THE EFFICIENT EXPLOSION MODEL

Remember back in 2018 when the VIX exploded and again in 2020? I will now explain why that happened...

First off, I am not an options dealer nor have I ever worked in that industry, however for years I have traded options on my own account. In order to do so wisely, one needs to have a general understanding how the options market works. This will not be a perfect explanation, but good enough for self-directed traders.

Step back for some perspective. The options market allows traders to rent capital for a certain period of time to increase leverage and manage their risk exposure. A put option is a much safer way to bet on downside than a naked short position. Even though as we will see below the underlying dynamics turn out to be very similar. 

The option buyer has the right to exercise or sell the option at a profit. However, most options get sold ahead of expiration. Why? Because selling an option ahead of time is usually more profitable and it's much safer than waiting until the date of expiration. The only way to survive as an options trader is to be aggressive about taking profit and always assume while you may be directionally right, your timing could be WRONG. The only way to control for that risk is by rolling over in time and price. 

Options market makers are on the other side of every trade. Their goal is to collect premium and maximize profit. They are the equivalent of the "house" and they usually win because the odds are mostly in their favour. 

When an option is opened, the market maker determines the amount they need to hedge their exposure by based upon the various option parameters ("Greeks"). Theta (time), Delta (rate of change), Gamma (2nd derivative delta) aka. convexity. A put option is hedged by shorting the underlying, whereas a call option is hedged by going long the underlying. 

For options that are out of the money, the probability of profitable exercise (in the money) goes down over time. This creates a natural bias towards profit for the market maker. 

When many options are clustered at a certain level, this creates a "wall" that paradoxically reduces the chance of option profit. 

Take a put wall below the market as an example. As the puts get bought, the market makers short the index/stock towards the common strike price. However, as the strike price approaches, delta and gamma approach "1" meaning that hedging is 1:1. Market makers are fully hedged AT the put wall. Therefore any momentum away from the put wall, including time expiration, lowers the overall probability of exercise and causes the hedges to unwind. Shorting then turns into buying. Buying turns into more buying and momentum drives price AWAY from the put wall. This is called a Gamma squeeze because it's very similar to a short squeeze.  

A call wall above the market works the same way. It is very difficult to penetrate because the dynamics of hedging accelerate towards the wall and then go in reverse at the wall. 

When pundits speak of "Dealer Gamma" they are referring to the total hedging exposure dealers have at a given strike price. It's a means of describing the directional bias and magnitude of the option buffers that are above and below the market. 

There's the background. All quite logical when you think about it. Now throw in weekly option expiration which is a relatively new options market. Weekly opex seemingly allows algos to "control" the market and otherwise dampen volatility between the call wall and the put wall, all the time.  

Which would explain why I have noticed recently that VIX gaps are large on Mondays which is the day after weekly opex and negative on Wednesday's which is VIX opex. 

Coincidence. No. 

All is well that ends well. However, as Rick Santelli pointed out this morning, derivative based strategies only work in continuous markets, because they use historical volatility to predict future volatility. Yes, you read that right. Therefore, they do not function well in discontinuous markets. 

What does this all mean to a Black Swan trader? It means that the market is binary. It will function well until the day it doesn't. When volatility explodes, the market makers will step aside and there will be no one on the other side of the trade. 

Which is what happened in March 2020. Except back then the Fed reinitiated QE on March 15th and when that did NOT work, they initiated QE infinity on March 23rd, which was the bottom. THEY were the buffer below the market. Now, they are on the side of reducing liquidity and increasing volatility. 

The key takeaway in all of this? Market stability is an illusion that will not withstand global RISK OFF. Volatility expansion will accelerate downside momentum as the majority of large players realize they are underhedged according to their traditional models. 

In summary, despite what many bulls are saying, NO ONE is positioned for what's coming - the consequence of 14 years of continuous bailout.

If you believe that the FOMC who are now diametrically opposed to easing will come in to support the market more quickly than volatility algos can go RISK OFF, then your amnesia precludes memory from three years ago. 

This will be March 2020 without the Fed put. 

DEEP BURIAL

No excuse this time...

Michael Burry:

"How anyone over the age of 40 didn't see this coming is a riddle. The answer is Greed."

Pollyanna predictions still abound. There is no shortage of pundits willing to tell people what they desperately want to hear. Blowing smoke up people's asses became the primary financial model after 2008. Each time markets get bailed out, fraud and corruption increase. However, this time gamblers are sky-diving without a parachute. The one time they didn't hedge is the one time they won't get bailed out. As I said in my last post, this is extreme moral hazard.

A new and extremely dangerous myth has been created that the dumb money is the new smart money. This myth was cultivated during the Gamestop debacle which saw a massive rush of gamblers into the casino. During that pump and dump, the Reddit mob took down a couple of over-leveraged hedge funds. However, there were many MORE hedge funds that shorted Gamestop from the top all the way down. The REAL losers were the legions of newbies who were late to the party and got crushed by short sellers at the end of the pump and dump. Funny how that part of the story never got told.

This newfound *smart money* theory is just another way of ensuring bagholders remain in the market while conflict of interest continues to be assiduously ignored. We need not expect Wall Street to question such a lucrative fantasy.

History says that people who do nothing get officially buried by serial financial psychopaths. 

Wall Street keeps downgrading their market predictions while maintaining buy ratings on every stock. They've been behind the curve all year and they will happily remain far behind the curve, selling stock to useful bagholders. 

The never-ending pivot fantasy remains the clarion call of denial:

Lately I've been reading Paul Volcker's aptly named autobiography "Keeping At It". This is the book J. Powell cited at his Jackson Hole speech. The most interesting part of the book is towards the middle when he is nominated to the Federal Reserve in 1979. Back then Volcker raised rates to 19% and held them at that level until unemployment reached 11% in 1982. He caused two back to back recessions. The current Fed rate is 3% and the unemployment rate is a record LOW 3.5%. Even still, today's bailout junkies are complaining constantly. Just this week Cathie Wood wrote an open letter to the Fed decrying their battle against inflation. Apparently she has a passionate concern for the middle class.  

What is happening right now in the UK is a warning to stock market bulls as to what happens when a central bank tries to pivot in an inflationary environment. It backfires. Expansionary monetary policy only works in a deflationary environment. It does not work at the end of the cycle. Which of course is Econ 101, cycle theory:

"Instead of boosting growth, the IMF made it clear it thought the government’s policies ran a serious risk of provoking a deeper downturn once inflation had stayed too high for too long."

The Bank of England initiated a temporary bond market intervention two weeks ago, but they are warning markets it will end this coming Friday. The BOE has now officially put their credibility on the line and markets will soon test their resolve. Recall that George Soros made his fame and fortune shorting the Pound in the early 1990s. Now there is blood in the water all over again. 

The critical question on the table is how can the BOE defend BOTH the bond market AND the currency market at the same time? They can't. All they can do is sponsor ever-weaker global short-covering rallies, each one conflated as a "new bull market", until the wheels come off the bus for good. 

The RBA is another example of a failing pivot. On October 3rd they shocked markets by raising rates by a much less than expected quarter of a % point. Since then the currency has been bidless, accelerating imported inflation and exacerbating slowdown. 

China is having another devaluation disaster.

Investors came back from Golden Week to find their stocks are back at 2015 lows, on a dollar basis. Where they were the last time China currency devaluation forced a global bailout. 

Here in the casino, the market keeps stair stepping lower amid mass complacency. A Lehman-equivalent crash now would equal -60% down, from all time high to low. If this slow bleed lower continues, the final low will only be far worse. Picture a market that trickles down -40% and then explodes lower. Because that's the way things are heading.  

The political ramifications of this disaster are not even remotely priced in. There will be no bailout for the rich this time, which means it will be a corporate mass deleveraging event.

In each of the past two bubbles there was a discovery phase near the end of the bear market in which all of the various scams were revealed. As Warren Buffett says, "When the tide goes out, we find out who's been swimming naked". In 2001 it was of course rampant IPO junk stocks, Worldcom, Tyco, Global Crossing and Enron. In 2008, it was Bernie Madoff's fund and all of Wall Street with their subprime fiasco. Authorities jailed Madoff for his billion dollar scam while they bailed out Wall Street for collapsing the global economy.

This time around, the level of criminality is beyond anything we've seen before: record IPO and SPAC junk, Ark ETFs, Reddit organized pump and dump schemes, rampant Crypto theft, and a record housing bubble. The public will be enraged when the era of mega scams explodes. It will make 2008 seem like a Boy Scout jamboree by comparison. This article from the Wall Street Journal came out this week: 

WSJ: Thousands of Federal Officials Traded Stocks Affected By Agency Decisions:

"Across 50 federal agencies ranging from the Commerce Department to the Treasury Department, more than 2,600 officials reported stock investments in companies while those companies were lobbying their agencies for favorable policies, during both Republican and Democratic administrations. When the financial holdings caused a conflict, the agencies sometimes simply waived the rules"

In summary, there is no shortage of deceivers willing to tell the sheeple what they want to hear, because scams and corruption are widely embraced.

For now.

MORAL HAZARD. INDEED.

mor·al haz·ard

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

Wall Street has converged on the seamless bailout hypothesis. What could go wrong?

It's a very sad day when all of investing has boiled down to begging for central bank bailouts. The entire bullish thesis now rests upon central banks capitulating against inflation. 

The consequence of the 2008 Wall Street bailout and subsequent continuous monetary bailouts is that central bank invincibility is no longer questioned. Even in a high inflation scenario such as the one we face, the inevitability of higher markets is largely unquestioned. 

Over the course of 2022 as the market has stair stepped lower, Wall Street has slowly and surely downgraded their price forecast to a "worst case" consensus level of 3000. Which is a 40% total decline and roughly 15% from the current level. That point of view is now shared by Bank of America, Morgan Stanley, JP Morgan/Dimon, Gary Shilling, and the once uber-bearish Jeremy Grantham, who now finds himself with plenty of company. The outlier is John Hussman predicting a 50-70% decline. Michael Burry does not give price targets. 

This article lays out the "bull case" of a fast -20% decline followed by a certain Fed bailout and 50% rally. In doing so, the article inadvertently lays out the 1929 scenario of a ~45% initial decline followed by a 50% rally. Which by the way, would still leave the market 10% BELOW the all time high. Basic math now being beyond the capacity of this society. In other words, the bull case and the bear case are largely the same now. Which means that a TRUE bear case precludes a seamless bailout scenario. Which I will discuss further below. 

Going the exact other way, Peter Schiff expects hyper-inflation due to a Fed pivot that reinflates the everything bubble. He asserts that today's central banks lack Volcker's fortitude to deflate markets. What he doesn't understand is that the bond market is not going to allow rampant inflation. Real yields as measured by the nominal yield - CPI are ALREADY the lowest in U.S. history. According to Schiff they are about to go much lower. We are to believe that the Minsky deleveraging moment can be deferred forever while market rates sky-rocket. Sure. It's tremendously ironic that in 2022 inflationists have finally been proven right after 40 years of continuous deflation. However, in this year the dollar has sky-rocketed meaning their trades have imploded anyways. 

Fed governor Chris Waller astutely laid out the Fed's dilemma last week - which is that shelter costs in the U.S. as determined by rents, are going to continue to keep CPI elevated for months into the future. Each month only a subset of leases expire and are rolled over to the new higher rates. Therefore, older lower rents will inexorably rise.

"The inflation statistics use a six-month average when calculating rent growth. Asking rents and rents on new lease contracts—which do reflect contemporaneous rental market conditions—have been rising at a fast pace for more than a year. These increases have fueled shelter inflation so far this year, and they should continue to do so for at least the next six months"

The Fed is in a sense lucky, because if they measured inflation based upon the cost of carry for homeowners, the current inflation rate would be FAR higher than it is currently. The combination of house prices and interest rates has raised owner-occupied carrying costs by 100% in the past year. You read that right. That fact has priced new homeowners out of the market and placed even more pressure on rents. In other words, the Fed itself is STILL a key source of inflation by raising shelter costs. 

The Fed used their balance sheet to inflate the housing market and now they are using interest rates to bring it down. It's two policy errors for the price of global meltdown.

All of which from an investment standpoint leaves just the now universally anticipated "accident" scenario followed by bailout. We can surmise that the bar is now VERY high for what would force a Fed pivot. Something on the order of a 1998 Russian Default/LTCM meltdown. The problem is that such an event would immediately tip the world further into global depression. In other words, trapped bulls will realize far too late that they bought a false promise of seamless bailout.

Any blind man can see that U.S. consumer sentiment is at an all time low whereas in 1998 it was at an all time high. 

Subtle difference. 

 

All of which means this market is tradable but no longer investable. There will be large trading rallies followed by large declines. So far, we've seen small trading rallies followed by new lows. 

This roller coaster scenario is what Japan and China have already experienced at the zero bound. And what the U.S. experienced in the 1930s. 

Arguably gold is a long-term hedge against inflation and monetization of deficits. However, we must go through the deleveraging phase first which will be highly deflationary. I have no long side conviction in gold at this juncture.

In summary, the KEY point Wall Street never admits is that you can't always put the toothpaste back in the tube.

Position accordingly.

COLLAPSE IS RIGHT ON SCHEDULE

So far, the 2008 analog is continuing on schedule...

There was a lot of trolling of bears at the peak of the failed pivot rally this past summer and I've noticed that it has come back into style. Charles Hugh Smith who wrongly predicted new all time highs in the summer, is back for another bullish swing at bat. He asserts that everyone should "Play Devil's Advocate" to what he believes has become the new standard (bearish) consensus. I'm not going to refute the hard facts because there are none to refute, but first off I will say that any active trader who is down in 2022 needs to reassess their trading strategy in a down market, NOT try to pretend this is still a bull market. That is a dangerous game to play. He asserts that there is no analog for the current market and therefore one can evince "near ZERO " conviction. The article is a love affair with denial. 

"Very simply, nobody knows what's going to happen"

Anyone who doesn't understand the current level of asset deflation risk is the investor equivalent of JFK Jr. flying upside down into the ocean, unwilling to trust what their cockpit instruments are telling them. I can never understand how so many people have absolutely no memory that Fed over-tightening collapsed BOTH prior asset bubbles. During which time the CPI was lower both times. This current market is the sum total of every risk that has EXPLODED in the past two decades WHILE central banks were actively arranging bailout:  EM currency crisis, Tech bubble, housing bubble, Europe crisis, China meltdown. This time, all of those same risks are now attended by central bank coordinated tightening. So now we will find out what WOULD have happened all those other times had bailout not taken place. The irony of finance is that the less you know, the more confidence one can place in sheer fantasy. For example believing that the dollar and interest rates can both go higher indefinitely when they've already monkey hammered the Global Dow -30% amid the worst bond market in 100 years.

In 2022 financial reality has come home to roost. The cost of capital is sky-rocketing globally. Real yields are rising at the fastest pace since 2008. The Fed is boxed in. All of which means that risks have NEVER been clearer. But even more importantly, they will NEVER be clearer. So if you can't handle this type of market you should be playing Canasta with the girls on Thursday. This is a bear market and the trend is down. The decline to date equals the decline in the S&P 500 just prior to the October 2008 collapse. 

Now compare the "Devil's Advocate" view to Michael Burry who asserted this week that this set-up is now WORSE than 2008. The exact same "lone voice in the wilderness" in 2008 is pounding the table all over again in 2022. What people forget is that Burry lost a lot of money before he made a lot of money in 2008. Many at the time questioned his sanity. But he was adamant he was right and of course in hindsight it's his detractors who look like idiots NOT HIM. The fact that he was ever "wrong" has been long forgotten: 

Wall Street NEVER sees it coming. They do not try to predict Black Swan events or predict anything outside of their cozy consensus. Above all, they never say anything that would ignite widespread investor panic.  

In 2008 there were buy ratings on almost EVERY stock.  

May 16th, 2008:

Ritholtz: ONLY 5% OF WALL STREET RATINGS ARE SELLS

We just learned that the British pension system almost collapsed last week:

"A large quantity of gilts (UK Treasury bonds), held as collateral by banks that had lent to these Liability Driven Investment (LDI) funds, was likely to be sold on the market, driving a potentially self-reinforcing spiral and threatening severe disruption of core funding markets and consequent widespread financial instability.”

There were several bear market bounces in 2008 and then all hell broke loose in October. It's highly likely that this Pound "bailout" bounce is the 2008 equivalent to the early October TARP bailout rally. The last chance to get out. 

 

In summary, questioning the bearish narrative this month is tempting fate on a BIBLICAL scale. The number of people who would like to admit they ignored the EXACT same warning TWICE by chance happens to be the exact same number of people who "know what's going to happen". 

No one. 

STILL FRONT-RUNNING COLLAPSE

"What is becoming more apparent, however, is that it will be difficult for the U.S. — and other major economies — to wean themselves off the extraordinary support the Fed has given it in the past 15 years"

“Their own policies created the fragility, their own policies created the dislocations and now we’re relying on their policies to address the dislocations”.

Good luck.

After 2008, Zerohedge emerged as the leading critic of centrally managed markets. That skeptical view lasted all the way until the pandemic when whey emerged post-pandemic as newly converted believers in monetary bailouts. It was their chance to shed their perma-bearish image and join Wall Street in propagating the myth of perpetual market manipulation. So it is their fate that stocks are now having the worst year in 50 years. That sort of late stage "pivot" is called capitulation. What you would expect at the END of a bull market. 

Now in 2022 JP Morgan's markets "guru" Marko Kolanovic has been bullish all year. However, this past week he turned bearish and admitted that his assumption central banks would NOT make a massive policy error in 2022 was wrong. Central banks just made a massive policy error in 2021, so in 2022 he believed they were going to get it just right. You have to be an Ivy League PhD to believe that moronic delusion. What we are witnessing is BULLISH capitulation. 

Also capitulating, the aptly named BEAR Traps Report, now expects a Fed pivot by November. 

"In the coming 2-4 weeks, we expect a meaningful walk-back from Powell with a focus on financial stability"

Likewise, here is what the most bearish Wall Street pundit Michael Hartnett said this past week - Markets are breaking so get ready to buy stocks:

"Spiraling losses on Wall Street are now snowballing into forced asset liquidation, according to Bank of America Corp. strategists"

BofA strategists said to “bite” into the S&P 500 at the 3,300 level -- about a 9% decline from the latest close, “nibble” at 3,600 and “gorge” at 3,000. Hartnett and his team added that a drop of 20% below 200-day moving average has been a good entry point back into stocks in the past 100 years."

In other words, Wall Street pundits are converging on a NEW CONSENSUS view - MINOR additional downside followed by a seamless bailout. 

It's a similar consensus from the one this past summer, but the stakes have been raised in the meantime. It indicates there has not been any TRUE capitulation, because these new pivot believers are once again positioning investors AHEAD of the pivot. 

Barron's ran an article over the weekend which spells out the Russian Roulette investors are now playing. A Fed put that is now far below the market: 

Front-running the Fed is a very dangerous game to play right now. Why? Because the assumption investors are making is that the Fed can engineer a controlled explosion and then bailout markets with limited dislocation. What these people didn't learn is that in March 2020 the Fed required $2.5 trillion of IMMEDIATE QE to get the market under control.  Yes you read that right. 

Confounding this new bailout delusion is the fact that the Fed themselves are not nearly as worried as investors desperately NEED them to be:

September 27th, 2022:

The Fed's own financial stress index remains NEGATIVE:

What we have right now is make-believe capitulation. 

The AAII (Retail investor) positioning update for September indicates there is still a high degree of stock ownership:

https://www.aaii.com/assetallocationsurvey

In summary, the Fed and investors are now dead-locked. Each side expects the other side to capitulate. Neither side is backing down, which means the Fed will continue to ratchet up the pressure. At this late juncture, investor capitulation has been delayed to the point that the systems won't be able to handle a global RISK OFF event. The inflation-trade has seen massive flows from bonds to stocks during 2022. A reverse flow from stocks back to bonds will break the market in such a way that the Fed will NOT be able to put humpty dumpty together again. 

What bailout follows will be solely dependent upon the political regime that exists at the time. Which right now is the most polarized in modern U.S. history. Only a fool believes there will be a Congressional bailout in 2022. 

Last week, Corporate bonds saw their biggest liquidation since March 2020. However, the *special* bailout powers that were granted to the Fed during the pandemic were rescinded in 2020.

Which means the deleveraging event that Wall Street never sees coming is ALREADY underway. 

When the masses finally panic out of the totally unhinged market, you can rent stocks, but you can't own them. The days of owning stocks for the "long term" are over. In the 1930s there were 10 bull markets and 10 bear markets, about one a year for a decade.

THE GLOBAL MINSKY MOMENT

This week the British Pound kicked off the global Minsky Moment with a currency crash and attendant bailout. Stock gamblers see their last chance to get in...

Just one day after saying they would not revise monetary policy until their scheduled meeting in November, the BOE panic intervened in the UK Treasury market to restore order. The 10 year UK Bond had catapulted from under 1% to 4.5% in less than a year. 

That's all it took for global gamblers to rush back into risk markets. Bailout Watch is back. Leave aside the fact that it was only a few weeks ago that Fed Powell monkey hammered global markets with the message that pivot was not on the table. The stock market has been straight down since that time and is now camped perilously at the June lows.  

Zerohedge was all over this new central bank "pivot", because it checked their box for imminent hyperinflation, dollar demise, and commodity super cycle. The latter of which has been a failed trade ever since the war in Ukraine began. More than a few pundits took the opportunity to assuage the concerns of trapped gamblers.  

Yet again, in order to believe in this latest central bank fantasy one must believe that the middle class will continue to go under the bus due to inflation and higher interest rates, while financial markets receive another bailout. It's the same theme of the past 14 years, however this time running up against 10% inflation.

What the Bank of England is attempting now, is known as "impossible". They are attempting to monetize a new tax cut, raise interest rates to cool rampant inflation, and stabilize the currency. No one told them these objectives are mutually incompatible, so they will learn the hard way. This new easing policy is highly likely to undermine the currency which has already collapsed.

All of which makes this the Boris Johnson of financial bailouts - it's here for a good time not a long time. The more central banks outside the U.S. capitulate, the more it will drive the dollar rally. 

It's the Fed that must capitulate, but there is not even the slightest sign of that taking place. Don't take my word for it, even perma-bull Jim Cramer understands the Boris Johnson bailout won't last:

"CNBC’s Jim Cramer said that Wednesday’s rally will likely reverse course as soon as a Federal Reserve official reminds Wall Street of its hawkish stance against inflation"
 

The market is short-term oversold so this nascent bounce could last a few more hours or days. Or it could already be over. This is a good article to understand the potential short-term path of this rally and ramifications for trapped gamblers:

The Big Short Squeeze Is Coming Here

The article asserts that "everyone" is bearish. Which is moronic, because the target audience for the article is trapped bulls. However, the real punch line further down in the article after setting the stage that sentiment is negative:

"During bear markets (2008), negative sentiment provided very small opportunities to reduce risk before further declines"

I agree, and I'm not even that bullish. However long it lasts, this could very well be the last bounce before the market accelerates lower. Anyone can see below, there is no sign of real panic the likes of which we saw in 2008 and 2020. This isn't even as extreme as 2011, 2015, and 2018. In all of those times the VIX hit 50.

Consider also that those blue squares represent ACTUAL Fed bailouts. Not imaginary bailouts, like this current one. It's shocking to realize that investors are the MOST complacent at a time when bailout is LEAST likely. Today's financial managers don't understand moral hazard. All they understand is bailouts. 

And 2022 is the year when bailout investing will fail catastrophically.

Below I put together this illustrative chart to show what I believe to be the next sequence of events. My original chart was somewhat optimistic, so I made this revised one to take into account the full scope of impending dislocation. This of course is a best "guess", so take it with a grain of salt. I will adjust accordingly as circumstances evolve.

Once this oversold rally ends and the June support level is broken, it will take serious U.S. dislocation before the Fed turns neutral. In the meantime, all hell can and will break loose. It will be a non-binary event meaning having dislocations that are very hard to predict in advance aside from brick shitting panic. Market liquidity will collapse. Ultimately, the Fed will be forced to turn neutral and attempt to calm the market. I predict that will further spook investors which is what happened in March 2020 - The first rate cuts were met with more selling. Ultimately bulls will capitulate and that will set-up a trading rally. After that, the market will continue lower amid widespread rumours of mass defaults in a new global credit crisis. Once the Fed panic capitulates and goes ALL IN on QE then likely a multi-month headfake rally could begin. 

In summary, of course the Fed is going to pivot eventually.

The question isn't "if", it's "when". And the answer could mean the difference between being financially intact and financially buried. 

THE POINT OF NO RETURN

The widespread belief that this is the 1970s deja vu has ensured this will be the hardest landing since the 1930s. Sadly investors are now trapped in Jackass Utopia...

Mass confusion reigns supreme. Case in point, this week Wharton Professor of Finance, Jeremy Siegel, pounded his fist that the Fed is over-tightening:

"It makes absolutely no sense to me whatsoever, way too tight,"

Back in late May of this year Siegel was still asserting the Fed was way behind the curve and inflation would remain high until 2024:

May 2022:

“We’re going to have high inflation throughout this year and into next year, and I don’t really see a slowdown until 2024,” Siegel said. In fact, the official inflation figures are understated"

In other words, Siegel and the majority of other pundits who have been pounding the table on hyperinflation all year are the reason why investors are now TRAPPED in their imploding Jackass Utopia. 

Of course, Siegel's most recent opinion is correct - the Fed is way overtightening.

The housing market is essentially shut down now as mortgage rates are almost at 7% this week vs. 3% a year ago. 

Who refinanced a year ago and now wants to pay $20k additional interest per year on a $500k mortgage? No one. 

"Some of the biggest players in the real estate industry, including RE/MAX, Redfin and Wells Fargo, have announced layoffs in recent months totaling thousands of jobs. Industry analysts are projecting the cuts could eventually be on par with what was seen during the housing crash of 2008"

The latest fantasy is that there is no subprime this time around and no supply glut. Any blind man can see that in-process supply (lower pane) is higher now than in 2008. As far as subprime goes, it's all been hidden behind the veil of the shadow banking system which emerged from the ashes of 2008. Instead of banks making subprime loans, specialty mortgage companies make subprime loans using money borrowed from banks. This way banks can pretend they are lending to solvent entities.

Then there is the Fed-induced Emerging Market currency "Doom loop", now that the entire world is being forced to over-tighten in lockstep with the Fed. 

Nevertheless, Fed bailout remains a predominant fantasy. Unfortunately, the Volcker gambit ensures that Powell will not be deterred by an EM meltdown. 

At this point in 2008 the Fed was ALREADY easing:

None of this risk is priced in yet, especially when it pertains to the soaring dollar and soaring bond yields:

"Fourth-quarter S&P 500 earnings will face an approximate 10% headwind from the stronger dollar, in addition to other issues like soaring input costs"

The equity risk premium which measures the stock market yield vs. Treasury bond yields has collapsed down to 2008 levels. Signaling "More Bear Market to Come":

“There is no alternative” (TINA), has completely evaporated with the rise in interest rates"

"The Equity Risk Premium has contracted since the market peaked back on Jan. 3. Using history as a guide, this is highly unusual, since it typically needs to widen by +425 basis points, on average, before bear markets come to an end"

The S&P 500 is now testing the 200 week moving average, which historically has been a critical bear market level. Below that level, the last two bear markets accelerated both in % decline and duration. And then investors were informed far too late that the economy was officially in recession. Which is similar to now when economists are pretending the economy is not already in recession. 

Below we see that from the Y2K top it took until 2013 to break out to new all time highs. Well over a decade of lost returns.

To now believe that Powell's Quixotic Volcker gambit will succeed at the zero bound is a fool's errand of the highest order. 

The market is on the cusp of worst three quarter return for the Nasdaq since 2008.

The market is technically oversold, therefore violent brief rallies are to be expected. However, the largest part of the March 2020 decline took place AFTER the market was oversold. In addition, investors should beware that the market was limit down in March 2020 when the Fed restarted QE. File that under careful what you wish for. 

As we see below, GDP and interest rate predictions have completely reversed since the beginning of the year. MASS complacency is borne of mass confusion.

In summary, the Volcker gambit is a disaster. The ubiquitous belief that this is the 1970s deja vu will ensure this is the hardest landing since the 1930s. 

WSJ: Buying The Dip Has Worst Performance Since 1930s

Indeed.