BOUNDING INTO THE ABYSS

The sum total of serial failure is coming home to roost in the worst way possible. The final magnitude of this economic disaster is now visible from outer space, and it has now officially become a Category 5 Shit storm...

The so-called "elites" are totally oblivious to the plight of the middle class. Hence they are the LAST ones to see this coming. For the first time in history the economy is collapsing AHEAD of the stock market. That can only happen when the ruling class is locked in a circle jerk of lethal proportions. In my last missive I laid out the bull and bear case for the stock market. In this post I will review the history of how we got here and why our policy-makers are doomed to fail on a biblical scale. 

The late 1990s capped off a two decade bull run that was only briefly interrupted by the 1987 crash and the 1990 Gulf War recession. Both were mild events by historical comparison. The late '90s featured a Tech-driven melt-up that stumbled during the Asian/Russian /LTCM Financial crisis of 1998. Up until then the Fed had been normalizing monetary policy by raising rates. The LTCM bailout and attendant rate cut set the stage for a melt-up rally into the Y2K Millennial date change. The Fed was reluctant to raise rates in 1999 because they wanted markets to be well liquefied going into the seminal date change. Which set off the final stage blow-off top Dotcom bubble. By May 2000 the Fed was playing catch-up and hiking rates at .5% per meeting. By the end of the year the Tech bubble had collapsed -60%. 

Sound familiar?

The Dotcom recession began in early 2001 and got worse with 9/11. Stocks finally hit bottom in 2002 with the Iraq war. The Fed rate was at 1.5%, down from 6.5% at the Y2K top. It took a FULL 5% decline in rates to put a floor under stocks and the economy. Low rates continued just long enough to inflate the housing bubble, which had started years earlier and continued growing through the Dotcom bubble. The Fed then slammed on the brakes with 17 consecutive rate hikes and burst their own monetary-driven housing bubble. Their next trick was the 2008 bailout and ZERO % interest rate policy. Japanification had arrived: The zombification of markets and the euthanization of investors with "free" money.  

What followed was a boring but metronomic rise in the stock market amid tepid economic growth. Stocks rose in lockstep with the Fed balance sheet. Every attempt to stop QE and/or raise interest rates led to a market crash. This monetary dependency continued until 2016 and the Trump election. When Trump was elected, the futures went limit down. But by the time the U.S. market opened green, the promise of a tax cut was making the rounds on Wall Street. The FISCAL melt-up began, which allowed the Fed to raise rates and pare the balance sheet for the first time since 2007.

It was all going well until late 2018 when the glue fumes from the tax cut had worn off and the Fed reached for one more rate hike in December 2018. Global markets imploded. Trump demanded Powell reverse policy which he did. It was off to the races again. However, the Fed cut rates three times in 2019 as "insurance" and they began expanding their balance sheet to deal with the "repo" crisis.

And then the pandemic hit, which is where this all gets interesting. 

The pandemic had two long-term deleterious impacts on the economy which we are now confronting. First off as we all know it clusterfucked the supply chain. Inventories of everything became depleted. Double ordering ensued. Consumers hoarded merchandise. And THEN the tsunami of combined fiscal and monetary stimulus hit the economy. So not only did the supply curve shift in, but the demand curve shifted out. From an economic standpoint, that meant MORE demand and LESS supply and therefore higher prices of EVERYTHING at the same time. What happened during the pandemic is the WORST thing that could happen late in a cycle, because it has NEUTRALIZED monetary policy. 

Fast forward to 2022, and now all of that stimulus is receding. There's only one problem. The price of EVERYTHING remains at record highs. So just as consumers are seeing less income, they are being asked to pay more for everything. 

Where today's pundits are ALL wrong is in assuming this is 1979 deja vu when the middle class was at its apex. Today, union membership is at an all time low. Which means workers have very little bargaining power. Sure, they've benefited from a tight labor market, but that doesn't mean they've recovered from 40 years of wage deflation.

Contrary to popular belief the economy did not float back from China which is why U.S. capacity utilization remains at record late cycle lows. 

Which means that the middle class is under economic duress from all sides - record gas prices, record food prices, record home prices, record car prices, record durable good prices, rising interest rates. All at the same time. It's no wonder that consumer confidence has collapsed down to the lowest levels in decades. And YET, our elitist financial pundits constantly inform us that the consumer is strong. Invincible.

How the hell would THEY know? They have no first hand experience AND they are now totally ignoring consumer sentiment polls. For some reason. 

All of which is why this Fed is making a COLOSSAL error late in the cycle with no monetary safety net, with all of today's idiotic pundits along for the ride. The Wizards of Fed will be the last to know that their magical money powers have been rendered inert. 

Meanwhile, clueless gamblers instead of de-risking, are doubling down into the abyss on the belief that everyone else is going under the bus. 

Soon to find out they ARE everyone else. 

2022: YEAR OF LIVING DANGEROUSLY

Over the past 14 years of continuous monetary bailouts, "Don’t fight the Fed" has been changed to "Don’t fear the Fed". Now, bad news is good news. So it is that gamblers are doubling down on depression…

In this post I was planning on assessing the bull case vs. the bear case. However, there is no real bull case to consider on a long-term basis. Since the lows of 2008, we've been told that "extreme valuations don't matter" because interest rates were at generational lows. That argument is no longer true. Over the course of this summer, investors will face the most extreme Fed tightening in history. Which means that now, record valuations DO matter. In addition of course, most of today's pundits happily ignore the ongoing Tech implosion and RECORD housing bubble. The only two bearish pundits who capture the magnitude of today's risks are Michael Burry and Jeremy Grantham. Burry made his claim to fame not only predicting the 2008 subprime meltdown, but successfully betting against it. Of course there was a book and a movie, "The Big Short" about the entire debacle. And yet, today's investors seem intent on ignoring his latest stark warnings: 

"Burry's view seems to be that consumers are raiding their savings accounts to weather inflation in food, energy and housing costs, and a recession is likely once those cash reserves are exhausted"

last summer, Burry warned buyers of meme stocks and cryptocurrencies that they were facing the "mother of all crashes."

Here is the personal savings rate with U. Michigan consumer sentiment:

In the past year the Fed has crashed Emerging Markets, Ark ETFs, Cloud internets, IPOs, SPACs, Crypto currencies, and the global bond market. And yet, investors have ZERO fear of the Fed right now. Complacency is rampant. Today's pundits only tell investors what they want to hear. They never mention the EPIC downside risk if this experiment fails. They never tell people that this time there is NO Fed safety net.

Investors have been conditioned over the past decade to believe that bad news is good news. They are now FULLY addicted to Fed bailouts. As risks increase, they are trained to increase risk allocations. Ironically, the Fed sees this mass complacency as a signal to continue tightening. Therefore, they have now commenced tightening their balance sheet for the first time since before the pandemic. In addition to double rate hikes the Fed is  now reducing their balance sheet at $45b/month, which will increase in $15b increments to $90b by September. Back in 2017, the Fed STARTED tightening at $15b/month. So they are starting QT at 3x the level of last time. Adding together rate hikes AND QT, the progression of tightening will look like this, below: 3x this month, 4x in July, and 6x by September (2 rate hikes and $90b in QT). As I said on Twitter, there have been no times since 2008 when the market rallied from this level of breadth disintegration WITHOUT Fed bailout.  

The only bull case right now is for a tactical oversold bounce. The bullish belief is that institutions have become too bearish and therefore a bounce is inevitable. Perhaps. However, it's not true that the market is heavily oversold. And therefore, there will be very little fuel behind any tactical rally. Which means the downside is far greater than the upside at this juncture. Let's take a look at the "bull case", so I can demolish it. 

We hear a lot about a "breadth thrust" meaning a high degree of participation in stocks, which took place last week.

Here we see the S&P 500 with the S&P oscillator (middle pane) the highest since March 2020 AND January 2019. Both were the beginning of large rallies. However, what we also notice is that those times, the oscillator FIRST became heavily oversold attended by a large spike in the put/call ratio. NOT this time. We also see that the last time the oscillator became this overbought was THIS YEAR in April and that was the END of the bounce, not the beginning.

MINOR details that can end up costing A LOT of money. 

The Dow, same idea. Three times the Dow has been this overbought this year and each time the market rolled over. 

Why? No capitulation compared to last times:

The S&P volume oscillator confirms what breadth is saying - this market is NOT oversold. 

I will become bullish when this indicator becomes oversold indicating capitulation AND when the Fed has capitulated and stops raising rates.

That combined scenario is limit down away.

The next bullish argument: "Institutions are bearish". Yes, major institutions have been selling all through 2022 which is what they do at every stock market top. Is that a warning sign or opportunity?

Here we see Active Manager positioning is bearish, but it's not as bearish as 2008. ALSO, prior bounces from this level of bearishness ALL had Fed participation. So make the popular 2015/2016 comparison at your own risk. 

In summary, bulls are playing based upon the rules for a BULL market. Which means they see a market becoming moderately oversold and they buy the dip. In a bear market we can expect sentiment surveys to become more and more bearish but less and less useful IF they are not attended by commensurate positioning. Investors are sliding down the slope of hope and  today's pundits are merely greasing the slide for them.

There is a wall of put options below this market and SO FAR that is keeping the market bid. However, below the bear market level there is NO safety net for this market. Grantham predicts the market has 40% downside below this level. I predict that this Disneyfied market will cease to function normally below this level. And that is when ALL of today's bulls will realize that 14 years of continuous monetary bailouts are ending BADLY. As anyone with an IQ of 5 could predict. 

GAMBLE AT YOUR OWN RISK.

FOMC: FEAR OF MISSING CRASH

An unprecedented hurricane of risks. Plus collapsed liquidity. The fastest Fed tightening cycle on record. And calls to buy risky assets. All from the same Wall Street bank. What's not to like?

JP Morgan CEO Jamie Dimon warned yesterday about a looming "Hurricane of economic risks". Last week he was sanguine, this week he's raising the alarm. He specifically is concerned about Quantitative Tightening - the reduction of the Fed balance sheet at double the pace of 2018, which ended badly. He is also concerned about the commodity shocks emanating from the war in Ukraine. 

“We’ve never had QT like this, so you’re looking at something you could be writing history books on for 50 years”

Last week, Dimon referred to his economic concerns as “storm clouds” that could dissipate...But his concerns seem to have deepened since then."

What changed in the past week? What does he know that we don't know?

What Dimon doesn't mention is that both of the key risks he mentioned are highly correlated. The ever-escalating sanctions are creating a commodity supply shock which is forcing global central banks to tighten monetary policy at the fastest pace in decades:

"Policymakers around the world have announced more than 60 increases in current key interest rates in the past three months, according to an FT analysis of central banking data — the largest number since at least the start of 2000"

Here we see copper rolling over into a death cross as global growth implodes. Many pundits forget that it was China that pulled the global economy out of recession after 2008. However, the PBOC is one of the few central banks actively cutting rates. 

For now, oil and commodities are in a push/pull between supply disruptions and the resulting demand destruction which is leading to recession. In the end, demand destruction ALWAYS wins out.

Repeated calls for $185/bbl oil by JP Morgan in 2022 have yet to come to pass. Russia has so far been able to bypass the sanctions by selling their oil to China and India. 

"India bought 27 million barrels of Russian oil in April and 21 million in May,  compared to 12 million barrels it bought from Russia in all of 2021"

In addition, as I write we just got word that OPEC will increase output faster than expected:

“Whilst it’s not an outright promise, Saudi Arabia [has] seemingly thrown the West a bone” 

The pre-FOMC silent period begins COB this Friday. However, the Fed once again is entering this meeting on an extremely hawkish tone. Bullard reiterated he wants a 3.5% Fed Funds rate in 2022 which means .5% rate hikes at EVERY remaining meeting in 2022. 

“This 50 basis point per meeting increase is twice the normal pace that the committee has used in recent years"

So there you have it. DOUBLE quantitative tightening and DOUBLE rate hikes going into the lowest liquidity period of the year:

May 17th, 2020:

"Liquidity, or the ease of trading, in S&P 500 futures is worrisome even by the standards of the Covid-spurred meltdown more than two years ago, according to JPMorgan"

“This implies that the ability of markets to absorb relatively large orders without significantly impacting the price is very low at the moment.”

One side effect of the Fed’s absence as a backstop buyer is that there is greater risk of market fragility when shocks do arise"

To top it all off, JP Morgan's head stock market analyst advises everyone to buy risk assets:

He mentions corporate buybacks as a reason to buy stocks, however corporate buybacks always peak at the end of the cycle. It's the only way to artificially boost share price when earnings growth is slowing. 

Which gets us to the casino set-up going into the strictest Fed tightening on record. 

The S&P is two years overbought and the two prior overbought readings this year led to rollover AHEAD of the FOMC. In addition, there has been ZERO capitulation by traders:

The rest of the world ex-U.S. just made its fifth lower weekly high:

In summary, the exact same major bank sees unprecedented risks, record low liquidity, and yet still advises buying risky assets. Investors have NO CHANCE to survive in this ridiculously confused environment. There is far too much conflict of interest masquerading as market expertise. 

The sheeple are lambs to the slaughter. 

And what's new?

"GOOD NEWS. WE HAVE ACHIEVED TERMINAL IDIOCRACY"

The only thing more dangerous than gamblers who believe bear markets no longer exist, are economists who think recessions no longer exist. One thing they all have in common is the belief that printed money is the secret to effortless wealth. The only question they ALL have is, why did no one try it sooner?

For months last year pundits pounded the table that inflation is NOT transitory. Last December the Fed finally agreed, and they slammed on the brakes. Six months later pundits are now saying inflation IS transitory. Stagflation in the 1970s lasted almost six years from 1974 to 1980. This time around it lasted six months. Which begs the obvious question, what is the definition of transitory?

The answer is it no longer matters, because per tradition the Fed is  heading in the wrong direction and this clown car doesn't go in reverse. We don't know if the economy is in recession right now, we only know it's on a slowing trajectory. Which means we are headed for recession and the Fed is accelerating towards the cliff. There is a consensus belief among pundits that the Fed can raise rates to the "neutral" level this year ~2.5% and then start cutting rates next year, all while avoiding recession in the meantime. In other words, the Fed will create monetary buffer by demolishing economic buffer. When they fail, the consequences will be cataclysmic. First the financial bailout will fail. And then the economic bailout will fail. Monetary policy is now a spent farce. 

This recent Fortune article basically sums up the standard view:

Fortune May 2022:

There Are Two Kinds of Recessions. The Good Kind and The Bad Kind. We Deserve The Good Kind:

“It typically takes about 10 months from the low in unemployment to recover to pre-recession employment levels in a typical recession,” Miran said. “For the dot-com [bubble] and the global financial crisis, it took about three times that amount, about 32 months, to recover to pre-recession unemployment levels.”

There are many things wrong with this article. It starts off by assuming there is NO asset bubble this time around. Which is obviously an asinine assumption. We learned today that home prices surged 20% in March. Which is a Black Swan event with a 1 in 420 probability based on known data alone. 

"March’s reading was the highest year-over-year price change in more than 35 years of data"

We have a parabolic housing bubble AND a collapsing Tech bubble, this time with no safety net beneath the economy. Yet both gamblers AND economists are convinced this bear market and this recession will be the easiest of the three. You have to be brain dead to believe this bullshit, which is why it's largely unquestioned. 

The article makes an even more fundamentally flawed and asinine omission when they claim that typical recessions don't last very long and are not as bad as 2008. Because what they fail to mention is that the Fed lowered rates between 5 and 10% in every recession of the past 50 years. Currently the Fed has less than 1% dry powder. So how is it possible to have a "garden variety" recession when the Fed has nowhere to go on rates?

What you notice from this chart is that every recession required the Fed to dramatically cut rates. EXCEPT the pandemic, because they only had 2.5% to go on rates. 

What saved the economy in 2020 was the largest fiscal expansion since World War II MONETIZED by the largest Fed balance sheet expansion on record.

The bet now is that will happen again during a mid-term election:

In summary, we are heading for a very hard landing. 

Whether stocks lead or follow is NOW totally irrelevant. The economic damage is done and the Fed no longer has any rate cut powder. This consensus view that they can head off catastrophe by tightening faster, is a LETHAL assumption. 

Which means we are now facing simultaneous deleveraging in tech stocks, housing, consumption, corporations, state and local governments, emerging markets, all at the same time. 

When the financial bailout fails and markets implode there will be no appetite to bailout out the wealthy. In addition, fiscal stimulus will be insufficient in a mid-term election year heading for political gridlock. 

The belief that printed money is the secret to effortless wealth has reached Terminal Idiocracy. Today's pundits claiming there will be a "soft landing" are borderline criminal. And the complacent masses wouldn't have it any other way.   

DOUBLED DOWN ON COLLAPSE

Late stage Tech crash and early stage housing crash. With a Fed tightening liquidity at the fastest pace in history. Retail investors are doomed. They've doubled down on collapse...

Collapse is ahead of schedule. The market has already reached the -20% Lehman pre-explosion level which took nine months to reach in 2008 and only five months this time. Despite being at the CRASH level AND at the cusp of bear market, I still get questions on Twitter if that means the market is NEAR bottom. No, it means the opposite, the worst has not yet begun. 

So far this decline has been a text book end of cycle market. First growth stocks imploded. Now cyclicals are imploding, led by retail stocks. Defensive stocks are weakening. And Energy stocks are in a blow-off top. 

It's a classic pre-recession market. It checks every box. And yet still today's pundits will claim no one saw it coming. 

"We remain steadfast of the view that the inflation scare is going to pass very soon — The lagged effects from the supercharged U.S. dollar is huge in terms of the impact on the cost of imported goods. Inventories have shifted from deficient to excessive"

The stock market is following a familiar pattern of a recessionary bear market. The first phase is the Fed-induced P/E multiple contraction"

The only problem is that Rosenberg is far too bullish on his S&P price prediction as are many other "bearish" pundits, which is why sadly today's investors are being told that it's too late to sell. Unfortunately, nothing could be further from the truth. After Y2K, it took 13 years for the stock market to make a new high. Inflation-adjusted it took 17 years. In 1929, it took 25 years to get back to the all time high on a nominal basis. In Japan, it's been 32 years on a nominal basis. On an inflation-adjusted basis the losses are much worse. 

Investors are reaching what I call "The valley of death". The point from which it will take DECADES to recover.  Unfortunately, not everyone has that kind of time.

This decline has now reached the point of no return. Retail gamblers are ALL IN as they've been buying every dip lower. Which means that the next phase will bring what I call "Bailout failure". This is the greatest risk markets face and yet no pundit is discussing it. It's what happens when investors are far too complacent in the face of epic risk. Sadly, the Fed can't bail out all global markets at the same time. Which means that retail gamblers who waited over a decade to pile back into the casino are going to ride unaffordable losses lower.

Here we can clearly see via the S&P futures net speculative (long-short) contracts traded, that speculators have been getting more and more complacent over the course of this LONGEST CYCLE in history.

 

Another problem is that investor MASS COMPLACENCY has fed back into the Fed's financial stress index via a muted VIX and compressed bond yield spreads. Which means that investor complacency has led to FED complacency. Which will be a DISASTER. Per the meeting minutes released Wednesday, in three weeks the Fed is going to unleash the tightest liquidity reduction in market history. 

Fed overtightening has caused every recession since WWII, so why stop now?

Going into this week the Dow was on the longest losing streak in 100 years - down eight weeks in a row. So, no surprise, it's bouncing this week ahead of the May long weekend. Working off the oversold condition. The market is now oversold on price and overbought on breadth. Which is the recipe for a panic collapse. 

Crashes occur in oversold markets that have been bought all the way down. 

Here we see the S&P 500 has declined to the bear market level, however the NYSE is MORE overbought on breadth than it was at the top and the counter-trend high in April:

In summary:

It's too late for bulls to capitulate because capitulation will initiate meltdown. Consumer Staples and Utilities - "recession stocks" are the "leading sectors" for now. 

Which was the same pattern we saw in 2008. 

"The current market price structure is eerily similar to the global financial crisis in 2008"

"In order to call for a stock market bottom, capitulation from both institutions and retail investors is needed. Before market capitulation happens, leadership in sector, industry group and stock is likely to disappear"

THE GOLDEN AGE OF DELUSION

It's Davos week, with the U.S. stock market on the verge of meltdown. Which begs the question - in a world where there is no such thing as right or wrong, what could go wrong?

Oxfam: Pandemic Created A New Billionaire Every 30 Hours

"There were 573 more billionaires in the world by March 2022 than in 2020, when the pandemic began, Oxfam said in a brief on Monday"

Fred: Wealth of 1%

Today's pundits all have one thing in common, they all have severe amnesia. Forgetting how we got here is necessary in order to pretend the future will be the exact same as the past. Be that as it may, once in a while it's important to remind ourselves of the level of delusion that is currently baked into today's Disney markets. 

First off, anyone who wants a reminder as to how far off the trendline we have come in recent years should read fund manager John Hussman's blog from time to time:

April 2022:

"The most challenging financial event for investors in the coming decade will be the repricing of securities to valuations that imply adequate long-term returns, following more than a decade of reckless and intentional Fed-induced yield-seeking speculation"

There’s a strong possibility of an interim loss in the S&P 500 in the range of 50-70% over the completion of this market cycle"

Then he goes on in deep detail how he arrives at this conclusion. Most of his work compares recent returns to the long-term trendline. For those who believe that the macroeconomic future will be the past, I suggest that his analysis is as good as it gets. He explains in theory there are two ways to get back to trendline - time or price. Historically however, returns have NOT  been negative for years at a time, so what usually happens is a "front loaded" crash and severe bear market followed by years of recovery. Not so bad for those who avoid the "re-pricing event". 

However, my view of this situation is quite a bit more dire than that of John Hussman or any other paid financial manager. Why? Because I believe the past century to be an outlier with respect to overall returns on capital. And I believe that this coming period will unwind much of the capital friendly policies of recent decades. I am of course referring to "free trade", massive tax cuts for the rich, de-regulation of finance, debt-fueled stock buybacks, bailouts for the wealthy, and massive  consumer debt accumulation. ALL of which have come at the expense of the middle class. If you back out all of those capital friendly policies and replace them with middle class friendly policies, it's easy to believe that we will undercut the multi-decade trendline and go much lower. 

One thing I believe will continue is zero interest rate policy, which means that valuations in our lifetime may always be distorted by the asinine theory of "infinite" present value. Be that as it may, the "numerator" in the calculation will be collapsed aka. corporate profits. No question, central banks will NOT give up on this delusion easily. And for that experience we can look to Japan and China where they've done everything possible to prevent TRUE pricing in the markets. And yet they have failed. The long-term implication of 0% interest rates is 0% economic growth. This fate has so far been avoided in the U.S. ONLY by strip-mining the middle class to the benefit of the ultra-wealthy. In a zero sum game. A process which is reaching its inevitable terminus. 

What I am trying to say is that there will very likely NEVER be a time when this market will appear "investable". Tradable yes, investable no. Why? Because all of the "capital friendly" factors I mentioned above have essentially blighted the economy. And I believe that once the stock market deflates back to the Hussman trend-line, we will begin to see an unwinding of the political tailwinds that created this massive one-time extreme over-valuation. In China they call it "Common prosperity". And I believe that theme is coming worldwide and will replace financial delusion as the predominant political force.

Granted, I could be wrong, but I for one believe this fairy tale has a very bad ending. And RIGHT NOW we are seeing ALL of the risks of the past 50 years coalescing at the exact same time, with a rabid Fed hellbent on detonating THEIR thermonuclear weapon of financial mass destruction. Fittingly, this delusion now has its best chance of giving back DECADES worth of ill-gotten gains in short order.

In summary, the roller coaster ride will begin as usual - with a huge drop. After that there will be a lot of volatility. For those who can stomach the ride, there will be decent returns to be eked out. In the 1930s there were TEN bull markets and TEN bear markets - each of 20% or more, in a SINGLE decade. Basically one bull market and one bear market per year on average.

Just don't puke on the way down.

THE SUM OF ALL RISKS

Today's bullish investors have only one investment strategy right now, which is waiting for bailouts. Therefore they must pray that their bailout karma has not run out after a decade+ of continuous bailouts and ever increasing moral hazard...

mor·al haz·ard

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

 

Today's investors have ZERO hedge. 

The site Zerohedge rose from the ashes of the Great Financial Crisis. The name itself impugns the sheer fantasy of perpetual bailout. But something odd happened over the many years since 2008. That platform morphed from criticizing market delusion INTO monetizing market delusion. They adapted to the "new normal" of what they had originally decried as "Keynesian bailout" culture. What began as a critique of the decadent culture of bailout, ultimately morphed into a 24x7 purveyor of non-stop delusion. So it is that we find ourselves knocking on Heaven's Door of the longest cycle in U.S. history, as retail bagholders FINALLY pile back into "this time is different".  While being sold down the same old river by Wall Street. And ironically once again there is NO ONE to warn them. All pundits having surrendered to the siren song of perpetual cheap money bailouts.  

Let's see what we have THIS time:

Imploding Tech bubble. Largest Nasdaq losses since 2008. 

Collapsing Crypto bubble on a scale larger than subprime circa. 2007 

Largest housing bubble in history. 

Largest inflation shock since 1980. 

Largest oil shock since 1973. 

Largest bond collapse in history.

Largest EM currency collapse since 1998.

In other words, the Fed will now successfully navigate all of the risks that caused recession and deep bear market in the past 50 years, without causing a recession or deep bear market. Despite having the least amount of interest rate buffer in history.

This is the current investment delusion:

History will say it took a pandemic to create the worst case scenario of a Fed way behind the curve of monetary tightening at a point when supply side pressures were at cycle high. The first rule of Japanfication is NEVER allow the economy to run too hot. Why? Because when there is too much debt, a hot economy will spike interest rates and bring down the entire house of cards. The pandemic made the perpetual Goldilocks scenario impossible. And yet few of today's pundits see it ending. 

Last December, Mohamed El-Erian was one of the first pundits to warn that the Fed was making a huge mistake by keeping policy loose for too long:

December 2021:

THE FED'S WORST CALL EVER 

"El-Erian has repeatedly said the Fed is underestimating inflation risks as the U.S. economic recovery from last year’s pandemic shock accelerates price increases for everything from energy and food to consumer items"

Failure to do so could result in needing to “hit the brake hard” in a few months, which would risk sending the economy into recession, El-Erian said"

Here we are a "few months" later, and El-Erian's worst case scenario is taking place in real time. The Fed IS hitting the brakes too hard. But what does he say now? He says there is low risk of recession:

STAGFLATION IS COMING. RECESSION UNLIKELY.

"The US economy can potentially dodge a recession, but stagflation is coming"

El-Erian and all of the other inflationists went from seeing the problem, to being the problem. They are now of the same mind as the Fed - that inflation is the biggest worry, NOT recession.

 

This week's abysmal retail earnings sent retail stocks to their worst performance since 2008. Tech stocks are having their worst two quarters since 2008. Consumer Staples are outperforming the S&P the most since 2008. And Energy stocks are leading the market the most since 2008.

How much warning do these people need?

Back in 2008, economists were still debating whether or not the economy was in recession, NINE MONTHS after it started. There are no economic leading indicators of recession EXCEPT markets themselves. The allocation of risk capital to LATE CYCLE trades is the clearest indication of late cycle risk.

"Stagflation is coming"

We may or may not be in recession at this moment, but it doesn't matter. Because the Fed is going to keep tightening policy until they are CONVINCED that we are in recession. Which means DEEP in recession. 

And then they will realize they don't have enough dry powder to get us out again. It will be at THAT point when today's pundits realize pounding the table on inflation for too long facilitated THE LARGEST policy error in Fed history. 

Today's older investors have NO EXCUSE not to see it coming. Aside from early onset dementia brought about by 14 years of brain dead investing. They've become fat and lazy. Accustomed to embracing all risk.

Today's young investors believe they are a new hardy breed of investor, unlike their parents who panicked and sold into the past two -50% market collapses. These young people have "diamond hands", meaning they never sell. 

That is all well and good, but they have diamond hands in a crystal market. Meaning they won't sell until the Matrix melts down around them like a well cultivated illusion.  At which point they will finally realize their entire life has been fed into a corporate hopper and sent to the Cayman Islands for efficient distribution to global Oligarchs.

Yes I feel bad for these young people facing EVERY type of major risk of the past FIVE decades at the same time. Layered on top with a collapsing crypto bubble, a student loan crisis, and a Fed with the least amount of dry powder at any end of cycle in U.S. history. All aided and abetted by the most corrupt and decadent financial commentary in U.S. history. 

Recall that brokers lowered commissions to ZERO right before the pandemic, thereby luring an entirely new generation into the casino just before the end of cycle pandemic mega bubble took off. So no wonder they see themselves as the chosen ones of casino gambling.

Be that as it may, history will say they were the ultimate victims of moral hazard and late cycle criminality.

To believe anything else is IDIOTIC.

Could I be wrong that this fairy tale is NOT ending right now?

Sure, there could be ANOTHER chapter of Goldilocks and NO BEARS. Alternatively, this is just ending the worst way possible with the fewest number of people seeing it ending, as one would FULLY expect it would end after 14 years of central bank sponsored moral hazard. 

Bet accordingly.