GLOBAL MARGIN CALL

The month of crash has officially begun. 

Since the Fed "pause" last week, global bond yields have sky-rocketed. Under this new paradigm, the Fed won't have to tighten again because the bond market is tightening for them. 

No one seems to have any answers for why this is happening. Bulls are at a total loss to explain how a Fed pause caused long rates to explode. The most obvious explanation is that the global bond market is now going bidless due to relentless central bank tightening. Real yields are rising which is a sign of central bank policy error. However, central banks are now trapped between the threat of further inflation and the need to support asset markets during an incipient meltdown. Consider the stark difference below between March 2020 and this current situation.

Central bank policies are currently at the opposite end of the bailout spectrum relative to 2008 and 2020. But to hear bulls tell the story, CBs can just flip a switch and instantly bail out everyone. As I said on Twitter, this time there will be a long line for bailout. A long soup line.

Because by the time central banks get the bond market back under control, the stock market will be a smoking crater. 

Over the past weekend, the government shutdown was temporarily avoided for six weeks, but it came at the expense of Speaker McCarthy's job. I had predicted a market meltdown if this happened, but instead of course the market rallied.

One more obvious risk to ignore. 

It appears that gamblers have yet to consider the implications of a market meltdown with a non-functioning Congress. They seem to forget that in 2008 and 2020, Congress backstopped both the FDIC AND the corporate bond market. So it's only fitting that corporate bonds are currently breaking the lows of last year and soon banks will be at new lows as well. 

Which begs the multi-trillion dollar unasked question - at what breaking point does inflation risk morph straight into default risk? And the answer is when the deflationary impulse returns which should be any minute now. Because the deflation paradigm will cause a massive re-allocation of capital from stocks back to T-bonds when everyone realizes that today's earnings estimates are off by a minus sign.

Consider that rotation scenario in the context of Utility stocks that are ALREADY imploding the fastest since 2008.

THESE are the stock market safe havens. Where will investors hide when the rout accelerates.

Netflix?

In summary, in the first week of crash month, it's only fitting that the average U.S. stock has now given back all 2023 gains and is now sitting at a loss for the year. Meanwhile, gamblers remain totally complacent. 

Because in a groupthink Idiocracy, the realization that they own an epic clusterfuck will dawn on them at the exact same moment.

aka. Too late.

 

OCTOBER: MONTH OF CRASH

The reign of complacency has continued to the end of September, despite the fact that the market peaked two months ago at the end of July. So as we enter the infamous month of October, it falls on those of us who can still fog a mirror to ask, what could go wrong?

 

Going back one year, stocks bottomed last October on the premise that the Fed was done or near done raising interest rates. There have been two rate pauses subsequently, but overall interest rates have continued to rise. 

Throughout the past year, consumers have continued to spend due to the inflationary impulse. In an inflationary paradigm, consumers believe that their increasing debts will be offset by rising wages. Unfortunately, interest rates have risen far faster than wages, which means that the debt burden has increased over the past year, NOT decreased. Which means that they are now trapped with higher debt levels AND higher interest rates at all time low unemployment. Once the deflationary impulse returns, they will be buried under a mountain of unaffordable debt. One can presume that they will not be happy to have been led to believe that the economy is strong. 

Meanwhile, the entire stock market rally has taken place under a backdrop of declining profits and rising real interest rates. The worst case scenario for stocks. 

Homebuilder stocks are a prime example of the mis-pricing of risk. One year ago, these stocks took off with yields at cycle high on the premise that bond rates were coming down. But since that time, bond yields have gone up.

WSJ: Rising Rates Finally Catch Up With Homebuilder Stocks

I've been showing this same chart all year, showing homebuilders rallying against the backdrop of Fed rate hikes, but nothing mattered.

Until they spontaneously exploded.

This positive correlation between homebuilders and interest rates doesn't seem to make any sense until we look back at the 2007 housing bubble. Then as now, home prices actually rose during the rate hiking cycle and then rolled over when rates came down. Why? Because the economy was imploding. 

We can expect the same thing to happen now.

This past week, Zerohedge posited that a "bounce" is due at any time. They also believe that non-Tech stocks will lead the rally from this point forward. I agree that an oversold bounce could occur at any time, but the experience of Y2K informs us that it won't last long. When the Dotcom bubble burst, "short duration" cyclicals outperformed growth stocks on a relative basis, but they still declined on an absolute basis. 

In other words, bulls are watching the Tech bubble implode and yet STILL making up excuses to own stocks.

In summary, anyone with amnesia can make up excuses to own stocks right now. But you don't have to just forget 2008 and Y2K, you also have to forget last year when that bear market started the exact same way it's resuming right now. I have yet to read one bullish pundit making year-over-year comparisons. Why? Because if they did they would be forced to conclude that we are heading for the first back to back yearly bear markets since the 1930s. And that their totally fabricated rate pause "bull market" has now reversed back to the breakout level.

So it is that I make a bold prediction. That by the end of October we are challenging the lows from last October as if nothing had even happened for the past year.

Because guess what, nothing did happen.

A COMPLACENT MELTDOWN

The week after Lehman anniversary, and markets are doing what was unexpected of them...

Throughout this tightening cycle, global risk markets have been front-running the end of rate hikes. Each rally has proven to be a false dawn. It has never occurred to bulls that THEY are the reason this tightening cycle can never end. Recently, the oil market has been spiking in 100% correlation with every other global risk market. Which is why, as I said would happen, economists  are now saying that a higher CPI is assured in the coming weeks. Which, will put the Fed back on the tightening path after only one pause. Deja vu of what happened this past June:

"We already know that due to base effects, the roll-off of the CPI is going to lead to very likely inflation going back up"

On a global basis, recall that last week, the ECB was also hawkish. Today, the Bank of England paused for just the first time in almost two years. Next, we are waiting for the BOJ to render their decision tonight (Friday in Japan). 

Also leaning hawkish, Japan is now declaring victory over deflation while being on the cusp of the most deflationary market event since the 1930s.

"We won"

All of this hawkish tightening is finally catching up with markets. 

Or should I say, catching down.

Here we see the S&P Tech index has taken out the key support level from August, but we also see that the Nasdaq VIX still signals complacency.

In this chart we see that the Nasdaq (100) equal weight is below where it was in August, but the oscillator is above where it was in August. Which signals the market is not yet oversold.

Away from Tech, here we see that the Industrials rally was a bull trap.

In summary, the VIX has now closed below the 200 day moving average for 128 trading days in 2023. That is the longest streak of reduced financial anxiety since the END of the financial crisis. The only difference is that back then the VIX was coming down from 100. This time around, the VIX is coming down from the March level which was 30.

Which begs the question - do bulls even know what is the difference between the end of a financial crisis and the beginning?

And the answer is $Everything.

 

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.