THE END OF THE SUPER CYCLE

What we are witnessing in real-time is the end of the 90 year stock market super cycle. In hindsight, historians will say the pandemic super bubble was the end of the super cycle rally which began in 1933. 

The extraordinary era that is assiduously used to extrapolate future stock market gains, is over. It turns out printed money is not the secret to effortless wealth. But, who knew?

Leaving politics aside, the health-related response to the "panicdemic" was unquestionably incompetent. An approach we were told was based on "science", at the local level, resulted in a hodge podge of made up rules with zero consistency from one city and country to the next. Any time you traveled you had to learn the new set of rules, all of which were based on "science". It was pathetically idiotic and yet there has been literally no assessment of what should have been done better. Which is how we roll in this society - lurching from one crisis to the next. However, it will be the  global Federal economic response which will cause by far the most dislocation. The true cost of which has so far been obscured by the super bubble. 

Three years ago in March 2020, global central banks panic eased the most in history. They flushed global markets with unprecedented amounts of printed money, which went straight into asset markets. From that point forward we have witnessed one pump and dump implosion after another. Beginning with the Gamestop melt-up in early 2021 which was attended by the Ark ETF, IPO/SPAC, Chinese stock vertical melt-up and meltdown. At the lows of that meltdown, the hedge fund Archegos exploded amid RECORD Nasdaq down volume. 

That event is what I call the "left shoulder" of the super cycle head and shoulders top. But, stocks recovered and marched to the all time highs in late 2021. That event was attended by the melt-up high for Crypto currencies, reflation trades (banks, industrials, retail, leisure, transports), and of course Tesla and the EV complex. That peak was the "head" of the super cycle  head and shoulders top. Next came the bear market of 2022 which culminated in an oversold low in October 2022. Since that time, markets have been rallying in what bullish pundits are calling the "new bull market". Which is what I call the right shoulder of the super cycle top.

The super cycle head and shoulder top can best be viewed by semiconductor stocks which have the most obvious top. Notice in the lower pane that consumer sentiment has been trending down throughout this topping process. Why is that not getting any notice from today's bullish pundits? Why would they assume the consumer is still strong after 20 consecutive rate hikes. Which happens to be three more rate hikes than what imploded markets in 2007.

Today's bullish pundits inform us that there has never been a Dow/S&P rally of this size and duration that didn't end at new all time highs. Never - meaning going back to WWII (1945). The last major rally of this size and duration that failed was 1930. Currently, the S&P 500 is up 28% off the lows of October 2022. Coincidentally, the same size rally as occurred in 1930. The one that back then had everyone convinced there was a new bull market. 

At this latest one year high, the S&P 500 is STILL unconfirmed by the equal weight S&P, despite the primary cap weighted index making ten successive new 52 week highs. This is the longest string of divergent highs between these two related indices, in 20 years of market history.

All due to this artificial intelligence mega cap Tech rally. The bank run in the Spring is long since forgotten. 

All of which brings us up to date.

Market history and Elliott Wave Theory predict that the impending failure on the right shoulder will be cataclysmic for risk assets. The fact that the equal weight index has not made a new high indicates that for most stocks, this counter-trend rally ended in February of this year. 

Note the record NYSE down volume in the lower pane which attended the Spring bank run:

What we are witnessing now with this latest melt-up is bearish capitulation. 

Once the global margin call begins, the main thing we should expect is that unlike March 2020, this time around central banks will under-react to this crisis. A crisis they helped to create. Which means that the liquidation of risk assets and attendant de-leveraging will be deeper and more severe than what we saw last time. By the time central banks panic, the global margin call will be complete. 

And then will come the bullish capitulation AND total loss of faith in printed money.

The erstwhile secret to effortless wealth.

FROGS IN BOILING WATER

Human beings have only one natural enemy - themselves...

I predict the artificial intelligence rally will end badly. At least it's named appropriately.

The temperature is white hot in the hottest summer in recorded history. Yet, you couldn't tell from stock bulls. The temperature is just right for boiled frogs. As with climate change and every other man made problem, denial is rampant. And lethal. After all, how could they see the problem when they are the problem? 

Investing is "so darned easy" you just throw your life savings into a handful of parabolic tech stocks and ignore all risk. Because everyone knows that stocks always go up in the "long run". Perhaps, but after 1929 it took 25 years for stocks to return to the prior high. After 2000 it took the Nasdaq 17 years to breakeven.

Once again, this society has painted itself into a corner with no way out. This week there were many indicators that were reminiscent of the all time high. It appears that the recessionary CPI collapse catalyzed total bearish capitulation. What else?

First and foremost is the fact that the Nasdaq (100) reached two years overbought on the % Bollinger Band which in the standard setting is 2 standard deviations above the 20 dma. The last time this happened was February 2021 during the Gamestop melt-up. The tall wick on the daily is of course reminscent of the all time high.

Then there is leading mega cap Tech stock, Nvidia, which at the highs of the week was up 240% in 2023. Then it suffered a major reversal of fortune on Friday which is deja vu of the Nasdaq's all time high in November 2021. 

Then there is the rampant speculation in all manner of junk stocks, led by Crypto infrastructure stocks. 

These stocks haven't been this overbought since you guessed it  - when Nvidia peaked at the Nasdaq all time high in November 2021. 

This is where it gets interesting - For some reason the banking crisis in the Spring catalyzed an artificial intelligence rally into the summer. Why, is not for me to say. 

This is a topic I haven't touched on for several months, so it's time to revisit FDIC risk. 

Back in the Spring, the FDIC organized several large takeovers of failed banks which helped to prevent their deposit insurance fund (DIF) from being depleted. However, in the meantime, the problem of $9 trillion of uninsured deposits remains totally unaddressed. 

This is what Janet Yellen said back in March - basically that these initial bank failures got special treatment:

“Will the deposits in every community bank in Oklahoma, regardless of their size, be fully insured now?” asked Lankford. “Will they get the same treatment that SVB just got, or Signature Bank just got?”

Yellen acknowledged they would not"

The issue is that barring additional takeovers of failed banks and barring FDIC bailout > $250k there will inevitably be panic among uninsured depositors leading to even larger deposit withdrawals than the record withdrawals so far in 2023 (below). When that happens, there will be mass bank failure. In other words, what happened so far, was just the easy part of the bailout.  

Year over year deposit flows, $:

Has this risk been priced in to the Disney markets since March?

Of course not, it has been priced out. The net effect of the artificial intelligence rally is that this time, Tech stocks won't be a safe haven from meltdown. 

ALL IN RECESSION

Sadly, in a proven Idiocracy, there is no strength in numbers...

Bears have been stampeded by rampant short covering. Bearish capitulation has created the illusion of a new bull market. Once again, hedge fund managers have been forced by the Reddit mob to chase risk higher. However, there are a multitude of indications that this rally is the ultimate fool's errand. Begin with the fact that we have now achieved a consensus of idiots that this is a new bull market. Below, it's clear that value investing has morphed into momentum investing during the past 15 years of continuous monetary bailout. If only investing was as easy as buying what every other dunce is buying:

Here we see the average U.S. stock remains in death cross on a weekly basis. A perfect predictor of S&P crash over the past 30 years:

Not only is breadth lagging within the cyclical sectors, but it's also lagging within the leading Tech sector itself. This week, the Nasdaq finally passed the 61.8% retracement of the all time high, after a nine month rally. Even among the largest cap Tech stocks, only three of Cramer's "Magnificent Seven" have made new all time highs: Apple, Microsoft, and Nvidia. Whereas, Meta (Facebook), Google, Amazon and Tesla are all trading well below their all time highs. Investing is now "so darned easy", that now you could buy just three stocks and trounce the "market".

Last week's bullish hubris has morphed into this week's extreme buffoonery: 

Unlike the bond market which has been warning of recession via the inverted yield curve for the past year, stock gamblers have no such concerns. Leave aside the fact that the U.S. Federal deficit at 5.5% is the largest deficit outside of EVERY recession since World War II. In other words, this tepid expansion is ALL borrowed money. History will ascribe this generation's continual moral degeneration for ignoring the incipient economic implosion. 

Worse yet, stock gamblers continue to evince unquestioned faith in a Fed that made a policy error in 2021 keeping rates too low for too long, and is making a policy error right now in jacking up rates far too quickly. All while their balance sheet remains pinned near all time highs. It's clear that the Fed has totally underestimated the trickle down fake wealth effect. Coincidence? I think not. For decades Fed policies have been extremely regressive, meaning favoring the wealthy at the expense of every one else. Whenever wages start going up, that's when rate hikes must end the party.  

All of which is why Fed rate hikes have succeeded in collapsing headline inflation at the fastest rate since the 2008 recession. Which is confirming the inverted yield curve. 

Stock buying opportunity?

It's just so darned easy to believe. 

MAX FRAUD MAX PAIN

Bulls got their first taste of risk off this week but they escaped the week intact. Past performance is no guarantee of future results...

To summarize, in June the fiscal debt ceiling was finally resolved and the Fed finally paused rate hikes. Those two events encouraged retail gamblers to embrace stocks at the fastest pace since the Gamestop melt-up in early 2021. What I call the left shoulder of the pandemic head and shoulders top. That retail stampede forced hedge funds to cover and otherwise go net long the most since the all time high in late 2021, which is the head.

Which is why entering July, bulls are claiming victory over bears:

"As the trillion-dollar artificial intelligence rally gathers pace, pity the humans on Wall Street trying to figure out this gravity-defying market"

Pity the fools who dare to question artificial intelligence. Where to begin...Suffice to say, this type of hubris in algo-fabricated Disney markets will not go unpunished.

The problem with the bullish victory hypothesis is that the rationale for over-allocating to risk no longer exists. This week the FOMC minutes confirmed that rate hikes are set to resume. Fed futures now put a July rate hike at over 90% which is a mere 2.5 weeks from today.

The two sectors that were the most sensitive to rate hikes in the past year were Tech stocks and bank stocks. Recall that regional banks spontaneously exploded in March of this year when the Fed shocked markets with a hawkish pivot. Now we see short-term rates have round-tripped back to the March highs.

For Tech stocks, this new hawkish pivot is even more precarious. The entire melt-up from the March lows was predicated upon a Fed pause which no longer exists. Now Tech bulls are way over their skis in the sector that is most likely to implode next. 

Another problem for bulls is that the Yen carry trade is rolling over again. 

Globally, things are even more precarious for this fraudulent rally.

In summary, bulls are claiming victory in the midst of battle. 

Probably because they have no defense and their offense is spent. They have no plan B for when this all explodes. 

And round 2 is about to begin.

TECHNOLOGICAL MELTDOWN

For some reason, we've become far too comfortable with societal meltdown as usual...

I call it "consumer choice".

Everything that's happening right now was predicted by Ted Kaczynski aka. "The Unabomber" who died two weeks ago in prison. He was a Harvard mathematician turned survivalist who launched a solo campaign against modern industrial society. In his manifesto he warned against the hollowing out of society and environmental destruction by mis-perceived technological "advancements". He was sentenced to life in prison for killing three people and injuring 23 others over the course of three decades. About the same number that are killed by McDonald's and Coca Cola every minute. At all times the COVID pandemic was far less lethal than heart disease and cancer. If we had locked down Burger King, more people would have survived. 

Kaczynski was a man ahead of his time, because we are witnessing the late stage meltdown of "modern" society. Eight billion people can't fix the problem, eight billion people ARE the problem. Every problem we face right now on this planet is man made. It's self-harm on a global scale. Personally, I have adopted the Taoist perspective that this was all meant to happen according to the laws of nature - to destroy that which is a threat to the natural world. In the end Kaczynski will get his way after all, but there will be a steep price to pay for true believers. We cannot protect everyone else, we can only protect ourselves. The desire to self-harm is not rooted in technology that's where Kaczynski was wrong. The desire to self-harm via addiction is rooted in human DNA and it will never be altered. 

Therefore it's very fitting that this late stage bull trap rally is driven by "Artificial intelligence". AI has been around for decades, it's nothing new. We are the only species that constantly reinvents the wheel while pretending this time will be different. No other species changes its way of life continuously simply because it has no memory of the past. 

In my last blog post I noted that July Fed futures were pricing a 75% probability of another rate hike in July. A mere few hours later, Powell confirmed that rate hikes "have a long way to go". It's Volcker 2.0. - a brief pause followed by many more rate hikes. 

While headline CPI is coming down along with commodities, the core PCE which the Fed uses, remains stubbornly high. Here we see the core PCE with the Fed balance sheet.

The Fed itself is STILL the primary source of inflation. So they will continue raising interest rates until everything explodes with extreme dislocation. 

It gets even more moronic, because just a few hours after Powell said interest rates are going higher for longer, Paul Krugman claimed that there is no sign of recession, unless interest rates go higher for longer. You can't make this shit up.  

"Recently, Krugman said any further interest rate hikes by the Fed to tame inflation down to its 2% target risks tipping the US into recession"

In summary:

Markets rallied hard off the October 2022 lows into late January on the belief that rate hikes were ending. Then in early February markets peaked and imploded at extreme overbought. Then in March Powell turned surprisingly uber hawkish again, at which point regional banks spontaneously imploded.

From that point forward, Tech stocks sky-rocketed due to the belief that rate hikes were once again ending. Last week stocks peaked a second time at extreme overbought. This week, Powell turned uber hawkish again. 

So, what we have now is a Tech bubble in a banking collapse.

Buy this idiocy at your own risk.

EVERYTHING EXPLODES FOR A REASON

Bulls can only be "right" so long as there is more dumb money to suck into the vortex of the casino. In this bear market rally, Bernie Madoff would be proud...

If you haven't watched the Fukushima documentary on Netflix "The Days", I highly recommend it. It completes the trilogy of nuclear reactor clusterfucks - "Chernobyl" (HBO) and "Three Mile Island" (Netflix). All are very similar tales - bad assumptions, greed, and hubris go into meltdown mode due to some unexpected "Black Swan event". It's clear that the manufacturers of nuclear reactors - similar to the dunces on Wall Street - STILL have no real plan for when nature pulls back the curtain on their PhD assumptions, revealing the fabricators to be nothing more than abject idiots. Who are for some unknown reason STILL entrusted with the capability of causing global meltdown. 

Which gets us back to these Disney markets and this latest iteration of impending unforeseen meltdown: 

I think we have to always remember that the "smart" money self-destructed on subprime junk mortgages in 2008 and then had to get bailed out by the so-called dumb money. It's important to understand that won't be happening again. If you believe it will, then it means you don't understand history and politics, much alone finance. New York is a tale of two cities. One which has the most billionaires in the entire world living in sky high penthouses. And the real city at street level which smells like a Third World garbage dump and is inhabited by homeless denizens sleeping on cardboard.

Which is why today's "smart" money managers - most of whom were completing middle school in 2008 - are all piling into a late stage Ponzi rally. Citigroup asserts that this is the "Most Extended S&P positioning in history".

I don't know if that is actually true, because I don't know what indicators they are using to arrive at that conclusion. All I know is that based upon momentum, volume, and positioning, this market is multi-year overbought across every dimension. Add in the fact that only a handful of stocks are making new highs which only increases the risk factor. Fittingly, BofA (Hartnett) capitulated last week as one of the last bears on Wall Street. Which leaves only Mike Wilson of Morgan Stanley, who never capitulated at the all time high in December 2021. Who is also the highest rated analyst on Wall Street and therefore the only one who has the sack to still remain bearish. After all, the pressure from his own organization to capitulate must be overwhelming given that Wall Street's hedge fund clients are adding exposure en masse. Why? Because it's not their money. And if you think that every hedge fund manager manages their own money the way they manage client money, then you don't know any hedge fund managers.

Chalk it all up to conflict of interest. These Wall Street brokers can only get investors into risk, they can't get them out. Which is why I call these bear market rallies, Ponzi rallies. You only make money if you are FIFO - first in, first out. If you wait until Cramer says it's time to sell then you are part of a stampede out of the market.

Getting back to the theme of this new bull shit market, it's all about monetary and fiscal expansion. Meaning it's entirely fictional. The Fed "pause" last week has led to a 77% probability of rate hike in July. On the fiscal side, things are even more dire as the Treasury is issuing massive amounts of new debt which will only implode liquidity further going into the low liquidity summer months. 

 

In other words, liquidity is set to collapse, just as this stock market glue sniffing rally is set to implode. Deja vu of last summer, only brought forward by a couple of months.

Note RSI in the top pane. Every rally for the past year has become more overbought than the last one. And yet, the breadth divergence in the lower pane has grown larger. 

What could go wrong?

On the economic side, student loan debt payment relief is set to end in October, providing a massive drag on the economy. 

For more than three years, federal student loan borrowers have not had to make monthly payments. But that pandemic-era pause is coming to an end this fall, setting up a financial shock for millions of Americans – and the big-name stores where they shop"

Note that among the stocks that will be most impacted is the one that usually LEADS new bull markets:

IBD: Target Leads New Bull Markets

In summary, investors have now bought a fictional bailout with both hands. Why that's good is not for me to say.

It's what you would expect to happen at the end of wave '2'. 

And, contrary to popular belief, breadth matters.

Because everything explodes for a reason.

MELT-UP TO MELTDOWN

Most investors don't understand or subscribe to Elliot Wave Theory. That's why it works. If everyone was aware of social mood and their proclivity for getting caught up in market FOMO, they wouldn't be doing what they are doing right now, which is going ALL IN...

Once upon a time, I used to worry about making accurate predictions across all of the various markets. Just like Zerohedge and Jim Cramer, I wanted to be "right" all the time, except not by reversing all of my own calls at the close of trading. Unfortunately, in this type of market that is not possible, because since the global all time high, we have watched as risk and complacency have BOTH grown in lockstep. Which means that bulls can be tactically "right", while being totally wrong as to the inevitable outcome. Think of it as a winning gambler who doubles down with each hand until he ultimately gives it all back. In other words, the sheer magnitude of this impending disaster vastly eclipses any micro call being made by the financial punditry. Everyone who is riding this Ponzi rally higher has NO exit strategy other than to believe they alone will get out first. No one has informed them, that's not possible. And they can't figure it out for themselves. 

Yesterday was the highest greed reading in at least two years, likely far longer, however the dataset is limited:

This week, the Fed finally paused rate hikes for one meeting while still vowing to tighten later in the year. The ECB tightened again yesterday. And Friday (today) the Bank of Japan continued their disastrous free money experiment which now looms like a Damocles Sword over global markets. A $3 trillion global margin call merely waiting for RISK OFF. Carry trade unwind does not require a BOJ monetary policy change, all it requires is a massive Yen rally the likes of which took place last Fall during the Yen intervention. Or, a global RISK OFF event would cause massive short covering as we see in the middle pane below.  

Either way, note the correlation between Tech stocks and the $USDJPY carry pair since the Yen intervention last October. Whereas before they were negatively correlated now they are 90% correlated.

June 5th, 2023:  

The irony for bulls is that the more they front-run a REAL Fed pause, the less likely it is to happen. Why? Because investor FOMO feeds back into risk premia and loosens financial conditions. Which means that investors can only get themselves more and more lubed up ahead of ANOTHER tightening.

What investors seem to forget is that the last FOMO melt-up also took place during the week of an FOMC meeting in January of this year.

That was merely wave 'a'. This pullback will make that one seem like a picnic.

In other words, the only way the Fed can stop tightening is if markets crash. Otherwise, they have to keep tightening until markets crash.

That is the bull case in a nutshell.

Also, what happened in 2008 and more famously in 1981 was that inflation re-accelerated as soon as the Fed paused.

If we get a higher inflation print at any point in time from this week onward, then markets will be in meltdown mode.

It will be Volcker 2.0.  

Another crowded trade is short Treasury bonds, which makes no sense whatsoever. Speculators are betting that the Fed can thread the needle between rate hikes and hard landing. So they crowd Tech which is a deflation trade while shorting bonds which is a more extreme deflation trade.

Nevertheless, as we see they don't have a good track record.

In summary, what it all comes down to is the fact that cycle DENIAL is a VERY crowded trade.

"The German multinational bank's top research team believes Washington has sparked a boom-bust cycle that now is nearing its end stage"