HAPPY NEW BEAR

2024 is beginning eerily similar to the start of the 2022 bear market. Which is why not even one pundit has made the connection. Looking back at recent history to recall what already happened is fraught with more career risk than merely joining the latest consensus of fools...

New Year, new hangover. So far, the January effect is exerting the reverse impact it has on markets traditionally. It used to mean that stocks were sold in December to harvest tax losses, which led to a bounce in January. Now the January effect refers to the proclivity of investors, gamblers, and bots to corner the stock market in December and drive it to new glue sniffing highs, only to watch it implode in January.

This was now officially the third MASSIVE pump and dump in so many years. It's abundantly clear that investors and pundits are not even remotely aware when they are merely going along for the social mood roller coaster ride. Like market clowns, they are happy on the way up and sad on the way down.

ZERO emotional control.  

Herein lies the problem with this latest pump and dump hangover: Big Cap Tech was the last part of the Tech market to actually reach new highs and they did so while the Fed was RAISING rates, which is highly unusual. Normally Tech/growth stocks outperform in a deflationary environment, while cyclical stocks (Transports, Banks, Retail, Airlines) outperform in a reflationary environment. So it is that we enter 2024 with the deflationary growth sector massively overbought while Wall Street is now wildly trying to guess what sector(s) will take over "leadership" from the largest and by far most over-owned sector of the market. Unfortunately, in a presumed rate cutting deflationary environment, that leaves really only late cyclicals such as Energy which is just starting to outperform even as oil collapses, and of course healthcare/pharma aka. recession stocks.

Which happen to be FOUR years overbought on new year momentum. All the way back to the pandemonium.

It's now a consensus on Wall Street that Tech stocks are dead and leadership will soon emerge from other sectors. Once Cramer jumps on board you have to know that every hedge fund is already ALL IN this new theory:

Another headline from this week:

Then there's this gem in the text:

“Crowding risk in the leaders of 2023 has been cited by many (including ourselves) as a key risk in 2024,” Bank of America Corp. strategists led by Savita Subramanian wrote in a note. A “January rout in megacap tech is now consensus.”

How can it be BOTH a consensus rout AND a crowded trade? Do these money managers believe their own positions are about to implode? Maybe they're trapped by the 2023 end of year pump and dump and they just realized it when they filled out the BofA survey.

Q: Are you trapped in a consensus of idiots?

A: Holy fuck!

It's times like these when it's useful to time travel back two years to the last time the January effect imploded Tech stocks amid rising bond yields and see what people were saying back then about the prospects for a broadening rally:

Two years ago:

January 5th, 2022:

"Thanks to the new-year bond selloff, Wall Street pros are doubling down on a big stock call for 2022: The leadership of high-growth tech darlings is no more"

And they were right. There was a rotation out of Tech into a  broad-based bear market. See first chart above.  

 

Finally, here is where it gets interesting:  way back in Y2K, two years after the average stock peaked, Big Cap Tech peaked and exploded.

And yes, as we see below the broader market imploded as well. 

Very much to the surprise of everyone on Wall Street. 

2024: YEAR OF THE HANGOVER

Most pundits have already forgotten that the last major rally ENDED with that year's Santa Claus rally - 2021. They are too busy telling people this is the last chance to get IN, to realize it may once again be the last chance to get OUT...

I don't know exactly what combination of factors keeps stocks magically pinned to all time highs at this time of year, but we can be sure it's some quasi-criminal combination of low volume, low volatility, option market manipulation, and most importantly investors wanting to avoid taxes. That's right, all of the big winning stocks of 2023 - meaning mega cap Tech - will be held right up until the end of December and then dumped in January, so that those massive 95% gains are not taxed for another full year. That is the major factor holding this market higher, for now and it portends badly for a hyper-speculative market.

Meanwhile, this past week, we got news that housing prices accelerated in October to their fastest pace in 2023. Which adds  fuel to the ongoing policy disaster that I discussed in my last post. Real estate gamblers are betting that as soon as rates come down, there will be a mad rush to buy real estate. However, history informs us that the opposite occurs. The chart below clearly shows that home prices are positively correlated to interest rates, meaning they are pro-cyclical and massively levered to the ECONOMY, not deflation. In addition, consider what home prices were doing at this point in the last cycle when rates were falling - home prices were already going DOWN. However, even though the Fed has now raised rates an equivalent amount as 2007, home prices are still going up while the economy is already rolling over. Meaning, that housing liabilities are increasing even as the economy is weakening.

From the stock market perspective, the last time the stock market got the totally wrong message from a Fed pivot was Q4 2007. Which happened to be the market top, as we see below. 

 

Many pundits are saying the Fed is being political by not raising rates now due to the oncoming election in 2024. Which is reminiscent of Trump when he said we are in a big, fat, ugly bubble back in September 2016. Little did he know, the bubble would continue growing for ANOTHER seven years after that. Which in today's way of thinking means it has no possible end date. It's human history's first ever perpetual asset bubble. 

The real bet isn't whether markets are overbought and overdue for a correction - even bulls are hoping for a pullback so they can add leverage - the REAL question is whether or not central banks still have control over the monster they've created.

The real answer is unconditionally, no - which is the opposite of what almost every investment advisor, pundit and media mannequin in the business world is saying right now. Central banks no longer have the means by which to resuscitate the economy when their super bubble explodes. Monetary policy alone will not be sufficient. Which means that in 2024 politics will determine the state of the economy, and we are entering a period of MAXIMUM political acrimony. One in which neither party will want to be seen as ceding ground to the other party. One in which neither party will want to be seen as bailing out the wealthy. Which means the Fed can "monetize" debt as much as they want, but if there is no big stimulus to monetize then it will make no difference. Then there is the unresolved matter of the insolvent FDIC, as a result of the 2023 bailout. Which is already long forgotten.

We are now at the point in the super cycle when the Idiocracy finally realizes that they are NOT in control and they were never in control in the first place. They were merely making convenient assumptions while the level of unsustainable liabilities reached proportions that were finally beyond central bank control. 

They are the children of the bailout. And they have to learn once and for all that printed money is not the secret to effortless wealth. And they will all say, "who knew?".

Lastly, as far as the Santa Pause rally goes, this is now officially the longest daily overbought streak on record going back to 1970 (life of data).

Got low rates?

2023: THE LAST PUMP AND DUMP

Instead of joining every other pundit in predicting what won't happen in 2024, I would like to point out that 2023 is not over just yet...

This has been the largest % weekly gain to a 52 week high since 1998. The S&P 500 has been up 8 weeks in a row, counting this week. And yet we just learned that fund managers are the most bullish since the start of 2022. Which happens to be the last time the market peaked out and crashed from this exact same level. Can anyone explain why it is that media pundits can't check the charts to see what happened the last time fund managers were this bullish? Instead, they do the opposite and write as if it's a bullish fact that so many "experts" are bullish. 

Ok, so instead of explaining to bulls the difference between a hard landing and a soft landing - which would be gratuitous on my part - I will instead focus on the precarious technical indicators that attend this current market.

The market is now overbought on every metric - momentum, breadth, and volume. Which is why I am calling this the "Santa Pause" rally. We are now to believe that this record overbought condition will not only continue next week, but into 2024 as well. 

"Bank of America also found that 66% of the fund managers it polled expect the world economy to experience a so-called "soft landing" in 2024"

"The bank's own head of US equity strategy is expecting stocks to perform well in 2024"

Herein lies the problem - this is the FIRST time the Fed has "pivoted" to a dovish stance with the market already fully overbought. Prior to last week's FOMC, the market was already 6 weeks straight-line overbought because the market has been front-running this Fed pivot for ALL of 2023. However, when the FOMC turned inexplicably dovish, the market exploded higher to an even more overbought stance. At the beginning of December, Powell had called talk of rate cuts "premature". But then two weeks later, the FOMC put three rate cuts on the table for 2024. It's pure Idiocracy. 

What this means is that the Fed has over-lubricated an already over-heated market. It's unclear why they would do such a thing, except to continue their unbroken streak of policy errors which began in 2021 by saying they would be "lower for longer". And then in 2022 they raised rates by the most since 2007 while keeping their balance sheet still almost 2x pre-pandemic. And then now, with this ill-fated dovish "pivot".

All of which gets us back to the pre-pandemic conditions in which the Fed had already pivoted and was using QE to address the "repo" crisis. By the end of 2019, they had cut rates three times in what they called a "mid-cycle adjustment", which came ten years into the longest cycle in U.S. history. So, risk assets soared and yield spreads collapsed, while the average stock went nowhere. And then we all know what happened next.

Astute observers will note that pundits were calling it a "soft landing" in late 2019. Not as soft as this one apparently.

In addition to the S&P 500 shown above, none of the other major indices have joined the price-weighted Dow Industrials at new all time highs. Here we see the Nasdaq Composite is still far below its all time high while the volume oscillator is now rolling over.

Yesterday, markets experienced a day of extreme selling, which came as a shock to bulls who are not aware such a thing existed. Pundits were scratching their head and calling it "inexplicable" selling. However, a brief glance at the NYSE volume oscillator shows that the market has tanked every time from this level during this past year.

It's only inexplicable if you are Stevie Wonder.

Here is another crazy factoid, the FANG+ are now up 95% year-to-date. And yet the majority of fund managers remain long Tech stocks for 2024:

"The most crowded trades include being long on the 'Magnificent Seven' and short on China stocks"

In summary, the REAL *smart* money trade is to fade everything Wall Street is doing right now. 

And instead bet that Wall Street will explode in 2024 with extreme dislocation and the hardest landing since 1930.

At the latest. 

And know one thing with absolute certainty - they don't see it coming. 

 

ALL IN COLLAPSE

Once upon a time the Fed said they would cut interest rates. So Wall Street went ALL IN…

What we have learned since 2008 is that monetary policy does not have unlimited power over markets, but it does have unlimited power over the imagination of 8 billion gamblers. Therefore, until such time as the last fool is found, it can indeed appear as if monetary policy is unlimited. If the powers of monetary policy were unlimited, then China which has been easing all of 2023 would NOT have the weakest stock market in the world right now. And Japan which has been easing for the better part of three decades would not STILL be below the 1990 high.

Therefore, it's ironic that Japan is finally moving away from negative interest rates which have been in place since 2007, which will put to test my theory that monetary divergence - now going in the exact opposite direction - will cause the $3 trillion Yen carry trade which accumulated while U.S. rates were rising, to explode as it did in 1998.

Ignored Risk: Exhibit A.

In the U.S., the belief that only monetary policy matters and all risks should be ignored grew out of the 2008 bailout and the attendant ten year span of 0% interest rates. That faith in monetary policy was reinforced again during the pandemic. Central banks have magical powers to bail everyone out. Investors seem to forget that both of those events came along with explicit government assurances that all bank depositors  - insured or uninsured - would be made 100% whole. Something that the FDIC itself has already stated would be TOO EXPENSIVE to repeat in the future:

FDIC (May, 2023): Options for Deposit Insurance Reform

"Following the 2008–2013 banking crisis, the reliance by the U.S. banking system on uninsured deposits grew dramatically, both in dollar volume and as a proportion of overall deposit funding.20 From year-end 2009 through year-end 2022, uninsured domestic deposits at FDIC-institutions increased at an annualized rate of 9.8 percent, from $2.3 trillion to $7.7 trillion"

Ignored Risk: Exhibit B

Banks are now three wave corrective over the Spring (Feb '23) bank run. Shorts have covered on the belief that the worst is over. When in fact the worst has not even started yet. 

Another key risk factor that giddy investors seem to forget is that home prices usually decline when interest rates are coming down. Whether that is correlation or causation is up for debate. However, clearly declining interest rates attend a weakening economy and the housing market is highly sensitive to overall economic activity.

Ignored Risk: Exhibit C.

As a fourth risk I would point out that this is the SECOND Dow Theory Non-confirmation that investors are buying in three years. And we all know how the last one worked out. Essentially what happened was that investors became more bullish over the course of 2019 as the Fed moved from pivot to full on easing. Which is why when the pandemic struck, they were maximum levered to risk. 

The 2024 risks that are "invisible" now to bulls are invisible as the pandemic was in late 2019.

Ignored Risk: Exhibit D. Dow Theory confirmation requires that the Dow Transports make a new high to confirm the Dow Industrials new high. As we see, the Transports are a long way from confirming the Dow. In addition, the Nasdaq, S&P 500 and of course Russell 2000 have not confirmed the Dow either. As a reminder, the Dow is the ONLY price weighted index, so it is not representative of market cap. 

In summary, if you think that this divergence between investor fantasy and global reality has a happy ending in 2024, then indeed ignore all risk and go ALL IN. And then you will realize the hard way that in an Idiocracy, there is no strength in numbers.

"Check out the performance of the “Magnificent Seven” compared to the rest of the S&P 500 Index since the beginning of the year...the Mag 7 has done +71%, and the rest of the S&P 500 stocks have managed just 6%!"

These levels of concentration are unlike anything we’ve seen before — even the late ‘90s dot-com bubble doesn’t compare"

And it’s all happening because investors from all over the world keep chasing the same Big Tech higher and higher"

Ignored Risk: Exhibit E and F.

THE WINTER OF DISCONTENT

2023 is coming to a close amid giddy optimism in markets. Pretty much every piece of junk that got bought in the past three years of pandemic asset bubble, is now hot again...

Dec. 1st, 2023:

Yahoo Finance:

"Stocks that got slammed amid fears of higher-for-longer interest rates caught a second wind during the roaring November market rally. The S&P regional bank index (KRE) rose more than 16% during the month...Cathie Wood's flagship Ark Innovation ETF (ARKK) gained more than 34%. Meme stocks are soaring too"

"Traders have decided that even though it’s still earning nearly 5%, cash is trash compared to quick profits in a wide variety of risk assets," Interactive Brokers chief strategist Steve Sosnick wrote in a research note on Wednesday"

Sosnick adds that the root of what he described as a fear of missing out, or "FOMO" rally, is the "expectation that rates will be coming down, and that is indeed a solid reason for a rise in risk assets."

This article came out on the exact same day that Powell warned that interest rates are not coming down any time soon:

Dec. 1st, 2023:

This is all very deja vu, because one year ago, stocks were rallying on the prospect of imminent rate cuts. Back then as well, the Fed was trying to tamp down expectations, but clearly they didn't do a good job of it because here we see that for over a year the Dow has been rising inversely to National Financial Conditions, since the lows of October 2022. Risk markets are unwinding the Fed's tightening.

Which means that the Fed is nowhere near cutting interest rates. 

Nowhere is there more interest rate cut FOMO than there is in the housing market. Recently we learned that pending home sales have collapsed to multi-decade lows, but homebuilder stocks are at all time highs and leading the market. This week, Toll Brothers reported that their unit home sales collapsed -27% year over year and yet the stock went vertical. They "beat" Wall Street's negative expectations. 

It's abject criminality on an epic scale. 

 

If there is a recession in 2024 - which most economists are now predicting - then it will be the first back-to-back recession since the early 1980s. A mere two years between recessions. Normally, in a recession there is de-leveraging of debt, however, during the pandemic initially there was de-leveraging, but central banks created such an instantly massive asset bubble that by the end  of the pandemic there was a massive RE-leveraging of debt.  Which is what we see in the graph below. That has never happened before in U.S. history.

Which is why we are now facing a second recession, but this time at astronomical levels of debt. And yet today's pundits are telling people to buy stocks ahead of this recession. It's fucking ridiculous. 

  

This week, Moody's downgraded China's sovereign debt from stable to negative. Which is the EXACT opposite of what happened a year ago when everyone widely expected China to lead the world in economic growth in 2023. 

And yet we see below via the ISEE call/put ratio that speculators are MORE euphoric going into 2024 than they were going into 2023. What it comes down to is that investors have been hearing about the China economic implosion for so long that they no longer fear it. Even when it's happening in real time. Why? Because they have been convinced over and over again since 2008 that they will always get bailed out by central banks.

But remind me again which is the only major central bank right now that's easing?

China. And they have the worst performing stock market in the world. A harbinger of what's coming for every other risk asset market IN THE WORLD. 

BUYING THE COLLAPSE

The bull case and the bear case for 2024 are now the same - lower interest rates. Bulls are convinced that low rates are good for stocks - and they are...Unfortunately, the record clearly shows that rate cuts are NOT good for stocks.

It took decades to reach this juncture at which bulls are now praying for a weak economy. The divergence between the economy and stocks began in the early 1980s with the implementation of free trade and mass immigration, but it was kicked off by Fed chair Paul Volcker who famously broke the back of inflation by pushing the economy into a double recession at 10% mass unemployment. Those events set-off a multi-decade deflationary era which has been incredibly beneficial to markets at the expense of middle class labor. Another unhealthy predilection that started in the 1980s was this market addiction to monetary policy which started in 1987 with Alan Greenspan. Over the course of the past three decades, each time the economy weakens, the Fed has arrived with greater and greater monetary bailout policy. Filed under moral hazard biblical scale.

Therefore it can come as no surprise that for 2024 Wall Street expects a recession AND higher stock prices. A brief glance at the chart above will show that none of the most recent recessions led to higher stock prices initially. It took quite a bit of pain first: -50% in 2001, -55% in 2008, -35% in the case of the pandemic.

I didn't read that article, because I'm not interested in data mining ancient history to goal-seek stock bulls' requisite answer. We can see from my own chart above that this type of  fool's errand is fraught with peril. Granted, the pandemic bear market was the shortest in history which is why it's an even greater fool's errand to believe that it was anything more than a speed bump in an aging bull market.

On a monthly chart, the pandemic "bear market" barely appears.

We were also informed this week that home prices have surprisingly reached a new all time high despite the Fed rate hikes. I'm sure the Fed was surprised to read that as well.  It clearly shows that their rate hikes are not reaching asset markets. 

Therefore we are now to believe that the Tech / housing bubble will continue to grow inexorably whether the Fed tightens OR the economy implodes.

Unfortunately for bulls, as I showed on Twitter this past week, delinquencies (adjusted for inflation) have now reached the same level as 2008. Except, the difference is that back then interest rates and home prices had ALREADY peaked and were coming down. Whereas now, neither is coming down yet. 

More importantly, we see that delinquencies continued to rise long after home prices began to fall.

In summary, what we are witnessing is the largest policy error in market history. Bought with both hands by complacent bulls at the behest of known con men.

How this was always going to end. 

BLACK FRIDAY

The day after Thanksgiving is named "Black Friday" because historically it was the first day of the year that retailers were "in the black" financially. Meaning, turning a profit. Almost an entire year of sales comes down to the last five weeks of the year. One could say the same about this market - an entire year of panic buying "stocks" and the whole year is now in the balance of these next five weeks...

To begin, let's review the year to date, using the chart above as reference. The equal weight shows that the YTD break-even has been a key pivot point for stocks all year long. The year began with tremendous optimism towards China. The country that infected the world with pandemic was finally emerging from the pandemic by exiting all lockdown protocols. Chinese stocks, led by Hong Kong, vaulted off of the November 2022 lows and reached their peak of 2023 at the end of January 2023, as marked "China rally" above. That was it. The high of the year for Chinese stocks. The next thing you know, China RISK OFF imploded global markets and sparked a U.S. bank run.

As we all know, several large regional banks failed at the March low, but the FDIC found buyers for the largest ones and fully bailed out the smaller banks. Crisis solved. However, in May of this year, the FDIC wrote a memorandum stating that the FDIC Deposit Insurance Fund (DIF) is at risk of depletion, and they will not be able to fully bail out uninsured depositors (aka. > $250k per account) going forward. Their proposal is to bailout above the $250k limit ONLY if the deposit is a working capital  aka. "payroll" bank account for a business. What they call "targeted" coverage. Nevertheless, the main takeaway is that of course nothing has changed since the Spring bank run. Except that risk has increased exponentially. 

Here are some highlights of their report, which you can read yourself:

"Trends in uninsured deposits have increased the exposure of the banking system to bank runs"

"Technological changes may increase the risk of bank runs. The speed with which information, or misinformation, is disseminated and the speed with which depositors can withdraw funds in response to information may contribute to faster, and more costly, bank runs"

"From year-end 2009 through year-end 2022, uninsured domestic deposits at FDIC-institutions increased at an annualized rate of 9.8 percent, from $2.3 trillion to $7.7 trillion"

For comparison, the Deposit Insurance Fund equals $117 billion. 

Notably, the report only casually mentions the ongoing threat of massive bank unrealized losses due to the bond market collapse. During the pandemic, banks had a massive inflow of new deposits arising from the various stimulus programs, so they did the easiest thing with the money which was buy long-term bonds. Since interest rates have exploded higher, those bond portfolio values have collapsed, leaving a ticking time bomb on bank balance sheets, as you can see below:

FDIC Quarterly Report, June 2023:

 

Going back to the first chart above, the second rally of the year was driven of course by the Artificial Intelligence Tech blow-off top. We can view the Tech rally from the perspective of a three year topping process that began back in early 2021 with the peak of the "Work from home"/ ARK ETF / IPO SPAC junk. The second peak was in late 2021, at Thanksgiving,  which is something I point out on Twitter all the time because the Nasdaq all time high was in the days prior to Thanksgiving. 

Interestingly, the 8 day moving average of the ISEE call/put index this week, was the highest since the Nasdaq all time high.

Here is where it all comes together:

AI leader Nvidia released their earnings on Tuesday night but the stock imploded on Wednesday. Their earnings and sales handily "beat" expectations, including a 200% year over year increase in sales. The problem is that the stock is already up 400% year over year. The second problem is that going forward, they forecast much weaker sales out of China (which accounts for 25% of their total revenue), due to the recently-imposed U.S. semiconductor export restrictions.

In other words the leading sector and the one that made new highs this fourth quarter is about to experience a drop in sales. Because what Nvidia didn't say - and no Wall Street analyst thought to mention - is that Nvidia will not be alone in being affected by export restrictions to China. 

This is going to affect ALL U.S. semiconductor companies.

The article of the week has to be this one explaining that hedge funds are now record crowded into Tech stocks, with TWICE the weight in Tech that they had at the beginning of the year:

"Megacap growth and technology stocks accounted for 13% of the aggregate hedge fund long portfolio, twice their weight at the start of 2023"

However, as popular positions gain momentum, there is a growing risk of crowding, which reached its highest in the 22 years since Goldman started tracking the funds"

This week through Wednesday caps Tech's largest four week run % gain to a new all time high since Y2K.

What does this have to do with banks?

As the Nasdaq oscillator shows, they're as overbought as they were at the beginning of this year when China risk off imploded global markets. 

In summary, the lesson learned is don't ignore what's going on outside of your own little world, because the FDIC has already said that next time there's not enough bailout to go around.