploding under the weight of the zero COVID policy. 

The divergence in policy between the Fed and PBOC is now the widest since August 2015:

The elephant in the room is the impending default on Russian debt. The first default since 1998 and the first foreign denominated default in 100 years. As of this writing Russia hasn't made the payment due today. The last time Russia defaulted in 1998, the Fed cut rates .5%. Nasdaq lows reached this current level AFTER the default, whereas this is BEFORE:

Next, we learned yesterday that German economic sentiment just collapsed at the fastest pace on record. Faster than during the pandemic. You will note that European stocks are three wave corrective, having rallied for the past week. Given that record outflows from European stocks combined with record collapse in investor sentiment, then we can assume Europe is the next market to go fully bidless now that short-covering is ending:

Not to be left out, the Fed is also ignoring U.S. Tech collapse which this week was on par with December 2018 which is when Powell capitulated and reversed policy. As anyone can ascertain, not only has Powell not capitulated, but speculators haven't capitulated either. 

What today's investors don't realize is that the Fed isn't worried about stocks imploding, they are worried about wage inflation. Therefore, they will continue tightening UNTIL they are convinced that wages are no longer a problem.

And that is going to take a while. 

In summary, at the beginning this fraudulent market was running on maximum monetary stimulus - the virtual  simulation of prosperity. Then it transitioned to running on maximum greed and Wall Street criminality. Having exhausted both of those sources of funds, it's now running solely on rampant self-destructing buffoonery at the end of the weakest recovery in U.S. history.  

Prepare for Gong Show:

CRASH INTO DEFLATION

Rule #1 of Japanification: Stimulus is everything...

My biggest mistake after 2008 was being too slow to realize that the U.S. and indeed the World are well down the path of Japanification. Meaning structural deflation at the zero bound. What inflation abides right now is cyclical and almost entirely supply driven. Which means this is not your typical rate hiking cycle that so many pundits and investors believe it is. They are of the consensus belief that this is just the beginning of the rate hiking cycle, when in fact it is very likely the END of the rate hiking cycle.

It's highly biblical that Supply Siders would commit such an egregious and amateur policy error after four decades of middle class obliteration. It's as if someone in charge wants this to end the hardest way possible. 

The mistake I made after 2008 has now been corrected. I've seen the light. Ironically, now all of today's pundits are making the exact same mistake I made i.e. ignoring the rules of Japanification. Of course the consequences of being wrong at this late juncture will be far more dire. The first rule of Japanification is that economic "reflation" is entirely dependent upon continued dramatic fiscal and monetary policy. Which means there will never be another "normalization" of policy, under the current deflationary paradigm. Which is what today's errant policy-makers are now attempting. 

Their failure will be cataclysmic at the zero bound. 

The COVID pandemic was the most deflationary event in modern world history. The first ever TOTAL lockdown of the global economy. Zero international travel, and work from home on a scale never previously even technologically possible. It was the apex of ecommerce and Amazon. It was the full scale realization of cloud computing. It was a "virtual economy". 

The initial onset of the pandemic and its 20 million layoffs saw the mass automation of jobs which was only partially offset by massive fiscal pandemic unemployment stimulus. Without which there would have surely been 1930s level poverty. However, as the pandemic progressed and life returned back to normal, the massive monetary stimulus set-off a round of manic corporate re-hiring. In addition, hundreds of new start-ups were funded via the IPO market all competing for the exact same pool of "gig workers". These factors and the pandemic-related early retirements I've discussed many times, tightened the job market beyond anything we've seen in recent decades. Putting the balance of power in the hands of the employee over the employer for the first time since 1979.

And THAT is why there is currently so much hysteria over "inflation". It is almost entirely ideological in its root cause. The chamber of commerce has informed the Fed that they need to get "inflation" under control ASAP. And hence the Fed is ignoring ALL risk in order to do so.

Here we see that despite the intervening years of population increase and GDP increase, NOMINAL commodity prices are STILL below 1980 levels. In real terms adjusted for wage CPI, these commodity prices are near decade lows (see bottom pane, red).

What people are currently (over) reacting to is the rate of change (middle pane), which is the highest since the 1973 OPEC Oil embargo. This IS a shock, but the bottom pane shows it is NOTHING comparable to what took place in the 1970s on a real income basis.  

Here we see that EVERY CPI spike since WWII preceded recession. 

Given the precarious position of consumer sentiment, we need not assume this time will be different. 

It gets far worse however, because this blinder view of inflation is causing the Fed to ignore ALL other global risks. Including as I've said the collapse of Chinese stock and real estate markets, Russian default, and global growth stock meltdown.

The worst since Russian default, 1998:

Bear in mind that these other spikes took place AFTER the event. Whereas this time Nasdaq lows are near record levels BEFORE a Fed tightening and Russian default. 

In the U.S. we are essentially blacked out from the truth. 

We are behind the Iron Curtain of bullshit and denial.

All of which is where Wall Street criminality comes in handy. Because only true con artists can speak of commodity melt-up and economic meltdown at the same time. Which are both logically and historically mutually exclusive.

Got that? High prices predict recession. And recession predicts low prices. 

So get in and out quick because if you don't front-run everyone else, you will get obliterated.  

That is the type of "trade" only Bernie Madoff could love. And yet, it's essentially the standard advice given on Wall Street - "hide" in inflation trades:

"On Sunday, Tesla CEO Musk tweeted that in times of high inflation, it is “generally better to own physical things like a home or stock in companies you think make good products,” rather than keeping your money in cash"

Elon Musk just took off the table MORE cash than he was worth before the pandemic. He nailed the top. And Warren Buffett is sitting on RECORD cash right now.

Their advice is strictly for people who CAN'T afford massive losses. 

In summary, the entire pandemic bacchanale was a sucker's rally at the end of the cycle, sold to the usual bagholders by the usual psychopaths. 

Under the auspice of being a "new cycle":

Next stop will be hard landing at the zero bound.

And what I call "bailout risk". 

Globalized Collapse In Real-Time

What we are witnessing is the collapse of Globalization in real-time, attended by a level of epic hubris that prevents the majority from seeing it happen - just as those in the Soviet Union didn't know it was ending until it was over. It's amazing what amount of societal decay can be "normalized" by a decadent society...

The main lesson from BOTH World War I and World War II was that only military alliances can create world wars. Absent alliances, conflicts remain regional. In an age of nuclear warfare, never before has that lesson been more important. Per the terms of the Budapest Memorandum reached back in 1994, Ukraine relinquished its massive nuclear arsenal in exchange for security guarantees from the U.S., Britain, and Russia. Back then, NATO expansion was in its infancy and clearly no one predicted the circumstance that would lead to this inevitable crisis. It was epic hubris on the part of the West to believe that an isolated Russia would stand by passively while the former Soviet Union got absorbed into NATO.

Yet here we are. Not to say I condone this invasion of Ukraine, only to say that history predicted it would happen. For the record there have been NO successful invasions of another country since WWII where the smaller country was supported by a superpower. ZERO. Therefore, the expansion of NATO was at best totally pointless, at worst it has needlessly brought us to the brink of WWIII.

Now, these economic sanctions have taken hubris to an entirely new level of ludicrous. The West is in no condition to simultaneously marginalize China AND Russia into submission. Which is what they are attempting right now. 

Both of those countries have a past history of repudiating capitalism for its failure to bring broad based prosperity to the masses. Now history is repeating itself. Globalized capitalism has failed those countries, which is why they are repudiating it. Globalization has also failed the rest of the planet, but unfortunately we live behind an Iron Curtain of hubristic denial. We think they don't get accurate information, when we are as blacked out from the truth as they are. 

In this coming week, on the same day that Russia is widely expected to default on its debt, the Fed is widely expected to raise interest rates. The last time Russia defaulted on its debt, the Fed CUT interest rates .5% in the Fall of 1998 to stave off global meltdown. 

In addition, the last time Chinese markets were in free-fall - in 2015 and again in 2018, the Fed STOPPED raising interest rates.

Chinese stocks are now below the level of the last Fed pivot in 2018 and Chinese junk bonds are bidless:

In other words, U.S. policy-makers are now trapped by their own epic hubris. Which means that investors are trapped as well. There are literally no pundits right now warning of the insane amount of risk that is NOT priced into these Disneyfied markets. Why? Because the initial impacts of Fed tightening via their balance sheet has seen global markets ex-U.S. basically collapse. In addition, global Tech stocks have imploded with the U.S. Nasdaq closing this week in a bear market, at the very BEGINNING of a rate hike cycle. And the dollar is screaming higher demolishing global currencies. In other words, U.S. broad based indices have so far been spared. If like most pundits, you only look at the S&P and Dow, one would conclude things are not so bad. The rest of the world however is already below the pre-pandemic level. Meaning the entire pandemic rally was nothing more than an end of cycle bull trap.  

 

These three trends I mentioned above - global market collapse, Tech stock collapse, and dollar rally will accelerate in the coming weeks. And when that happens U.S. broad based indices will not be spared. Nor will the housing market, and every other market on this planet. 

The circumstances prevailing at this juncture are eerily similar to what abided in 2008:

A simultaneous interest rate shock, asset collapse shock, oil shock, and inflation shock. All attended by rampant denial. The major bonus this time around being epic hubris and sanctions. 

In summary, the masses believe they are witnessing the second collapse of the Soviet Union. However what they are really witnessing is the collapse of Globalization. 

In real-time. 

And soon, it won't only be Russian Oligarchs hiding their yachts.

FOMC: Fear Of Missing Crash

The Fed is on the verge of the biggest policy error in human history, aided and abetted by a cabal of salesmen who will NEVER admit it's the end of the cycle even when it's over. History will say that a global pandemic caused massive supply chain disruptions, punctuated by an end of cycle Energy shock that sent commodity prices sky-rocketing. Deja vu of 2008. Then the Fed raised rates because their "models" said they have no choice. And they triggered the global Minsky Moment. Fans of "low prices" are going to love it...

The Minsky Moment:

"Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values"

First off, make no mistake this is a global asset meltdown in progress. Today was the biggest rally in almost two years (June 2020) due to short-covering ahead of tomorrow's ECB meeting and the major U.S. CPI report. One pundit today recycled the theory that if you try to time the market you miss all of the best days. The only problem is that the biggest rallies are ALWAYs in bear markets. The biggest days in the past 14 years came in the Fall of 2008 when the market STILL had -40% to go to the bottom. The sheeple are now DOOMED by this type of Idiocratic logic.

Today was a bear market rally in an early stage bear market. 

Regarding the ongoing war in Ukraine, the super spike in commodities has served the purpose of boxing the Fed into only one course of action. Which means that barring meltdown between now and then, they are going to raise rates into the weakest market in 50 years. Something they've never tried before.

Here we see NYSE new lows as of yesterday's close compared to prior rate hike cycles. In December 2015 at the beginning of the last rate hiking cycle, after one rate hike global markets exploded. 

As of today's close there is STILL a 99.8% probability of rate hike next week, despite the threat of global nuclear war, demolition of Russia and Ukraine economies, and sky-rocketing gas prices in Europe.

For the record, Americans have the LOWEST gasoline prices in the developed world and yet still there is existential angst over these prices. Here are a handful of countries to compare against:

All of which means that we have reached peak inflation hysteria. 

This was today's headline in U.S.A. Today:

TOTAL disinformation

Nominal gas prices are higher than 2008. REAL gas prices are nowhere near 2008 levels:

Despite the millions of variables today's pundits like to throw at people, this has all become a very simple equation: Escalation of the war in Ukraine can now only serve to accelerate this meltdown. If the war ended tomorrow, oil would collapse and the rest of global risk assets would rally as they did today.

That is until next week when the Fed pulls the trigger. 

Oil has now become the Armageddon trade, which is why I'm not that bullish long-term.

Today was the LAST day for Quantitative Easing. The pandemic emergency inflation of asset bubbles is now officially OVER.

Just in time for new meltdown. 

There are of course two major differences between now and two years ago. First off, the Fed has ZERO room to go down on interest rates. Secondly of course, they are on a tightening path  which means they are several "meetings" away from contemplating market bailout.  

Nevertheless, mass complacency reigns supreme. Whereas during the past two market implosions the Fed was conducive to bailout, gamblers nevertheless hedged risk. This time, with no bailout on the horizon, they are taking no precautions. When everyone reaches for the sell button at the same time, there will be no one on the other side of the trade. We are headed for a ZERO liquidity global asset meltdown. 

You see, the passive money bubble doesn't believe in risk management. These people have been brainwashed into ignoring all risk. And therein lies the problem - without risk management, panic at lower levels is all but assured. 

And there is no way central banks can bailout everyone at the same time. 

In summary, forget about oil and inflation.

This is now the largest RATE SHOCK in U.S. history when measured on a relative basis. What took six years post-Lehman took six months post-pandemic: 

The global Minsky Moment has arrived. 

THE BREAKING POINT

A Black Swan nuclear event. What's not to like? Gamblers can finally say "No one saw it coming". And Wall Street now has  their excuse to bury clueless gamblers deep in end of cycle trades...

We are late in the crack up BOOM AND BUST. The only thing that can stop Fed-precipitated meltdown, is meltdown. Bulls are optimistic...

On the topic of the war between Russia and Ukraine, the only thing that's clear is that both countries are turning into failed states. Russia has become the new North Korea. We can pray that it doesn't turn nuclear but Putin is desperate and he may deploy a tactical nuke to keep NATO at bay.  

In the meantime, the nuclear economic option has now been deployed - a ban on Russian oil and gas. Today the White House announced the U.S. ban and Europe announced they will seek to ban a majority of Russia natural gas over the course of 2022.

In retaliation, Russia is threatening to cut-off ALL oil and gas to the West.

This is now officially the largest global Energy shock since 1973 when OPEC embargoed oil shipments to the West due to U.S. support for Israel during the Yom Kippur war. That event led to U.S. and global recession and the 1974 bear market. 

Going into this fiasco, the global economy was already facing tremendous end of cycle risk. So it's highly likely this event has pushed the global economy over the cliff.

Talk of recession is now circulating Wall Street desks, but so far that scenario has remained well out of the purview of Main Street investors who are now trapped in end of cycle trades. Wall Street is now free to say whatever they want to clients, because they can blame this "Black Swan" event for what comes next. 

Which is where this all gets interesting. 

For the moment, oil is the wrecking ball creating "demand destruction" across the entire economy. However, this event has teed up the U.S. to become the only safe haven on the planet.

Before this war started, China was already imploding due to their real estate meltdown and COVID zero tolerance policy. The PBOC has been in easing mode for several months.

Hong Kong stocks are now well below the COVID lows and totally bidless as one China policy has destroyed their status as a global financial center.

The European Central Bank which meets Thursday this week will likely return to a neutral stance as their Energy markets are massively exposed to this Russian oil embargo. European recession is now getting priced into markets as European stocks go bidless:

EM currencies, EM bonds, and EM stocks are all imploding due to the various meltdown factors and the rising $USD which I will discuss in a moment:

Next comes Japan. Normally, in a crisis scenario the Yen catches a massive bid due to the global carry trade unwind. However, this time the Yen remains weak due to the commodity shock and the record trade deficit. Which is why there is now a massive policy divergence between the U.S. and Japan. 

Shock Commodities Spike Threatens to Push Yen to Six-Year Low - Bloomberg

"No chance monetary easing will be reduced"

Normally in a commodity super cycle Canada and Australia would be massively outperforming. So far their stock markets are holding up better than most. However, currency wise we now see a massive disconnect between the C$ and oil. This is further indication that oil is totally disconnected from global economic growth. This is the largest divergence we've seen since 2008 and we see how that worked out for oil:

All of which means that the U.S. is the ONLY safe haven left in the world. Which is why the dollar is rising in lockstep with this parabolic ascent in oil. 

Whereas oil is currently the global wrecking ball, soon the $USD will become the REAL global wrecking ball. Oil has boxed the Fed into tightening. So either something breaks THIS week due to oil. Or something is going to break NEXT week due to the Fed. The only thing that will stop meltdown is meltdown. 

Dollar funding stress is already showing up in global markets this week:

Funding Stress Indicator Surges to Widest Levels Since May 2020 - Bloomberg

"The fear that the impact of the war will create a dollar shortage is rippling through the system"

What would a dollar super spike do to all of the above markets? 

In particular it will implode oil, gold, and Emerging Markets post haste. Followed by massive global deflation. 

This Thursday we get another CPI report which is expected to run hot. 

At least bulls can honestly claim no one saw it coming.

Again.