ONCE UPON A TIME IN DISNEYLAND

The bullish case is borderline hyper moronic, but in the spirit of "fair and balanced" reporting, no theory is too asinine not to be bought and believed on a massive scale...

I've had it with trolls on Twitter so now I've blocked all comments. Unfortunately, I have to block the good with the bad, because I can't afford to have my sanity polluted by the dregs of humanity. That said, from time to time I review the "other" standpoint to see where or when it may actually be correct. So now I will tackle the bullish point of view and show where it's right, and where it's wrong. 

Fortunately, the entire bullish pivot theory can easily be evaluated since it already recently happened in back in late 2018. Back then the Fed was tightening on both ends of the curve at the same time as they are now. In December 2018 the market imploded into bear market and the Fed pivoted from a hawkish stance to a dovish stance and the market took off. 

So, why can't it happen now?

From a purely technical point of view, this rally has the same breadth thrust as the one from early 2019 (see second chart below). Which is another point for the bulls. This is what has caused the majority of bullish pundits to assume the "bear market is over". No question, it's a strong technical signal with a good track record in economic expansions, but unfortunately one indicator does not erase all other risk. 

So here are the differences between the 2018 pivot and now:

First off, there was no capitulation this time around, whereas the put/call ratio spiked in late 2018. Here we see the equity put/call ratio is lower this year than during every other market event since 2008. And of course we also see the other huge difference in the CPI. Back during every other Fed bailout, the CPI was falling and already at or below 2%. Right now, it's still above 8%. 

The entire bullish thesis is predicated on the idea that the Fed is almost done raising rates and will soon be lowering them. 

Another difference is that back then Trump demanded the Fed pivot and a week later Powell acquiesced. This time, Trump has not demanded the Fed pivot and Powell has not signaled that he will. Quite the contrary, recently Fed members have been taking turns informing the public that interest rate hikes will not end any time soon. 

Back in the Spring of 2019 the economy was stalling, so the Fed gave forward guidance of potential rate cuts in the summer, which kept the rally going. And then they cut rates three times over the summer of 2019. In addition, they phased out QT and re-started QE during the repo crisis in September 2019. That juiced the market even higher. 

All of which you can see in the chart below:

Now let's revisit these same factors for this "Pivot" time period. This time, the economy is ALREADY in recession. CME Fed futures are right now pricing in 100% chance of rate hike in September: 60% chance of a .5% rate hike and 40% chance of a .75% rate hike. There were no rate hikes larger than .25% in the prior rate hiking period (2017-2018). In addition, QT will be at $95b/month in September, which is DOUBLE what it was in early 2019. 

 

There you have it. Story time is over.

Here is where it gets interesting.

While so many people are in a hurry to tell me my timing is "bad", I happened to notice that this meltdown is taking place at the exact same rate as the one in 2008. The top was in late 2007/2022. There was a lower high in Spring 2008/2022, and a third lower high in August. 

Another myth that's circulating is that hedge funds and institutions are bearish and waiting to buy stocks. However, they were TWICE as bearish in August 2008 and yet still the market crashed in the Fall. We also recall that even after Lehman failed the Fed was STILL preoccupied with inflation. So they committed a policy error of letting Lehman fail. 

Imagine if China melts down tomorrow and the Fed meets and decides that inflation is the greater risk. Because that's what is  very likely going to happen. I predict the Fed will be very slow to reach a neutral stance this time around. And even slower reaching panic mode of re-starting QE. 

Another thing I predict is that over these coming weeks ALL risk markets from stocks, cryptos, commodities, junk bonds are going to explode at the same time. Making what happened in 2008 seem like a picnic. The inflation hypothesis has caused investors to hold too little cash which will lead to a global liquidity crisis. 

My last prediction is that when markets do crash, the NBER will come forward and state that we are now officially in a recession that started at the beginning of this year. And then, trapped bulls will learn the true meaning of bad timing.  

Too late.

THE TWILIGHT OF GLOBAL PONZINOMICS

The extent of lies bought and believed right now are both pathetic and lethal. There is an entire media industry built around propagating the fantasy of perpetual financial bailout...

And while that is NOT happening, we are not imagining things - the gunfire IS getting closer. Two thirds of the largest mass shootings in U.S. history took place since 2007.

What do we expect this time when the sheeple realize they've been conned all over again by the same psychopaths as last time? 

A society in latent moral collapse has no clue it's in moral collapse. What used to be illegal is now common place. Pump and dump schemes used to be prosecuted by the SEC. Now they're deemed "social investing". The only question regulators had about the Gamestop debacle was why did brokers prevent people from fully participating. Social media has weaponized financial Ponzi schemes against newbie bagholders. Stock buybacks used to be illegal, now they're used to facilitate insider selling on an industrial scale. Buybacks hide collapsing revenues at the end of the cycle by shrinking share count to give the illusion of rising profit. Stock buybacks have weaponized passive indexing against retirement bagholders. Record buybacks did nothing to prevent the worst first half for stocks in 60 years.  

The U.S. deficit is now fully considered "GDP". 2022 growth is so far negative while the deficit is almost 5% of GDP. In any other time that would be considered a deep recession.

We've now seen the exact same profiteering take place across EVERY major industry since the pandemic. In each case, temporary supply chain interruptions deplete inventories and lead to a spike in demand. Followed by higher prices and expanded profit margins. And then it all collapses. No one says anything. Economists fear a wage-price spiral when what they should really fear is the wholesale collapse of the middle class. Buried by profiteering in every direction. 

Home prices rose the most during the past two years in U.S. history. Auto prices have sky-rocketed 30% in two years. Retail inventories are already piling up and it's only a matter of time before the glut is everywhere.

Like now: 

August 15th, 2022:

"A gauge of New York state manufacturing activity plunged by the second-most in data back to 2001, with sharp declines in orders and shipments that indicate an abrupt downturn in demand"

"The survey likely shows “that industries extrapolated orders from the Covid period and they ordered too much stuff”

We should fully expect that economic data will "surprise" to the downside from this point forward. Today's pundits have a lethal bias towards optimistic predictions and their audience wouldn't have it any other way. This current belief that the Fed won't over-tighten is a sheer fantasy. The Fed already HAS overtightened. The NAHB states that housing affordability is the worst since 2008. The combination of price increases and rate hikes has caused the financing costs of a new home to TRIPLE since 2020.

Still, for now the lying flows like a river in between collapsing data points. Over on Zerohedge, yet another pundit fears the imminent debasement of the currency. What these fools should really fear is the debasement of humanity into Third World squalor while the dollar is sky-rocketing. To believe in the hyper-inflation argument one must first ignore the past 40 years of deflationary debasement at the hands of Supply Side Ponzinomics. This so-called "model" has imported far too much poverty to lead to inflation. We can be fairly certain that the true MMT experiment won't lead to the largest rise in global billionaire wealth on record.

This continual false optimism is what will make this burial even more lethal. Since the Fed began raising rates in .75% increments, financial conditions have eased as investor complacency has increased. It's the law of too many bailouts.

In summary, the truth is a choice. And those who choose to believe today's rampant criminals will pay with everything they own.

And then the chattering classes who dominate the media will be silenced.

For good.

And the new investor sentiment won't be greed.

It will be fear.

And THAT will make me bullish. 

MELTDOWN REPORT 8/12/2022

Despite the fact that the CPI came in weaker than expected, cyclicals enjoyed a major rally this week due to the fiscal stimulus bill that just passed. Will this bill remediate Global Warming? Of course not. But the attendant short covering rally could initiate global meltdown, which will do more to reduce the carbon footprint than any legislation imagined by any government...

Banks rallied this week, despite the flattest yield curve in 40 years.

This is the first weekly close for crude oil below the 200 dma since the pandemic started:

Inflationists wrong. 

Again.

What is more cynical, to vote AGAINST a bill to finally address Climate Change? Or to vote FOR a bill that is too little too late?

"Once I stood to lose her

When I saw what I had done

Bowed down and threw away the hours

Of her garden and her sun

So I tried to warn her

I turned to see her weep

Forty days and forty nights

And it's still coming down on me"

WAITING FOR OFFICIAL BURIAL

By the time the National Bureau of Economic Research finally declares official recession, their astute observation will be only useful to archaeologists attempting to figure out what happened to the deeply buried Kardashian society...

While playing history's greatest central bank following fools, today's gamblers believe that time is on their side. Nothing could be further from the truth. With each passing day the hole gets deeper. But you would have no way of knowing by reading the mainstream financial media. They have a skill at turning all economic risk into gold plated opportunity. If Bernie Madoff was alive he would be head of the SEC.

We have now crossed over into the back half of the year, well into the months (August/September) that have caused the greatest financial dislocation in the past two decades. It appears that for whatever reason, the worst first half stock market performance in 60 years ignited a massive short-covering squeeze. Many hedge funds that were short in the first half decided to book profit. Which means that now currently there is no short buffer below the market:

Bloomberg July 28th, 2022:

BEARS UNWINDING SHORTS LEAVES STOCKS EXPOSED

"The rally, and attendant change in sentiment, has forced speculators to unwind bearish positions that once served as a key source of (stock) demand...With short sellers retreating, stocks might be exposed to a downdraft if the Fed turns more aggressive on future rate increases or corporate profits start to crater"

This implies that there is plenty of room for CTAs to start building up short positions again.” 

In other words, shorts covered despite the fact that risks have grown steadily since the beginning of the year. Goldman Sachs started the year with a prediction for four rate hikes in 2022 (1%) and they are currently predicting 16 rate hikes (4%). All Wall Street economic growth predictions have now been updated with minus signs. 

We can see the reduction in short positions via the CBOE option skew which is an indicator of short positions in the options market:

Another risk that still never gets mentioned is the Fed's Quantitative Tightening program which in September will be twice as lethal ($95b/month) as the prior tightening in 2018. And yet commodities are already collapsing deja vu of 2008 and from the exact same level:

Basically what happened since the end of the first half is that bearish money managers took profit while betting the worst was over. When in actual fact the worst hasn't even started yet. 

Which is why investors are now praying for recession to get them to their imaginary promised land of a Fed reversal near the zero bound. Their safety net is no longer shorting, their new safety net is believing that the Fed can finish tightening and pivot to bailout fast enough to prevent wholesale meltdown. 

Even at this late juncture I have yet to hear ONE pundit inform the public that a 2.5% Fed Funds rate is not enough to prevent economic depression, much less deep recession.

Yield curve inversion is now the flattest in forty years, meaning that long-term rates are significantly lower than short-term rates as the bond market predicts the Fed is making a COLOSSAL mistake by overtightening:

So it is that investors now believe that all bad news is good news for stocks. Their new buying mantra. A mantra that has been assiduously cultivated during the era of financial Disneyland that has abided since 2008.

Today's CPI showed that inflation may well be peaking, however some context is in order, because the CPI is still a long way from where the Fed will stop raising interest rates. If the past twenty years is any guide, that level comes in at about 4.5% on the CPI:

Deja vu of the March rally, this latest rally is an overthrow of the June high and a backtest of the 200 dma, coming off of the lowest volatility of 2022. In addition, VIX below 20 attracts a lot of bulls who believe it's a sign the bear market is over. It was a bull trap in April but for these amnesiacs that is long forgotten.

Here we see via AAII positioning data, the shocking divergence in cash balances from 2008 versus now:

https://www.aaii.com/assetallocationsurvey

In summary, it's abundantly clear that today's investors missed the "pivot" from inflation to deflation and from fantasy to reality.

And who can we thank for that but all of the pundits who told them that inflation was NOT transitory in 2022.

Wrong again. This time with no cash buffer AND no monetary safety net. 

BULL CRAP

Doom and gloom is pervasive across a variety of risk factors, which is why this society excels at ignoring it. There is a belief now that as long as everyone sees something coming, it can't happen. Which is sheer denialistic fantasy of course. This society now specializes in talking about problems full time while doing nothing about them. Always taking the easy way out. Which means that all of the "change" has been delayed and therefore all of the various crises will come crashing down at the same time...

 

Fortunately, I did not shred my credibility by attempting to guess Friday's jobs report which came in more than double what economists expected. These are the people that this society depends upon as experts. They've been substantially wrong for every jobs report in 2022. In just one week, the odds of a .75% rate hike in September jumped from 28% to 68%. Remember the Fed pivot? That is history. 

The pivot theory actually started back in June with the first .75% rate hike. The theory was the Fed would "front load" all of the rate hikes in June and July and obviate the need for further rate hikes. Here we are in August and the theory is already dead. 

Far too many bulls are STILL trying to front-run the Fed which has the effect of compressing risk spreads and otherwise EASING financial conditions. Which forces the Fed to keep tightening. 

From an economic standpoint, the Fed remains fixated on lagging indicators while ignoring leading indicators. The number of McJobs created in any given month has no bearing on inflation. During the 1970s, job creation continued well after the economy was already in recession in 1970, 1974, and 1980.

We are still struggling with the after effects of the pandemic when job openings sky-rocketed. But now we see they are beginning to roll over:

The labor participation rate for the key younger demographic still hasn't recovered to pre-pandemic levels. Which means that a lot of people are now going to be long-term unemployed. 

Now on to everyone's favourite topic - Disney markets and imagined realities. 

This is now the second headfake rally in 2022. 

There is now a desperate belief that institutions which have been selling all year long will soon be bidding up the stocks of retail bagholders. That has NEVER happened in the history of markets. What happens next is that retail bagholders puke out stock into a collapsing market, the Fed is forced to reverse, and THEN institutions come off the sidelines. This idea that the dumb money is now the smart money and vice versa is the height of desperation. 

This second rally of 2022 looks almost identical to the first one, and shares many of the same attributes: Extreme low volatility, overbought oscillator, overbought volume momentum, three wave retracement and of course it confirms the second quarter in a row of negative GDP. Qualitatively it's clearly different than the rallies that attended Fed bailouts in 2018 and 2020. This rally has yet to take back the 200 day moving average. Which means bulls are now facing the second failure at the 200 dma - something that has not happened since 2008. 

All of which is why I call this the "recession confirmation rally".

If you can't understand it, it's because your IQ hasn't collapsed like a cheap tent. 

Here is the Nasdaq on the weekly. This rally percentage wise is basically identical to the first one:

This week, crude oil decisively broke the 200 day for the first time since 2020:

Here we see stocks are tracking copper very closely as the world economy implodes in broad daylight:

In summary, by the time we get official confirmation of recession, bulls will be officially buried.

Like last time, except far deeper and with no hope of bailout.

ECONOMIC APOCALYPSE NOW

Bulls will be happy to know that I have officially downgraded my economic forecast to economic armageddon aka. "BTFD"...

mor·al haz·ard

“lack of incentive to guard against risk where one is protected from its consequences”

The Fed is clueless. Investors are complacent. Wall Street is corrupt. What's new?

Before considering any market forecast one must first discern whether or not the pundit is operating under the post-2008 rules or pre-2008 rules. The vast majority of today’s commentators are operating under the continuous monetary bailout rules that have abided since 2008. Those readers who believe THAT era still applies, should proceed straight to CNBC and Zerohedge for your daily financial infotainment enema.

This is for those who believe that the era of continuous investor bailout was always going to end with a widely embraced swan dive straight into the economic pavement at the zero bound. 

First off, we are witnessing an unprecedented event wherein the economic data is deteriorating faster than the markets. Which is a function of a Fed believing that inflation is "sticky" and therefore willfully ignoring all escalating signs of economic risk. It's clear they are not concerned that their actions are accelerating economic meltdown. The Fed has never been adept at managing soft landings and currently their own economic models predict only 10% chance this time. Hence it’s the consensus bet on Wall Street.

The Fed and investors have reached a deadly standoff. The Fed needs investors to reduce risk to bring down asset prices. Investors however expect the Fed to capitulate and bid up markets. Neither side has blinked. Yet. Therefore, the Fed is forced to continue tightening until investors capitulate. In the meantime, the economic data continues to steadily worsen.

So far, there is NO sign of fear from investors.

Institutions have been taking down their market exposure all year due to the rising economic risk. However, this has been a very orderly de-risking process with no sign of panic. As opposed to 2020 when both the VIX and market volumes skyrocketed. 

Individual investors have largely stayed the course and remained over-invested in stocks going into recession.

The housing bubble has now become the locus of primary risk. Home prices are collapsing at the fastest pace since 2008. Housing inventories are rising at the fastest pace in history and are already at a level previously associated with deep recession and economic deleveraging. Add in an over-priced auto market beginning to implode, durable goods slowdown, consumer debt skyrocketing, semiconductor glut, PC/mobile phone decline and soon you are talking about the entire market ex-narco-pharma and Disneyland.

Coming off of last week’s Fed rate hike, many pundits are saying it’s too early for a Fed pivot. Nothing could be further from the truth. It’s too LATE for the Fed to pivot, because economic risk is already past the point of timely bailout. At this point the Fed should jack rates up as fast as possible so they can turn around and slash them back to zero. Gain some altitude before the crash. 

The Fed will never be able to pivot in a way that rescues today’s investors who are already over leveraged on risk. The Fed pivot will be a step along the way to investor wipeout. Investors are now trapped by the bailout rules that applied since 2008 and the pundits who espouse them: Meaning, the worse the reality of the economy becomes, the greater the expectation of large scale bailout.

Russian roulette with no spare chamber.

None of what I am saying makes any sense to those who have no memory of real markets prior to 2008. Back then valuations mattered, bad news was bad news, and the mantra was don’t fight the Fed. Now, all of that has been turned on its head.

Market reality has been on vacation for 14 years and now it’s returning home to economic apocalypse. Bought with both hands at the zero bound.

The unforeseen cost of bailing out financial criminals who are now predominant across the financial media.

Booya skidaddy!!!

THIS IS NOT A DRILL

You are not imagining things, this is all far worse than it looks...

This is not the end of the world, this is the end of a Kardashian society doing everything possible to keep their facade from crumbling.

We are witnessing escalation towards all-out war in Europe (U.S.).  Escalation towards war between China and Taiwan (U.S.). The total destruction of Ukraine. The end of Russia as a functioning nation state. Mass shootings not just in the U.S. but worldwide on an unprecedented scale. Political bifurcation bordering on civil war.  40 year high inflation. Societal breakdown reaching a boiling point. And of course environmental apocalypse in real-time. 

To top it off we are now in recession with a Fed still in tightening  mode and Wall Street telling investors THIS is the start of the new bull market. When this gambit fails, don't worry about Wall Street, there won't be one. 

If you want to see a prime example of epic mass confusion, look no further than Zerohedge who have the unique ability to contradict themselves continuously and yet always be "right".

Things Can't Get Any Worse. Fed Pivot Coming

Wall Street Expert: Too Early For Fed Pivot

Pivot Hope Sends Stocks to Best Month Since April 2020

Why the Pivot Rally Will Fail

In other words the disinformation overload worked great. Mass confusion has led to mass financial complacency.

I would caution anyone who believes this Wall Street fairy tale that there will be recession for the middle class at the zero bound and a bull market for stocks. The CPI is now the biggest enemy of the economy AND stocks. It precludes the Fed from bailing out ANYONE on a timely basis. Which means that BOTH markets and the economy are at a high risk of crash. Which will be deflationary. 

In this chart we see the level of option hedging in the top pane is lower than all prior market events. And we see the CPI in the lower pane. In ALL prior Fed bailouts, the CPI had been falling for at least six months and was below 2%. Except, the pandemic when markets were limit down six times in two weeks. THAT is what it will take for another bailout. 

Unfortunately, this whiplash u-turn from an inflation narrative to a recession (deflation) narrative has come far too fast for investors as a whole to adjust. It ensures that hardcore inflationists are about to go through the windshield.

This week's confirmation of recession means that it's now clear for institutional investors to rotate from stocks and cash back to Treasury bonds. Whether you believe in Wall Street's "soft landing" fantasy or the hard landing reality, Treasuries SHOULD rally.  However, unlike Treasuries, in the hard landing scenario, stocks will crater. Treasuries are a safe haven from deflation and global meltdown. Whereas stocks are massively overvalued relative to Treasuries and in recession, earnings AND profit margins will implode.

As we see from 2018, after the Fed pivoted both performed the same. However, at the start of the pandemic, stocks crashed while T-BONDs continued to rally. I see 60% or more upside from Treasuries in the next 12 months which will take yields back down to the zero bound.     

Why am I telling you this?

Normally, I don't give financial advice. However, I feel an obligation to point out this one time that T-bonds present a rare opportunity for outsized gains over the coming 12 months. 

Here are my caveats: One, I have a core position in Treasuries that I plan to trade around. So, you know I have a bias. Secondly, if you notice above, Treasuries crashed in the early part of the pandemic for a very brief amount of time. That's because a lot of institutions panicked and sold everything to go to cash. 

I suspect they will do the same thing this time around, to gain liquidity for the impending avalanche of redemptions. You see the problem is that due to the inflation narrative, most investors are far too light on cash. And that poses a huge liquidity challenge for the Fed. It means that markets are about to get out of their control. 

If the Treasury market crashes, two things will happen. First stocks and everything else will go limit down. Second, the Fed will panic and Japanify the bond market back to 0%. Personally, on a crash I will back up the truck to buy Treasuries.

The third and last caveat of course is what if inflation continues to escalate. I have every confidence the Fed knows how to implode markets and the economy to bring down inflation. So far, I give them an A+ in 2022. Their level of recklessness is insane and the bond market happens to agree with me.

In summary, if you think that the system is rigged and you want to stand as close to the printing press as possible, buy Treasury bonds and wait until the Fed has no choice but to take you out of the trade at a much higher level. And don't tell anyone you are now part of the "elite". 

GAMBLE AT YOUR OWN RISK.