GLOBAL LIQUIDITY TRAP

Both Japan and China are now in deflationary liquidity traps. The U.S. and Europe are following close behind. Soon the masses will learn the hard way, you can't borrow your way out of a debt crisis. They will all find out, once it's officially too late...

 

As of this writing, Japan and China are both easing while Europe and the U.S. are both tightening. It's the biggest global policy divergence we've seen in our lifetimes. Despite the falling Yen, Japan has steadfastly maintained easy monetary policy. Why? Because they know what happens when you don't respect the zero bound. Consider that Japan's inflation rate is currently 2% while the U.S. inflation rate is 9%, even though Japan is easing and the Fed is record tightening. Which makes even less sense when you consider the dollar is sky-rocketing and the Yen is collapsing. It only makes sense in the context of a country that has been caught in a liquidity trap for decades. Which means that consumers are averse to borrowing money, whereas in the U.S., consumers are not averse at all. YET.

China is also well along the path to liquidity trap. In 2008, China pulled the world out of recession as their GDP growth rate was 14% that year. It never went negative during that global recession. Subsequently, they built massive empty "ghost cities" and real estate development is now 30% of GDP. So it is they find themselves at a point wherein lower interest rates no longer spur demand. 

"Taken together, the data shows banks are flush with cash but are struggling to boost lending to customers against the backdrop of weak growth and turmoil in the property market.

The data is a classic sign of a liquidity trap. Liquidity is ample, but no one wants it. Under these circumstances, monetary policy can do little to support the economy”.

Sound familiar?

China's GDP is collapsing faster than Wall Street can keep up. Not a month goes by when they don't revise lower China's full year growth rate. Only a serial fool would believe that this current GDP reduction will be the last. 

Now consider that in all of the major stumbles since 2008: 2015, 2018, and 2020, global central banks were all on the same page with respect to monetary bailout. Whereas now, they are diverging massively between Asia and Europe /U.S. /Canada /Australia etc.

What happens when there is a global collapse and two of the largest central banks are already flailing away. And the remaining central banks refuse to bailout markets?

What happens is a far worse crash that damages markets, the economy, and consumer confidence. Followed by a clusterfucked bailout and loss of confidence in central banks. 

Many of today's bulls are claiming that this currently collapsing housing bubble is not as big a risk as 2008 because there's "no subprime this time". What they don't acknowledge is that most of the global economy IS subprime this time.

This epic risk of a global liquidity trap combined with global monetary policy divergence are the two biggest economic and financial risks, however they are completely ignored. Investors are currently betting on an imaginary pivot to an imaginary Fed bailout followed by an imaginary global recovery. 

And no one will tell them any different, because today's financial press have the attention span of a coked up flea. Today's financial press are eagerly monetizing false optimism because that is their largest market for readers and they don't want their audience to be disappointed by reality. They have gladly sacrificed all shred of credibility on the altar of continuous monetary bailout. They are in the exact same closed loop as investors, incapable of seeing the risk to their groupthink circle jerk.

In the U.S., the biggest beneficiary of "inflation" was corporate profit. So, bringing prices down, axiomatically means lowering profit margins from record highs back down to historic levels. 

What we see from this chart is that after the pandemic, it took a mere one year for corporate profits to skyrocket to new all time highs. Versus four years in Y2K and 2008.

Profit is 90% correlated to CPI (not shown). 

In 1980, Paul Volcker purposely engineered a recession to bring down inflation, because he knew that he had ample dry powder in case he needed to cut rates to bring back the economy. In the event, he brought rates down 12% to offset the worst recession since the Great Depression.

This Volckerized Fed has a 2.25% rate buffer on the economy. And yet untold numbers of pundits have been pounding the table for them to raise rates as quickly and brutally as possible. To bring down "inflation".

At no time in this entire debacle did the Treasury market believe that inflation was ANYTHING like 1980.

What these people all need is an education on economics. And they're going to get one. 

When it's officially too late.

"The velocity of money is a measurement of the rate at which money is exchanged in an economy. It is the number of times that money moves from one entity to another. It also refers to how much a unit of currency is used in a given period of time. Simply put, it's the rate at which consumers and businesses in an economy collectively spend money"

AN OVERBOUGHT COLLAPSE

The Fed needs markets to capitulate to get to neutral, but markets are anticipating neutral so they never capitulate. In the meantime rates keep climbing...

The seeds of this disaster were planted over a decade ago when the Fed switched from interest rate based policy to balance sheet policy at the zero bound. Over the past 14 years they've been using financial markets to manipulate the economy, instead of the other way around.

It's totally asinine to believe that a 1.5% interest reduction during the pandemic caused a 9% inflation rate and yet that's exactly what the majority of pundits currently believe.

One year ago at Jackson Hole 2021, Powell made a mistake when he said that inflation was transitory. Back then everyone believed that inflation was caused solely due to the pandemic unemployment fiscal programs. A $300/week unemployment stipend was causing hyperinflation. You would have to be an idiot to believe that, therefore it was consensus view. Only one of the many dunce theories propagated by Zerohedge during the past year. Of course those fiscal programs ended a year ago, which is when inflation accelerated. So in 2022 the Fed hurriedly raised interest rates back to pre-pandemic levels. And here we are with inflation STILL near 9%. Why? Because the Fed balance sheet is too large and the wealth effect is still working its way into the economy via asset markets. The Fed's entire strategy for 14 years has been market based but still market participants think  that interest rates control inflation and the economy. We are now in a trickle down fake wealth economy:

August 2022:

"Ferrari has reported record quarterly sales and profits as concerns over the global economy fail to dent the enthusiasm for buyers of luxury trophy vehicles.

The company, the latest luxury or supercar manufacturer to post record profits after Lamborghini and Bentley"

We've seen four consecutive rate hikes of increasingly shocking magnitude, the last two being .75%. Now ANOTHER .75% is back on the table, all because markets have been front-running  the Fed again. Which was due to the mistake Powell made in July of this year stating the Fed rate was in the territory of neutral. Now this week, he has to back out of his mistake from last month and from the entire past year. 

Which means he is going to club markets like a baby seal.

He is going to crush any hopes of a near-term pivot and in the process he is going to force RISK OFF. His credibility is at stake.

"The chair of the Federal Reserve may have a hard time convincing markets that the central bank is serious about defeating inflation. But he’ll have to try"

Powell must take care to disabuse markets of the notion that the Fed will soon be done tightening monetary policy"

What a lot of people forget is that even the mighty Volcker screwed up forty years ago. He raised rates initially and shocked markets, but then he quickly lowered rates. Which caused inflation to resume. Which is why he had two recessions, one in 1980 and another in 1982 when we was forced to shock markets a second time. Today's Fed members know all this about Volcker history which is why in this week's FOMC minutes there was a discussion around raising rates and keeping them elevated for an extended period of time. Which is the opposite of what stock market bulls expect.

"Some officials indicated that once rates had been raised to the point where they were cooling down the economy “sufficiently”, it would probably “be appropriate to maintain that level to ensure that inflation was firmly on a path back” to the Fed’s target of 2 per cent"

This week, Fed member Bullard reiterated that he sees the Fed rate at 4% this year. Sooner than later. Which would be almost DOUBLE the pre-pandemic interest rate. 

Risk markets are now overbought going into the riskiest period of this year and this cycle. On the belief that bailout is imminent. When, nothing could be further from the truth.

This week the Nasdaq 100 reached the most overbought level in history based on MACD. Tied with August 2020 another low volume levitation period. MACD is a momentum indicator based upon the convergence and divergence of two moving averages - one short-term and one long-term. When MACD is high it means that the market is going parabolic and the short-term indicator is moving quickly relative to the long-term trend. 

Hedge fund short covering is highly evident in this chart of active manager risk exposure:

In summary, soon all risk markets will be at new lows for the year. And the Fed will be doing nothing about it except waiting for bulls to finally capitulate. 

And then when that happens and the machines abiding this low volume illusion go offline, EVERYONE is going to realize that the big mistake didn't start in 2022. It started when investors were systematically conditioned by the Fed to become bailout whores. 

With the USD at the highest level in 20 years, the risk of a policy error has never been higher. 

Consider that the Fed was cutting rates the last two times the dollar was sky-rocketing in a recession.

And to think, investors are front-running rate cuts in a recession. Which equals a long bear market.

The current "best case scenario", is actually the worst case scenario.

Which is what you would expect in a Full IDIOCRACY. 

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.