ON THE VERGE OF THE SUPER LEHMAN

This week is the 15th anniversary of the Lehman collapse. Therefore, it falls on us to ask, "What could go wrong?"

Let's begin by assessing what is the same now relative to 15 years ago. Eerily, back then as well as now, the Fed was almost solely focused on inflation. At their September 2008 meeting they didn't raise rates, but they didn't cut them either. In other words, it was a "pause" meeting. Sound familiar?

The transcript for that meeting contains 129 mentions of “inflation” and five of “recession.”

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

Sure. 

By August 2008, many financial firms had already failed, BUT most of them had been taken over by larger banks. Therefore, markets and pundits were not panicking. Similarly, this year, all of the firms that have failed got bought by larger banks AND were fully backstopped by the FDIC. Note the magnitude of unrealized gains that remain on U.S. bank balance sheets AND the massive liquidation volume. As two major negative divergences. 

Meanwhile, current bank exposure to commercial real estate is 3x subprime:

Among the differences however is the fact that the U.S. housing market has not fully cracked as it had back in 2007. Which is what we see in the chart below. Here we see that this decline resembles the initial decline off the top (red line) in 2007.

Notice that in 2007 as the housing market rolled over, the unemployment rate rose. Whereas this time the unemployment rate remains at a 50 year low. Are we to believe that this time correlation will be different? That is the bullish point of view - a new permanent plateau for over-valued asset prices while rate hikes implode the middle class.  

Fed policy, I mentioned above, is widely expected to be a likely pause next week. However, overall this Fed is still behind the curve on inflation relative to the last cycle. 

Here we see that when the Fed paused in 2008, inflation took off. This time if that happens, inflation will head back to 8%. 

Which means that we are always one too-strong data point away from meltdown. 

Another key divergence is the fact that the Fed is currently reducing their balance sheet. I believe that the Fed balance sheet is the primary source of today's inflation - mostly asset inflation. As we see, the balance sheet has only come down a small amount relative to where it was pre-pandemic. The current Fed policy of raising rates on the middle class while keeping the asset bubble inflated, is a disaster waiting to happen. 

It's merely a temporary plateau of rampant idiocy. 

 

Of course I've mentioned China many times as the locus of global collapse. Unlike 2009, China is in no condition to lead the world out of depression. This time, that country is leading the world INTO depression.

In summary, this week we learn that Americans have never been wealthier AND child poverty is soaring. 

September 11, 2023:

September 12th, 2023:

Anyone who doesn't see this coming, won't be bragging about it in the future. 

INSIDE THE CRASH ZONE

For bulls, reality is no longer an option. It's totally unaffordable...

Today we got news that tied China directly to Tech stocks, which is a key warning to bulls as to which markets are at the locus of collapse. The headline stated that Chinese officials are banning the use of iPhones. The only problem is that it's old news.

"The government staff were given these instructions by their superiors in recent weeks"

It is unclear how many central government agencies have been impacted at this time, although Beijing has restricted iPhone usage among certain officials for years"

News? Bullshit. This is merely media pundits hunting around for headlines to attach to imploding markets. Note that this article came out after the close on Wednesday, however the stock tanked DURING the regular session on Wednesday. 

This September pattern is the same as August: A gap down at the beginning of the month. The August gap (black arrow) just got filled and now there is a new gap for September. Last month, Apple "beat" earnings, but the stock imploded. Pundits were at a loss for how that could happen. This time, they came prepared with stale headlines to explain what the chart was already saying. 

In other words, what is the bigger story here as it relates to U.S. Tech? Is it China economic meltdown, or is it the Chinese government extending a ban on iPhones? 

Nvidia is another good example of pundits at a loss to explain speculative capitulation. In May, Nvidia's earnings blowout was catalyst for a massive Tech rally. In August their earnings blowout was catalyst for Tech implosion.

This is what I mean, when I say "inside the crash zone". This is the first time semiconductors have failed a retest of the 50 dma and come straight back down. This is critical support. Notice what happened last time the 50 dma broke at this level. Look at the volume.

But the real warning came from the fact that semiconductor sales have only recovered back to the 2018 level. This new idea that  a "Magnificent Seven" Tech stocks could carry the entire market while the majority of Tech stocks imploded, was a hyper-moronic theory, hence it was consensus. 

Recall that during the pandemic, Cramer labeled the leading  Cloud/Work from home stocks, the "COVID-19". Those stocks soared and then they crashed -80%. The same fate awaits the Magnificent Seven. 

Back to the REAL story of continuing China meltdown, despite a record 54th consecutive currency intervention by the PBOC, the Yuan broke to a new 16 year low. The policy divergence between China and the U.S. grows wider every day. Now, all it would take is one more piece of strong economic data from the U.S. pointing to another rate hike, to implode China. 

In summary, bulls face a second consecutive yearly bear market for the first time since the 1930s. Bullish pundits continually point out THAT as their primary basis for continued optimism - i.e. that the market has never rallied this far off the bottom and then made a new low - except during the 1930s. During the 1930s, this up-down bull/bear sequence repeated 10 times, roughly once per year for a decade. Which is what I expect to happen now. The low of course back then was -90% from the all time high. Do I expect that now? Unlikely, due to central bank manipulation. But -60% is highly conceivable, because that's what happened to the Chinese market in 2015 amid non-stop intervention. Or, see their currency above for another example of policy clusterfuck. 

Be that as it may, today's bullish pundits will never predict a return to the 1930s, because under that scenario, no one needs their services. 

SUPER CYCLE FRAUD

2023 was the year in which all of the end-of-super-cycle fraud coalesced into catastrophe. August was the month it ended...

Global risk assets peaked at the end of July, fell for three weeks and bounced into the end of August. We are seeing three wave retracements across the board in every risk asset class from Tech stocks, to EM markets, and junk bonds. Nvidia made a new high last week post earnings, but the rest of the AI trade got obliterated in August. And now we see the minor bounce.

Don't tell bulls that the AI trade actually peaked over a year and a half ago. They still haven't figured it out. 

In August, the government of China went to great lengths to support their markets, but still the Hang Seng fell into bear market. Apparently, very few people remember 2015 when the Chinese government did everything possible to keep markets from imploding, but nothing worked. Among the desperate gimmicks they tried, was banning short selling, then banning institutions from selling. Shutting down the market for days at a time.

Here we see that none of that worked last time and it's not working this time either. 

Nevertheless, entering the worst month of the year seasonally, the onus is as usual back on the bears to prove this is not a great new bull market. Leave aside the fact that the market is set-up almost exactly as it was last year. The oscillator bounced at the same level as last August and has now rebounded back to the same retracement level - while the S&P backtested the 50 dma. Relative to last year, this decline is ahead of schedule. That selloff reached its low in October, whereas this one will likely reach its selling climax in September. 

Between now and the next FOMC meeting in September, there are several key economic reports, any one of which could reinforce Powell's hawkish view and explode markets. 

The stock market has no leadership anymore. The Tech generals all sky-rocketed in July and crashed back to Earth in August. All except Nvidia of course which made its high last week and has been attempting to make new highs this week. Alas, so far that has not happened. When the leading stock cannot confirm its own breakout, then the market has no leadership.

On the economic front, bulls are now literally praying for a collapsed economy. This week we got news that job openings are falling, which sparked a manic rally in stocks. It never occurs to these people that job openings may have fallen because more people got jobs. We'll find out on Friday.

In summary, the great global deleveraging has already begun, in China. Soon it will spread to the rest of the world as the panic rate hikes begin to take effect. Only a fool would believe that the country lowering interest rates will be forced to delever, but the economies that are panic raising interest rates will not. 

Hence, that's the consensus view for 2023. 

Soft landing for super cycle fraud. 

THE ARTIFICIAL INTELLIGENCE HYPE CYCLE. IS OVER.

This is a special blog post to tie out the events from the past week...

Two major events took place this week in markets:

1) The artificial intelligence hype cycle exploded 

Nvidia released its earnings after the close on Wednesday and at first the stock sky-rocketed after hours similar to what it did last quarter. But Thursday's open was the high of the day for Tech stocks. After that it was straight down.

This reversal of fortune is due to the confluence of several risks. First and foremost social mood has turned down on the right shoulder of the two year head and shoulders top. What was deemed great news in May was now deemed to be solely a Nvidia-specific story. There is no carry over to the rest of the Tech sector. Secondly, since that rocket launch in May, the majority of Tech stocks have already rolled over and imploded. Including semiconductors. So it would be hard to launch another hype cycle rally, when the last one is still imploding. AMD is a case in point. This company is developing their own AI chip to compete with Nvidia. They are the closest thing to a true competitor. And yet the stock is now re-tracing all of its gains from May. Which clearly is reminiscent of the all time high and the 2021 semiconductor pump and dump scheme that crashed in January 2022. 

I will say this, that Nvidia CEO Jensen Huang is a quintessential salesman. He has convinced a majority of CEOs to invest in AI technology despite having no clue what it will do for their businesses. For their part, the CEOs were just trying to impress Wall Street by saying they were "investing in AI". The main benefit is that it's going to give them a write-off at the end of this year. One wonders why this serial criminality is allowed to continue. 

For 2023, this artificial intelligence pump and dump was a total act of desperation for the crime syndicate of Wall Street, Silicon Valley and CNBS. These people can't afford another bear market in 2023 following the one in 2022. It would be the first back to back bear markets since the 1930s.

The question for the week is can bulls survive without artificial intelligence? And the answer is, NO. The outside of the right shoulder is the locus of maximum crash risk. 

2) The next major event took place this morning with J. Powell's much-anticipated Jackson Hole speech. Once again, he was uber-hawkish. His overall thesis is that the Fed's fight with inflation is "far from over". At the end of his speech he invoked Paul Volcker when he said we will "keep at it", until the job is done. Which was the title of Volcker's autobiography ("Keeping At It"). In other words, what 80% of pundits said would happen earlier in the week, still somehow was not priced into markets. Today, the market is gyrating like crazy due to the weekly options expiration. Next week we will have a much clearer picture of the consequences of this hawkish speech. Needless to say with a jobs report and a few inflation reports due between now and the September FOMC, more rate hikes are most definitely on the table. 

However, another related event this was week was the wholesale meltdown of retail stocks. Most CEOs complained that high theft is reducing profitability. High theft is a sign that consumers are getting squeezed by higher costs and higher interest rates. We can expect far more theft in the future. Whether that is morally right or wrong is not my point, only to say that people are getting desperate.  

My key point is that clearly there is a major disconnect between the official economic data which is pointing to an almost 6% GDP print in Q3, versus what's happening to the consumer. As always, the Fed is solely focused on the data, while ignoring what CEOs are saying. After all, they have a 100% track record of over-tightening at the end of the cycle to maintain.

So, that's the week. All of 2023 risks have now been kicked into the last week of summer when liquidity will be at the low point of the year when it can do the most damage.

We will find out Sunday night in Asia (Monday) what they think about higher for longer. 

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.