GLOBALIZED CLUSTERFUCK

We are watching the endgame for Globalization, but investors are fat and happy...

This past week, an article in the Wall Street Journal aptly described the collapse of the Chinese economy after 40 years of breakneck growth. The Boom Is Over.

China is once again exporting deflation globally. Their strategy of using infrastructure investment to power the economy is ending in a mountain of insolvent debt and excess capacity. Ghost cities. Bridges to nowhere. Multitudes of empty airports. They believed that being an industrial powerhouse was the secret to economic success. And yet, the article also points out that despite all of these extreme efforts, China never achieved a true middle class. Average incomes still linger far below developed world standards. What went wrong? Globalization went wrong. Instead of creating a middle class in the Third World, it bankrupted the middle class in the developed world. All solely for record corporate profit and rampant environmental degradation. If China goes down, the whole world goes down. Therefore it's only fitting that the Walmart junkies don't see it coming. 

Here we see the U.S. bank index with 2008 on the left and 2023 on the right. Clearly, banks are descending in a three wave nested waterfall. In the lower pane we see the eight week moving average of retail investor bearish sentiment, still at the lower end of the range. 

A lot of people don't know that Lehman Brothers was actually a second rate Wall Street bank. That's why the Fed let it fail. Having organized bailouts for all of the initial dominoes, the Fed finally just let the chips fall where they may with Lehman. But the system went into meltdown, because the system requires ALL wealthy investors get bailed out, not just a lucky few. So now, we are comparing the failure of a minor investment bank to the failure of the country that pulled the entire world out of recession after 2008. And yet investors view this as the minor event. 

You have to be brain dead to believe that, hence it's consensus. 

Let's recap events to date:

Global markets bottomed in October 2022 on the basis that the Fed and other central banks were mostly done raising interest rates. Markets sky-rocketed into early February and then tanked because inflation had rebounded and the Fed became hawkish again. The same week that Powell raised rate hike expectations, regional banks spontaneously exploded. However, the bank run caused investors to once again believe that rate hikes were over, despite the fact that Powell himself said there was no connection between the rate hikes and the bank run. 

Nevertheless, gamblers rotated from cyclicals back to the beloved Tech sector on the basis that artificial intelligence was the next gold rush. The Tech melt-up went vertical in late May when Nvidia released earnings and raised guidance for the year. Now, fittingly Nvidia earnings are on tap again in this seminal week. One Wall Street bank after another has been upgrading their price target on Nvidia this past week heading into earnings on Wednesday.   

Meanwhile, Powell, who saw no connection between rate hikes and U.S. bank implosion is widely expected to be hawkish again this week at the Jackson Hole Symposium, on Friday. Below we see that he was hawkish last year at Jackson Hole and he catalyzed a collapse in stocks to their October low. This time the stakes have been raised to global meltdown proportions.

The dotted lines show what would happen if markets follow the same trajectory as last year - they will oscillate ahead of the meeting and then explode lower. Which means next week.

Note GDP Now in the lower pane vs. last year, for those still praying for a dovish speech.

Here we see the S&P Tech sector backtesting the 50 day moving average similar to one year ago. Many bullish pundits claim the market is "oversold", however oversold in a bull market is not the same as oversold in a bear market. Which this chart clearly shows. 

In summary, this is Powell's defining moment. Similar to most U.S. gamblers he has zero perspective on the collapse of China and its implications for global markets and the economy.

Here we see what happened last year when Powell monkey hammered the Yuan lower. This year it's at the precipice. The Chinese government is trying to support the currency and lower interest rates at the same time. Which never works.

Something has to give. 

GLOBAL RISK OFF

Not since 1929 have so many obviously ignored risks been present in markets as we are seeing right now. And yet, the sheeple are complacent because they've been zombified by history's most extreme case of central bank induced immoral hazard.

mor·al haz·ard

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

Any questions?

I asserted two blog posts ago, that the greatest risks of 2023 are as yet unknown. No sooner did I say that when bad data out of China imploded global markets this week. Of course the China risk has been simmering in the background for over a year now, but we were told over and over again that it was "fixed". So fixed, that in fact quite a few smart people bought into this belief that China would lead the world economy in 2023. Even The Big Short's Michael Burry was buying Chinese Tech stocks earlier this year. And yet, we see via this Emerging Markets stock chart, that this was the SECOND fraudulent Chinese recovery since 2021. And notice that the first one took place on the left shoulder  (the equal weight semiconductor index shows the head and shoulder top in the background (gray)).

Still, I would argue that this second "re-opening" has been an even bigger fraud than the first one. 

Now, the Chinese government is struggling to get their currency back under control. Which, is deja vu of August 2015 when uncontrolled Yuan deval caused global markets to crash. That crash by the way took place over this week in August 2015 from Thursday through Monday. FYI. 

In other words, a risk that was not even on the radar two weeks ago has now become the locus of global collapse. That's how things work on the right shoulder. 

"The PBOC is in fact faced with a major dilemma: allowing the yuan to weaken along with deteriorating sentiment may increase financial instability, while propping up the currency too much would risk further hurting the fragile economy"

Of course, the greatest risks of 2023 are STILL unknown. Any one of the known risks can explode this market, but it's what happens after the global crash where things will get interesting. 

First and foremost, global central banks are now all at odds with their monetary policy. Some are tightening, some are pausing, and some are easing. There is literally no coordination taking place on monetary policy. Which, happens to be the opposite of what happened in March 2020. We don't know how they will react to a global financial meltdown, all we know is that it will be an abject clusterfuck.

The other source of unknown risk will stem from all of the fraud in the era. We are about to find out who has been swimming naked in a pool of cheap money. And, rest assured it won't be pretty. When it comes time to actually buy stocks in this market, for what will be a decent trading rally, it's going to feel like buying Maui real estate with the houses on fire. 

Another risk that raised its ugly head again on the right shoulder is bank run risk. Ratings agency Fitch came out this week and said they are putting U.S. banks on watch for potential downgrade. In other words, they waited for the four month short covering rally to end and then they monkey hammered banks all over again.

As we see in this chart below, S&P down volume has been tracking higher with each time the Financials test support.

And then of course there is Fed policy risk. We learned via the July Fed minutes that the majority of FOMC members remain hawkish. In addition, we learned this week that GDP Now real-time GDP tracker is now predicting 5% growth in the current quarter (Q3). Bear in mind, that fake growth is ALL borrowed money, because the U.S. deficit is currently 6% in 2023. Running a massive pro-cyclical deficit the largest since WWII with the lowest unemployment rate in 50 years is bonkers asinine. Hence, it's largely unquestioned. 

Nevertheless, it's why J. Powell will do what he did last year at this time, and monkey hammer markets lower. If they haven't already crashed in the meantime. 

ARTIFICIAL INTELLIGENCE IMPLODING

The artificial intelligence bubble is the biggest dumb money bubble in human history. The crowning achievement for an endgame Idiocracy...

Any questions?

First off, the CPI ticked up this month, ending the longest declining streak in 40 years. In addition, the PPI ran hotter than expected. Which means that Fed rate hikes are far from over. Current GDPNow estimates put 3rd quarter GDP at a surging 4.1%. To believe the Fed is done raising rates with the core CPI at 4.7% is hyper-moronic. 

And therefore it's consensus:

August 7th, 2023:

"The Federal Reserve's aggressive interest rate hike cycle, which kicked off in March of last year and was partly responsible for roiling the crypto market, has ended, according to several investment banks"

The only way the Fed's rate hike cycle has ended is if markets go into meltdown mode sooner than later. 

Which gets us to the imploding Tech bubble. Since earnings season began, we've seen major reversals by Tesla, Microsoft, and now Apple. Google, Amazon, and Meta all popped after earnings but those stocks are giving up those gains as well. Now,  even Nvidia is rolling over - the super star of artificial intelligence.

As we see via global semiconductor sales stats - and as warned about in the CNBC article above - artificial intelligence has yet to provide any meaningful revenues to the semiconductor industry. Here we see the market cap weighted semiconductor index with global semiconductor sales amounts, adjusted for inflation, which are lower than they were in 2018.

"Market participants are “overconfident” about their ability to predict the long-term effects of artificial intelligence, according to Mike Coop, chief investment officer at Morningstar Investment Management"

Somewhat overconfident.

  

All of which confirms that the two year head and shoulders top is completed. Market observers like to say that "tops are a process, not an event". I say that tops are a process followed by an event. And the event - artificial intelligence meltdown - has already begun. Additional confirmation comes via the return of meme stock speculation, which first went wild on the left shoulder back in early 2021. 

This chart of the equal weight Nasdaq 100 sums it up. What we see here is a Tech sector rallying back to the same level first reached in 2021. The return of meme stock speculation. The same volume pattern (middle pane). And of course a far lower number of new highs confirming this "rally" (bottom pane). Note also that during the pandemic rally, the Fed was actively easing on an unprecedented scale. Now currently, they are tightening at the fastest pace in history on both ends of the yield curve. 

 

What we are witnessing now is heavy distribution in the Tech sector as institutions are selling Tech to rotate back into blue chip Dow stocks. So the question on the table is whether or not the broader market can continue to rally without the Tech generals. And the answer is no. Y2K proved that the broader market can't rally without Tech. 

Therefore, all we are witnessing right now is the biggest short covering rally since 1930. Fittingly, Carl Icahn - this era's most notorious short seller just exploded, due to this relentless AI  driven melt-up. 

Which is another sign that bears have capitulated. 

All of which fool's rally has been conflated as a "victory" for small investors because short sellers have been eliminated from the market.  

In summary, the artificial intelligence bubble is now imploding. 

Believe it.

Or not.

NOTHING MATTERS, UNTIL IT EXPLODES

We now live in a late stage Idiocracy that is in denial of risks that are unfolding in broad daylight, to say nothing about what's going to happen when this gong show final explodes...

Among the many known risks in 2023 - Tech super bubble, bank run, BOJ carry trade implosion, housing bubble, extreme over-valuation etc. etc. - debt ceiling fiasco was near the top of the list. That is until June, when Congress finally reached an agreement with a mere one day left. Bulls unilaterally decided that the 2011 scenario had been avoided, so the agreement catalyzed a melt-up into the end of July. Which happens to be exactly when the U.S. debt was downgraded in August 2011. And it happened again on Tuesday, August 1st. And yet no bullish pundit saw it coming. So what else could they say now? "It doesn't matter". By the way, they said the exact same thing back in August 2011. But the market plunged -20% anyways. 

Incidentally, those who say this entire fiasco "doesn't matter" apparently don't read the news, because Congress is heading for ANOTHER funding clusterfuck in September. In other words, the ratings agencies had to send a message:

Remember Occupy Wall Street? That movement was launched at the nadir of the debt ceiling fiasco. Far worse awaits this incipient collapse "not happening" in real-time. 

Of course, the biggest risks of 2023 have yet to be revealed. The known risks are bad enough, but the yet unknown risks will be far worse. Consider that no one predicted the Adani explosion, Carl Icahn's Ponzi revelation, and regional bank meltdown. But those things happened anyways. That's what happens on the right shoulder of a super cycle head and shoulders top. We finally learn who has been doing stupid things with free money. 

Nevertheless, pundits continue to say that BOJ policy normalization isn't happening, even though it's taking place RIGHT NOW. They predicted the BOJ would NOT modify their policy twice, and then it happened twice. Now they are saying it again. They don't learn from their own mistakes.  

Why? Because placating the stoned masses is now the primary order of business. Making sure that money is spent freely on all manner of goods, but most of all ad-sponsored financial bull shit.

These people are amply proven sociopaths, so anyone who trusts them, does so at their own risk.

Another lethal denial is the belief that the Fed is done raising interest rates. This week we learned that Q3 GDP is heading back to 4%, which guarantees not only more rate hikes but also an IMMINENT u-turn higher in CPI. 

But economists say it doesn't matter as these two headlines on my news feed show:

And, as far as Friday's jobs report, we learned today that ADP came in hotter than expected. I've always suspected that a hotter than expected jobs market could explode stocks. We'll find out on Friday when the first test of last week's pause melt-up gets system tested.

Which gets us to the world's largest and most important stock, by market cap. Which reports tomorrow after the close.

As a preview, tonight we got Qualcomm:

"Qualcomm reported third-quarter earnings on Wednesday that beat Wall Street expectations"

Net income during the quarter fell to $1.8 billion, or $1.60 per share, a staggering 52% drop from the $3.73 billion or $3.29 per share reported at the same time last year.

In summary, what else could go wrong?

HOT AIR EXPLOSION

Markets have now fully priced in a Fed pause for 2023. There is only one problem - it's a total fabrication. Which means that this market is now priced for a high altitude explosion.

Any questions?

As it is with all problems this Idiocracy faces, they are now painted into a denialistic corner of their own making. And still they are somehow totally oblivious to that fact. 

Yesterday, the Fed raised rates another .25%, to the highest level in 22 years, and they signaled they are ready to hike again in September if necessary. Bulls took that to mean that rate hikes are over. Hence, they have now vaulted the Dow to the longest winning streak since 1987. I would be remiss if I didn't remind everyone that it was the combination of Fed rate hikes and market melt-up that preceded the crash in 1987. 

The problem with fully pricing in a pause is that there are multiple inflation reports and job reports between now and September. When the Fed paused back in 2007, inflation rebounded sharply. Currently, the CPI has already fallen for 12 months straight which is the longest monthly streak in over 40 years. Betting on another month of falling CPI is like betting on another Dow up day. They have a similar probability except if the CPI turns up again, the Dow is going to have a down year, not a down day. 

Today, we already got news that GDP is re-accelerating. This chart shows that consumer sentiment is chasing markets. It used to be that markets follow the economy, but now the economy follows markets. 

It's only a matter of time before the inflation downtrend reverses. 

We also learn that money managers are no longer hedging, which is why per BofA/ZH: "It has never been cheaper to hedge a market crash". From a nominal cost standpoint, S&P puts have never been cheaper. That's because there is ZERO risk management in this market. You see, despite put options being record cheap, that does not prevent them from losing 100% of value in a melt-up such as the one we've been in since mid-March. But money managers can't afford to lose more relative performance to the most narrow market in history that is now powered by a "Magnificent Seven" stocks. 

Which is why we see that even as active manager risk exposure has round-tripped back to the highs of late 2021 (lower pane), the index over-weighting to Tech is now MUCH higher. 

Which is a disaster wanting to happen. 

All of which gets us back to a Fed who continue raising interest rates while keeping their balance sheet at double the size it was pre-pandemic. At the rate they are rolling off the balance sheet, it will be several years to normalize. In doing so, they are favouring the wealthy over the middle class.  

Which means that when markets explode, the middle class will be pre-imploded by two decade high interest rates. And consumer sentiment will collapse like a cheap tent. 

It's the same mistake the Fed made in 2008. 

"As late as August 2008, there were no clear signs that many financial firms were about to fail catastrophically"

Same.

FOMC: FEAR OF MISSING CRASH

"It's called the American Dream for a reason - you have to be asleep to believe it" - George Carlin

I just finished watching the HBO special, George Carlin's American Dream. I thoroughly enjoyed it of course. It confirmed my view of the degeneration of humanity. Throughout Carlin's life his views on society became darker and darker, but then he died in June 2008, just before the big housing collapse and bailout clusterfuck. Imagine if he were alive today what he would be saying about this current gong show? Over the past 15 years since 2008 all of Carlin's self-destruct themes have gone into overdrive. The difference is that in 2008 we discovered Quantitative Easing - printed money - the secret of effortless wealth. Which happens to be just another drug - a financial drug. I call it monetary euthanasia - just hose down markets with enough free money to give everyone the illusion of normalcy. In other words, central bank manipulated markets give the sheeple the illusion of wealth while everything falls apart in real time. Carlin would say that it's all a big fucking conspiracy.

Of dunces. 

Which gets us to this coming week's central bank extravaganza. The Fed is widely expected to raise rates again. The ECB is also expected to raise rates again. The BOJ is once again expected to continue massive easing.

The question for the Fed is what do they tell markets going forward? Headline CPI has dropped sharply, but now GDP is re-accelerating and the last time the Fed signaled an impending pause was at their May meeting, at which point markets exploded higher. Which has forced them to put on another rate hike in July. In other words, their dovish commentary at the May meeting made another rate hike necessary. Will they make the same mistake again?

Which gets us to the casino. Since this rate pause rally began late in 2022, mega cap Tech stocks have vaulted 100%. Typically, Tech/growth stocks are the primary beneficiary of a slow growth economy with receding interest rates aka. "The deflation trade". However, the rally was running out of gas in May, but the Fed reignited the rally with their June pause which coincided with the debt ceiling resolution. Those two events AND the AI frenzy led to the recent overthrow high for mega cap Tech.

Which gets us to this week. 

At the start of this rally no one expected rate hikes to be continuing into July. Therefore, the bull case is that now with another potential pause coming, Tech stocks should bolt higher again. However, one could make the case that even if the Fed is dovish going forward, much of the "pause" has been priced in already.

If so, then we are looking at history's biggest rope-a-dope, as Tech is now the most crowded trade of 2023. 

Making life a bit more complicated for bulls is the fact that this past week Tech earnings were a shit show. Netflix imploded and then Tesla imploded. But it was Taiwan Semiconductor that threw cold water all over the artificial intelligence rally. They guided revenue down for the full year and said that AI demand was not sustainable following the initial surge in orders. In other words, AI is turning out to be just another Tech scam similar to Crypto, Cloud, and Metaverse. Consider that we've now been told that semiconductors went from a shortage in the pandemic, to a glut in early 2022, to a shortage in early 2023, to now a glut again.

Sure.

Here we see the semiconductor sector (weekly) with Taiwan Semiconductor. 

This has been the best start to a year for Tech stocks in 30 years of data. Including the Y2K bubble. 

Tech stocks are now up seven months in a row, including July.

According to bulls, the bull market is just getting started. 

In summary, the sheeple are going to soon awaken to the inconvenient truth that the American Dream is just a big fucking scam.

And when they do, they are not going to be fat and happy.

 

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.