THE BIG LONG

Today's investors all believe that as long as they never sell they can never take a loss. Unfortunately, that's not how it works...

What investors "learned" from the central bank assisted v-bottom in 2008 and again in 2020 is that as long as they never panic sell, they will eventually make up their losses. The 2020 losses were particularly short-lived because after March 2020, the Nasdaq entered its blow-off top, over a decade in the making. All of which explains why we are now witnessing mass complacency in the face of economic meltdown. Because that is how central bank moral hazard was ALWAYS going to end. Bulls loading up on stocks going into a depression. 

I would remind bulls at this juncture, that Japan's stock market is STILL lower than 1990 and China's market is lower than it was 2008. And yet, BOTH of those central banks are STILL easing. Which puts to rest the Efficient Bailout Hypothesis.

Note that for Japan, the pandemic pullback preceded the melt-up into wave 'C'. It wasn't a bear market, it was merely a correction in an ending bull market. 

But, but, but...this is the United States NOT China and Japan. In this country, back in 1929 it took 25 years to make a new all time high, in 1955. If you have that kind of time then finish your homework and go to bed on time. 

In the book/movie "The Big Short" there was a period of time in 2008 when the economy and real estate market were clearly imploding but the subprime mortgage market remained well bid. The "CDS" contracts insuring subprime loans actually lost value because the risk premia came out of the market due to investors hungry for yield. This was the point in time when Michael Burry and a few others were the lone unwavering bears in the subprime market.

That's where we are NOW. 

The economy is imploding and the real estate market is seeing collapsing sales - a precursor to lower prices. However, global risk markets are rallying. 

The only traders who have capitulated are the bears, as we witnessed by the epic collapse in the VIX a week ago. Another place we saw bearish capitulation was in high yield spreads which are highly correlated with the stock market. The Fed is not going to rescue markets when markets are signaling that everything is A-OK. 

FYI, in the past decade each time we saw the high yield spread blow out, the stock market was down at least -20%. . 

Not only is the Fed not going to rescue markets, they are going to keep tightening which is what they said this past week. Three separate Fed members (Bullard, Mester, Brainard) said that the Fed rate must now go ABOVE 5% and stay there until inflation comes back down. Recall, that the Fed's target rate has been moving higher for over a year now. It should be called the moving target rate. 

What we are witnessing is a massive bullish circle jerk into the abyss. 

Clearly, the bear capitulation shows that being "right" on the market is not the same as being a good trader. In order to survive volatile markets one must spread their bets across asset classes and learn to take profit in stages instead of all at once. Be that as it may, the great irony of markets is that the greatest risk arrives when the majority of bearish participants have turned bullish. So unfortunately, for this event to be spectacular, bear capitulation was required. 

Which gets us to the next order of business, bull capitulation. We can surmise that it would take a major meltdown to cause panic in this market. So that's what we should expect.  

What I've noticed is that the "January Effect" has been very pronounced in recent years. The January Effect means that stocks that were dumped for tax loss purposes in the prior year get bought back in the new year. However, this effect now gets pulled forward into the fourth quarter.

Below, we see that EM stocks took massive losses in 2021 and 2022 and have now enjoyed a 25% rally. The same size rally they had in 2020 pre-pandemic. However, the biggest rally culminated in Q1 of 2021. We also see that U.S. consumer sentiment followed the same pattern. Each time peaking in Q1. 

What's happening is that rebounding markets are dragging social mood higher. 

In summary, today's investors have "diamond hands". But, it's their intestinal fortitude that will be system tested. 

And it will shit a brick. 

At which point all economic predictions for 2023 will be wrong, by a minus sign.

But don't forget, no one saw it coming. 

October 2022:

DAVOS 2023: LETHAL COMPLACENCY

It's Davos 2023, amid peak market hubris. What could wrong?

The central bank gambit of increasing the wealth of corporate oligarchs at the EXPENSE of everyone else reached new lethal levels of inequality in 2022. According to Oxfam, the ultra wealthy almost doubled the $ wealth increase of the remaining 99%. For those who know their history - few to be sure - this does not end well:

Go back to the aftermath of 2008 when the Occupy Wall Street movement started to protest bailouts for the ultra-wealthy while the middle class imploded. Fast forward one decade to the pandemic and this time around it was Millennials "democratizing markets" with their Reddit-ordered pump and dump schemes and Crypto con jobs. 

The central bank policy of inflating capital wealth while imploding the middle class further escalated in 2022 as they kept their balance sheet unchanged year over year while DOUBLING mortgage rates. Rates now on everything are far higher than they were pre-pandemic. 

And yet, complacency reigns supreme. 

This set-up is starting to look a lot like the one that preceded the pandemic in early 2020. First a melt-up and then a meltdown. 

Then, as now, gamblers were front-running central banks and not worried about the pandemic. FOMO was running wild. 

Now however, the greatest risk that investors face is not a pandemic, it's central banks themselves. In other words, investors are embracing the cognitive dissonance of ignoring central bank-caused tightening by believing in central bank bailout. Nothing quite as obviously asinine has ever been believed in market history. 

Let's take a trip down memory lane circa February 2020.

This headline states that the pandemic melt-up - that unbeknownst at the time preceded meltdown - was due to investor FOMO:

Feb. 5th, 2020:

Sound familiar?

The riskiest stocks surged ahead of the pandemic lockdown, as they are surging now:

In addition, to moral hazard and belief in central bank invincibility, what fueled this parabolic rise into meltdown? For one thing, China was ALREADY easing massively and their markets were leading global risk assets.

As they are right now. Except this time, the risk to markets and the economy is the risk posed by policy makers as they take down all of the supports put up during the pandemic. Recall, it was China that led the way with tightening of lending conditions for real estate a year ago.

In addition to the above risks, what we are witnessing across many sectors is a scenario in which stocks are trading AGAINST the fundamentals. Meaning fundamentals are imploding, but stocks are going higher. This is because investors are "looking across the valley" to the other side of bailout. The most obvious examples are in housing stocks, oil stocks, retail stocks, financial stocks, and of course Tech stocks.

Here we see homebuilders usually peak LAST. Right before the crash. And of course pending homes sales lowest in history:

Oil stocks, which normally trade in lockstep with the leading indicators, are decoupling massively as they did in 2008.

For a time.

Oil services are not just decoupling from the leading indicators, they are now decoupled from oil itself:

Nothing could be more asinine however than Wall Street's prevailing view that earnings will grow in 2023. A prediction that is TOTALLY decoupled from consumer sentiment and Fed policy.

Now recall one thing about March 2020 - it was the largest combined fiscal and monetary stimulus in human history. Dwarfing 2008. And yet, U.S. markets STILL crashed -30%. There were six overnight limit down S&P futures gap opens in two weeks. 

I say remember that fact because this time around the amount of stimulus will be a fraction of what abided in March 2020. 

FINANCIAL ARMAGEDDON

As an antidote to ludicrous bull shit, I am now upgrading this debacle to Financial Armageddon. It won't be the end of the world, but it will feel like it for those who don't see it coming...

Following last week's strong but not "too strong" jobs report, we are now inundated with commentary saying that it was a "Goldilocks" report. Wasn't Goldilocks a fairy tale? 

"The report will most likely add to the growing narrative of a disinflationary environment crossing with a robust economy, and therefore a soft landing"

It's bull shit like this that energizes me to blog twice in a handful of days, something I haven't done in a long time. I am now of the mind that this is all coalescing into the biggest clusterfuck in modern history. Because when you layer on this kind of late cycle buffoonery you are inviting a level of societal rage that few can comprehend. To go into the worst financial crisis since 1930 invoking fairy tales is a bad look for the financial services industry. 

First off, contrary to popular belief, the longer this inflationary debacle takes to resolve the MORE risk gets added to the bonfire. Why? Because in the inflationary paradigm, it makes sense to INCREASE liabilities on the assumption that wages are rising in lockstep. Imagine if you were conditioned to believe you would receive a 7% raise every year. You would load up on debt. Hence we just learned that credit card debt AND interest rates have sky-rocketed to record levels. And at a rate of change we've never seen before. In other words, debt inflation is very real. 

The Fed conundrum is that they can't ease UNTIL financial conditions tighten, otherwise they will create runaway inflation.  However, investors won't capitulate because they've been conditioned by the Fed to expect a bailout. Both sides are locked in what I call a moral hazard death spiral. The Fed assiduously cultivated the bailout mentality for 14 years and now they can't get out of it.

Meanwhile, even as financial conditions are NOT tightening, bank lending conditions ARE tightening. 

We've NEVER seen such a lethal disconnect such as this before:

All of which means that the inflationary hoarding mentality will make this event 10x worse. 

Notice the Rydex ratio of cash balances as a ratio to all bullishly positioned asset balances.

This is the inflationary hoarding mentality at work. Retail investors have been told that they will lose money to inflation in perpetuity:

With all of that in mind, now imagine if you will, back in 2010 in the aftermath of the Global Financial Crisis, someone telling you the following fantastical story:

In the span of a decade there would be an asset bubble that would dwarf 2008 in magnitude. It would arise out of a global pandemic and it would span every asset class, including crypto currencies. What are crypto currencies you would ask, and you would be told they are thousands of digital Ponzi schemes with trillions of dollars in market cap and ZERO net worth. And they are fully legal and accepted without question even in 401k retirement accounts. Because they are considered safe havens from inflation.

So far, so good: a bigger housing bubble than 2007, a bigger Tech bubble than Y2k and something called a crypto Ponzi bubble. All of which asset inflation causes economic inflation to explode to the worst levels in 40 years. So what do central banks do? They extreme tighten at both ends of the yield curve at the same time. Until one by one the dominoes start falling. Starting with crypto Ponzi schemes, junk IPOs, pot stocks, electric vehicle bubble stocks, then moving on to global housing markets, autos, and mega cap Tech stocks. Until everything is imploding at the same time, but central banks are STILL tightening. By the end, all of the asset markets are imploded while liabilities remain at all time high in a deflationary depression. 

The story continues that China, which drove the world out of recession in 2008, is only finally emerging from a Maoist-inspired total lockdown three years later, their economy decimated. So they throw the doors open to the world and watch as their virus death toll explodes out of control among their totally unprotected populace, as their economy final implodes. 

Meanwhile, the pundits of the day are telling the masses to expect a soft landing because the Fed has magical powers to bailout everyone from disastrous financial decisions caused by cheap money, using more cheap money. Ignoring the fact that if they could do that, 2008 would never have happened. 

And they lived happily ever after. 

THE EVERYTHING RECESSION

History will say that extreme profiteering masked the collapse of the economy. For a time...

We are just a global margin call away from extreme deflation.

Wall Street's economic predictions for 2023 are science fiction:

https://www.bloomberg.com/news/videos/2023-01-05/global-recession-outlook-video 

The majority expect a mild recession or NO recession. A couple of banks expect a moderate recession. No one sees a hard landing on the horizon: 

Friday's jobs report further fueled false hope that the economy could pull off a soft landing:

The problem with the "soft landing" delusion is that Fed tightening has caused every recession since World War II. The only soft landing (non-recession) took place in 2018 when Trump demanded the Fed pivot. It turns out he was right to do so, because the Fed ended up cutting rates three times in 2019. Unfortunately, this time around there are ALREADY signs everywhere that a hard landing is unfolding in real time. 

What we are seeing across the economy is that unit sales have collapsed, and only prices are lingering at higher levels. 

First off, this article from a few weeks ago confirms that an earnings recession has arrived as the spread between Morgan Stanley's profit model and analyst consensus is the widest since August 2008:

“We often hear from clients that everyone knows earnings are too high next year, and therefore, the market has priced it,” he wrote. “However, we recall hearing similar things in August 2008 when the spread between our earnings model and the Street consensus was just as wide.”

There were many profit warnings in 2022, but each time they occurred Wall Street analysts lowered the bar so the next quarter it appeared that profits were improving, when in fact they were going lower. That game has been playing out in every major sector. Neverthless, this past week Tech bellwether Samsung shocked markets with a staggering -70% drop in profit to eight year lows. The problem is that the Tech sector overall is still overvalued, however Tech earnings growth is now falling below the market average and going negative. 

The same thing happened in 2000. The Y2K date change had pulled forward demand which was then accelerated by the Tech  investment bubble itself. When the bubble burst, demand collapsed below the economic baseline, however company (over) valuations remained too high. This time around, the pandemic pulled forward Tech investment which was accelerated by hundreds of new Tech startups which are now imploding.

For all of 2022 there were 181 IPOs compared with over a 1,000 in 2021. Yes you read that right. 

This week we learned that new car sales were the lowest in over a decade during 2022. Car prices remain elevated because car companies are still playing the "supply chain shortage" card.

Here we see the 12 month moving average of total new auto sales is the lowest since 2008 and before that 1992. Note that the recession after Y2K doesn't even register on this chart. 

https://fred.stlouisfed.org/graph/?graph_id=1145096

 

 

In my last post I indicated that pending home sales have collapsed to a record low. This is how that looks on a chart with housing stocks.

Deja vu:

The real shocker this week came on Friday when the Services ISM fell below 50, indicating recession. Up until now we had been told that the services sector is strong. In three decades the Fed has never tightened with the Services ISM this weak. Every other time they were easing.

What we are witnessing is the largest policy error in history getting bought with both hands by the usual bagholders. 

 

Retail and airlines imploding. And commodities imploding. The only time you see Airlines (Transports) collapsing along side oil is during a recession:

In summary, one would have to be totally delusional to believe in a soft landing, hence it's largely unquestioned. 

Retail investors are heading for a deep burial at the hands of serial psychopaths. 

THE END. 

THE CALM BEFORE THE SHITTING OF BRICKS

2023 is starting off the same as 2022, except this year instead of the all time high into wave one (blue) down, this is a broadening top into third wave (blue) down. The difference will be in how much underwear is soiled this year compared to last year...

The Dow's all time closing high was a year ago today. The all time intra-day high was a year ago Jan. 5th, aka. my birthday. Those early Jan. 2022 highs have stood until now. Which leaves the only question on the table - is this week seeing the highs of the year for 2023?

For the record, now that 2022 is over we know that the post mid-term election "melt-up" never happened AND the annual Santa rally was a total dud. The Goldman Sachs/Zerohedge Q4 stock buyback bonanza also failed to deliver.

Nevertheless, the Q4 low volume/volatility collapse has carried over into the new year. The only way to keep the market pinned at these levels is to essentially lower liquidity until all trading stops. Case in point, today the Nasdaq VIX flash crashed the most in history. Clearly the algos are having a hard time maintaining this illusion when one by one all of the market cap generals get taken out and shot. Today it was Microsoft's turn to get downgraded due to "rapidly decelerating" cloud (Azure) growth. Meaning, it was a veiled downgrade of Amazon as well. Recall that in the last quarter, analysts valued Amazon's Ecommerce business at $0, and ascribed all market cap to AWS. Which is now "rapidly decelerating".  

It's the same low volume in the housing market. Last week we learned that pending homes sales have collapsed to two decade lows.

This chart shows the ratio of U.S. home prices to U.S. incomes, available from the OECD web site. The middle pane shows the months of homes available for sale. And the bottom pane, pending home sales. Note that the monthly inventory of homes for sale only rose AFTER prices began to fall in 2006. Whereas this time it has already shot up. When prices finally begin to collapse, sellers will rush to the market and all try to get out at the same time. 

It won't work.   

Michael Burry was out this week saying the U.S. is already in a recession and he believes the Fed will make the same mistake Volcker made which is to stop tightening too soon which will allow inflation to reaccelerate. That's a bold call to make and it's quite bullish. However, there are reasons to believe that won't happen this time around.

First off, Burry ignores the fact that financial conditions today are nothing like they were in 1980. Today they remain far too loose for the Fed to pivot. It would have to be one hell of a crash to make them change their mind. Without that, CPI won't be coming down any time soon.

Back in the early 1980s, there were protesters outside the Fed:

"Those were tough times—economically and politically. Interest rates of 20 percent and unemployment rates of 10 percent; rings of tractors around the board building; offices filled with 2x4s mailed in by builders; consumer demonstrations outside the building; talk of his impeachment in the Congress"

Which get us to the the next point: by this time in both 2000 and 2008, the Fed was ALREADY easing. So this idea that they will push the economy deep into recession and push markets lower, THEN bail them out has no basis in reality. They neither bailed out the stock market nor the housing market the last two cycles. Unless you consider SPX -50% a successful bailout. 

The risk isn't that the Fed restarts inflation, the risk is that they create runaway deflation. In 1980, Volcker had 19% of Fed rate to ease. This Fed has 4.25%. Consider the fact that the 1990, 2000, and 2008 recessions all required 5.5-7% of rate cuts.

In other words, if the Fed woke up to their incipient mistake tomorrow, it would still be too late to bailout markets and the economy. 

On a related note, Burry is ignoring the fact that in 2008 the CPI collapsed 7 percentage points WHILE the Fed was easing. It actually went negative. 7% is an interesting number because it happens to be the current CPI.

In summary, the only REAL question is, how much does the Fed have to crush the Nasdaq and the housing market in order to collapse CPI. And then once they find that out the hard way, they can jump in their time machine and go back one rate hike.

That is the bull case in a nutshell.

"Policy makers worried they could have to raise rates more than projected if higher stock, bond prices spur economy"

2023: DEFLATIONARY COLLAPSE

The biggest risk for gamblers anticipating bailout in 2023 is that we are at the exact opposite end of the Fed policy continuum from bailout...

Rewind to November 10th, 2022:

"There's still a chance we can avoid a hard landing if the Fed pivots in December"

Exactly. But the Fed didn't pivot in December. So now what do bulls expect? They expect a Fed pivot and soft landing to come in 2023 instead. And a pony to go with the horse shit. 

Recall that during the first half of 2022, pundits pounded the table saying the Fed was tightening too slowly. Markets had their worst first half since 1970. So then pundits panicked and spent the last six months saying the Fed is tightening too fast. 

Which is why the watch word of the year is "Fed Pivot".

What they call "pivot", I call bailout. Have you noticed I'm the only pundit who uses this term? Pivot sounds so official and technical. It's almost like a real economic term. Whereas "bailout" sounds like a trapped bull  in desperate need of Fed assistance - the entire market story for the past fourteen years.

This current Fed bailout fantasy has been assiduously cultivated by the financial media desperate to give trapped bulls the illusion of another easy bailout. Just this week, Goldman Sachs put out their latest prediction for 2023 saying it will be an even softer landing than consensus already predicts (re: 4,000 SPX is consensus). Goldman actually sees a soft landing WITHOUT a Fed pivot in 2023, which is on the side of free-basing crack. Bearing in mind that the people writing this were playing Halo in their parents' basement in 2008. 

Zerohedge compounds confusion:

"We agree that a divided Congress will be unable to respond to a recession (which will occur), which means that the only support possible in 2023 and 2024 will be from the Fed, and yes: the firehose is coming"

Of course the firehose is coming. But at what level is the question. Will Zerohedge join the NBER in declaring recession with the SPX down -50% as they did so well in 2001 and 2008? 

It appears they will.

In early 2023 we will find out what would have happened if the Fed hadn't pivoted in 2018 because the Fed won't pivot until they see market panic and by that time it will be too late. Moral hazard has caused too much underlying technical damage, as we see in the lower pane below. 

Recall that in 2008 the Fed didn't have to (1) pause (2) pivot (3) stop QT (4) start QE. We are currently at the exact opposite side of the bailout continuum from 2008 AND from March 2020. 

Unlike March 2020, Tech won't support the market this time around. 

Recall that it was the "work from home" Tech stocks that supported the market in 2020. Now most of those stocks are already below their March 2020 lows. 

2022 has done all of the pre-crash preparation. The ensuing global RISK OFF will leave the casino bidless with nowhere to hide. 

The Fed's Volcker gambit of shock interest rate hikes will fail  catastrophically because global central banks don't have enough rate hike dry powder to prevent mass deleveraging. And as Zerohedge admits, this Congress will be deflationary. When I say deflationary I mean that supply will exceed demand at the macro level. Leaving a glut of EVERYTHING at the same time.

Contrary to popular belief, already-collapsed consumer sentiment will not improve in 2023 when global asset markets explode.

This is nothing like 2018 in terms of consumer sentiment: 

In summary, right now 90% of investors and pundits are bullish and 10% are bearish. I mean really bearish not Wall Street bearish.

This bear market doesn't end until it's the other way around. When that happens, we will STILL be in the minority camp, battling the same morons every step of the way.

And on the right side of the trade. 

2023: TERMINAL CRIMINALITY

My prediction for 2023 is that widely ignored fraud will explode spectacularly, amid what will be widely considered an unforeseen Black Swan event. When that happens, all of Wall Street's lethally optimistic predictions for 2023 will be instantly imploded...

My Twitter picture (below) was taken at the Ladner bird sanctuary in 1971. My first encounter with a black swan. I have since migrated south of the border.

Sam Bankman was extradited to the U.S. this week and released on $250 million bail. His partner in crime was released on a mere $250 thousand bail because she threw him under the bus. She admitted they had been knowingly committing rampant fraud, in exchange for a reduced sentence. This is the type of criminal spectacle that keeps this society preoccupied while they are being fleeced by what I call criminality as usual. 

The problem with today's markets is the problem with this society - we are dominated by storytellers who ignore all facts. Today's market predictions are science fiction, however this society has an addiction to what I call "soft" fraud. 

Which gets us to my 2023 prediction. I predict that the Fed will continue to escalate their campaign of incompetence, and Wall Street will continue to escalate their campaign of fraud until it all explodes with extreme dislocation. Bullish pundits who assert that us skeptics have been wrong this whole time, will be viewed as accomplices to fraud.

Let's recap:

In 2021, exiting the pandemic the Fed made the mistake of staying too loose for too long. In league with global central banks, they inflated the largest bubble in human history. Wall Street took full advantage by "democratizing markets", which meant democratizing fraud. It was exhibited by the Gamestop/ AMC pump and dumps which were conflated as victories for small investors. In addition, a record $1 trillion of junk IPO/SPAC issuance dumped on small investors. Followed by the Ark ETF bonfire of retail money, and mainstream adoption of Crypto Ponzi schemes in 401k retirement plans. 

But who knew all of THAT would be small time compared to what was coming in 2022? Not one bullish pundit. 

In 2022, the Fed made the mistake of panic raising rates up to a level 3x higher than pre-pandemic while keeping their balance sheet unchanged on the year. Today's bullish pundits STILL have yet to realize that was a colossal mistake, because it has so far only imploded the middle class while leaving the casino class intact. In 2022, Bankman's FTX losses were 1/100th the scale of mega cap Tech losses. Wall Street's consensus 2022 market prediction was off by -30% at the lows of the year and it remains off by a bear market magnitude, as we see in the S&P 500 full year chart below.

 

I now predict 2023 losses will make 2022 seem like chump change because once again, the Fed and Wall Street have found a way to up the ante:

My prediction for 2023 is that Wall Street's profit and GDP estimates will be off by a minus sign and their market consensus of S&P 4,000 will be catastrophically wrong.

The Fed will be tightening in a bear market/recession. The much anticipated "pivot" will be a total clusterfuck that will accelerate investor risk aversion. I predict the Fed will react very slowly to market meltdown and then they will ultimately panic, causing even more mayhem. Today's bullish pundits just assume that the Fed can easily pivot 180 degrees to rescue markets even though that wasn't the case in 2000 or 2008. 

It will be like March 2020 without the central bank bailout. When that happens, the simmering global housing bubble will final explode, rendering all of Wall Street's 2023 predictions instantly buffoonishly optimistic. 

  

In summary, "hard" fraud accounts for a de minimis amount of society's wealth losses. Whereas soft fraud accounts for the overwhelming amount of societal losses. Casually destroying people's financial lives is now the primary business model. 

And it's going out of business in 2023. 

The SEC will finally be seen for what it is - an enabler of  mainstream fraud, while focusing solely on small time spectacle. 

As always, the burden of truth is on the minority who believe it exists.