GLOBAL CRASH AND EXTREME DEFLATION

In this post I will focus on the commodity markets and the prospects for imminent crash which would be extremely deflationary...

This linked article makes the case that $150/bbl oil is still likely. Let's tackle the bullish argument before we get to the bearish points. The bullish argument is based upon the fact that the global spot oil market is extremely "tight" meaning there is no excess supply. So tight that the market is in backwardation meaning spot prices are higher than future prices, which is extremely unusual. The other part of the bullish argument assumes that Europe will ban Russian oil and therefore global supply will tighten further. These are the exact same arguments that were  used prior to the war. In the months prior to the war, oil was trading in a very wide range between $60 and $90. Volatility was extremely high. When the invasion began, oil sky-rocketed from $100 to $130 in a matter of days. In other words, those who are piled into commodity trades and waiting for the melt-up should be aware that it ALREADY took place. 

On the chart below on the left side we see the post-Crimean war collapse. Followed by the China/Fed policy error collapse. In the middle the 2018 Fed policy error crash followed by pandemic. As we see, realized volatility is at a record. The lower trend-line is -50% lower from high to low.

Does anyone remember August 2014? (see circle with "Crimea"):

“I’ve been surprised at the market and have actually taken a loss on Brent and North Sea crude,” he said. “It seems like the world has accepted war in the Middle East. After a while investors say: ‘OK, that’s the way it’s going to be,’ and production hasn’t been cut off any place.”

That $100 prediction didn't last two weeks. 

So we see this is all very deja vu, nevertheless I will tackle these fundamental arguments:

First off, the tight spot oil market and backwardation are very likely a short-term phenomenon. The futures market is clearly expecting oil to decline. In addition, if there is a global recession, which appears highly likely, demand will fall. At the same time, supply will adjust to the higher prices and reach market at a time when demand is falling. 

We have seen this OVER and OVER again during the past decade. Supply adjusts at the worst possible time. 

This chart shows all of the recent times the oil market was in backwardation meaning the USO ETF (futures-based) was gaining value as it approached the spot (front-month) expiration. Each time USO/WTI rose, the market collapsed:

This chart shows that from a global growth perspective commodities diverged the most from China GDP in 20 years. The last divergence in 2014 resolved to the downside to the surprise of T. Boone Pickens.

The second bullish argument is that soon Europe will ban Russian oil imports. We've heard this many times before. The Germans have recently said that won't happen BEFORE the end of this year. 

"Germany, the continent’s biggest economy, still gets 40 per cent of its gas from Russia, even after cutting its reliance.

It aims to end Russian coal imports this summer, oil imports by the year's end, and be largely independent on gas by 2024, German Economy Minister Robert Habeck said"

Just this week, German bankers warned that cutting off oil and gas imports will cause a deep recession:

Those are the bullish arguments, now here come the bearish ones:

Every commodity shock since 1970 led to a U.S. recession - 1973, 1980, 1990 (Gulf War), 2008. 

Now, both the Fed AND European central banks are in a box. They can't ease policy until they see major economic and financial dislocation. European inflation is running at record levels:

"there are other side-effects from the war, most notably higher energy prices — which are driving up inflation across the bloc. European Central Bank President Christine Lagarde said earlier this week that “three main factors are likely to take inflation higher” going forward"

The global economy cannot AFFORD higher energy prices. Because the current prices are already driving a far too rapid monetary tightening. 

In addition, the dollar is now heading higher into the upcoming FOMC:

Last but not least, the International Energy Agency today announced that they will join the U.S. in releasing oil from their strategic reserves:

"Between the IEA and the United States, 240 million barrels of crude oil is set to be released from the world’s strategic energy stores"

The U.S. release of 180 million barrels will be the equivalent of 1/3rd Russian production for the next six months. However, Russian production is still likely to reach the market. 

Here we see what happened the last time the U.S. released oil from the SPR - it crashed. This time it's far more technically at risk of...

Margin call.

In summary, it's HIGHLY likely we are on the verge of a massive deflationary commodity crash. And when that happens along with the coincident crash of real estate and stocks, everyone will realize that inflation is no longer the problem. 

THE BRICK WALL OF "MORE"

An intelligent life form dropping in from Outer Space would in no way believe the Titanic scale of infantile bullshit being bought and believed at this dire juncture. Only a society in late stage dementia could buy the current ludicrous promises being made about the future. The "solution" to our environmental catastrophe is coming straight at us - it's the brick wall of "More", which was financed for over a decade at 0% and is now facing facing imminent global margin call...

Don't look down.

"U.N. Secretary-General Antonio Guterres said the report by the Intergovernmental Panel on Climate Change revealed “a litany of broken climate promises” by governments and corporations, accusing them of stoking global warming by clinging to harmful fossil fuels.

“It is a file of shame, cataloguing the empty pledges that put us firmly on track toward an unlivable world”

I used to worry about climate change. It was at the top of my list of existential worries. But since the pandemic, I finally realized all of this risk is outside of my span of control. The pandemic caused the largest collapse in carbon output in our lifetimes. It was temporary, but it showed the potential for what can happen when a species is preoccupied solely with personal preservation. After all, the pandemic was relatively innocuous. The U.S. states that had the lowest vaccination rates, the worst healthcare, and non-existent social distancing measures all fared just fine. By any account Alabama should have imploded. But they're still fat and happy. We were warned that our consumption-oriented way of life was ending, so what did we do, we went on a biblical scale consumption binge.

The pandemic and associated lockdown drove a consumption preference from services to durable goods. This consumption shift combined with the supply chain disruptions, caused inventories to become depleted. As a response retailers began double ordering and they abandoned just in time inventory techniques. This accelerated the "hyperinflationary" hysteria that fueled inordinate above-trend demand. As we see below, it was A MASSIVE consumption binge that is only now starting to abate as evidenced by recent declines in trucker freight rates. 

You don't have to be a genius to see that durable goods consumption went above trend. However, in economics there is a concept known as reversion to the mean. Which holds that forays above the trend are followed by forays BELOW the trend. Looking at 2008 as by comparison, it's certainly not hard to believe. 

Meanwhile, during this hyperinflationary consumption orgy, the Fed was  busy inflating their asset bubble to record levels across every risk asset class on the planet. So now they are slamming on the brakes at the fastest rate in history, which we see below via the thirty year mortgage % change. Of course this is all the PERFECT recipe for total economic collapse. And the first order effect will be financial collapse and credit crisis, both of which already started in Q1.

Fortune: 

"The housing market has gone into a savagely unhealthy stage. Everyone should embrace higher rates to cool off this madness and hope inventory rises," Logan Mohtashami, lead analyst at HousingWire, tells Fortune. "Let higher rates do their thing."

Aiding and abetting this disaster in progress, are all of today's financial pundits who are convincing people to ignore all risk. They have succeeded in convincing the masses that they can ride out a global depression, by hiding in stocks. These pundits have universally been fooled into believing that inflation is the biggest long-term problem facing stocks. None are more deluded than the Fed themselves who are now moving into what I call "Stage 2" global meltdown:

“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017-19.”

Below we see via momentum stocks, this was the level of decline at which the Fed pivoted to a dovish stance in 2018. Then in 2019, the Fed cut rates 3 times AND expanded their balance sheet due to the repo market dysfunction.

This time, they're going for FULL meltdown. 

In summary, what's coming is what I call B.S. reduction. There is far too much hot air on this planet right now and most of it is emanating from proven psychopaths. 

What this all points to is hard landing at the zero bound. A non-existent monetary interest rate buffer to offset the fastest demand collapse in world history.

Japanification. 

Which means ZERO economic growth long term. 

And a stock market that can be RENTED, but never OWNED. Because one thing this society will learn the hard way is in the end we are all just renters anyways. 

Q2: THE MAIN EVENT

Q1 was the warm-up. Q2 is the main event. The only thing that saved the markets in Q1 were retail bagholders buying the dip...

First recap Q1 risks:

China stocks and bonds crashed. China's non-manufacturing PMI is at decade lows (outside of the pandemic).

The Russian  economy was obliterated.

European stocks crashed and the German ZEW investor sentiment index saw its fastest collapse in history, including the pandemic. 

The Japanese Yen crashed as the BOJ is determined to keep rates as low as possible to support the imploding economy. 

The global bond market collapsed the most on record.

The U.S. Yield curve inverted, while U.S. consumer sentiment collapsed to decade lows. 

Global commodities crashed up and and then down. Oil is currently in a bear market -25%

Companies warned on profits due to the effects of the Russian/Ukraine war.

The Nasdaq was down -25% at the lows. 

Overall, U.S. markets had their worst quarter in two years.

And amid all of that risk, the Fed fully tapered their balance sheet and raised rates .25%, which sparked a short covering rally and the largest combined breadth thrust in U.S. market history. 

You will note however that S&P 500 breadth went nowhere on the week:

Now for the main event.

In Q2, the Fed plans to double their speed of rate hikes AND to begin reducing their balance sheet. As of this writing, odds of a double (.5%) rate increase in May (4th) - one month away - are 73%. 

My hypothesis is that whereas the first quarter fully ended the Nasdaq growth rally, which had been rolling over for a year...Q2 will fully end the NYSE value stock rally which has also now been rolling over for a year.

Many say that tops are a "process" not an event. I say tops are a process followed by an event. 

Here we see that NYSE breadth (% above 200 dma) has been stair-stepping lower for months. In addition, this is the first time the S&P 500 made a lower high during this breadth divergence.

Mid-pane we see the spike in NYSE lows in January which accompanied the last major plunge lower in stocks.

And we see (bottom) pane the market is overbought:

Banks in particular are warning of recession. Normally they would be rallying during a Fed rate hiking cycle, however they falling due to the yield curve inversion.

In addition, the Energy Sector is now record overbought:

What does Wall Street say about all of this risk?

They admit that this scenario is most like 1973. However, they predict the market will end higher on the year:

"The Goldman team, reiterates it sees the benchmark S&P 500 closing at 4,700 at year-end...a further 4% this year"

The investment bank reckons equities could tumble a further 21% to finish 2022 at 3,600. That would be Goldman's "recession scenario."

"The 2s10s yield curve inverted in 1973, a more comparable period of high inflation...ultimately entered a bear market, falling by 48%"

In other words, the most analogous scenario is not even under consideration.

Cutting through the bullshit, the most LIKELY scenario is that the S&P implodes -50% and then the Fed once again bails out the markets with the market ENDING -20% on the year.

What happens in between however will shake investor confidence to the core and most won't be in the casino in time for bailout.

THE GOLDEN AGE OF FRAUD

This is a society with a lethal case of hubristic dementia. What we are witnessing is a centrally managed collapse in broad daylight. The Sheeple are eagerly following their trusted psychopaths deja vu of 2008...

This society has survivor bias on steroids. No matter how many people go under the bus, the mainstream message remains rinse and repeat. The ultra-wealthy beneficiaries of fraud continue to push the standard narrative at the expense of the silenced majority. 

U.S. policy-makers are trapped in a past that no longer exists. In a stimulus dependent economy, conventional economic models no longer work. The U.S. is now at record economic policy divergence vis-a-vis Japan and China. Those two countries have  already learned to respect deflation, and they are both currently in easing mode. Whereas U.S. policy-makers are operating on the basis of extreme hubris in a torrent of disinformation at the end of the cycle.

In the meantime, today's CEO salesmen are delighted to push the stagflationary hypothesis to record profit. Stagflation is a call to buy everything - durable goods, cars, homes, stocks, cryptos, gold. Which is why after tax corporate profits just grew the most on record, going back to 1948. It's called profiteering from inflation hysteria, also known as "Shock Doctrine". Never let a good crisis go to waste. 

"When taxes are factored in, last year’s corporate profit increases were even more of an outlier. They soared 37% year over year, more than any other time since the Fed began tracking profits in 1948"

Of course to believe today's business pundits, the only "bad" inflation is wage inflation. They are more than happy to turn a blind eye to rampant profiteering. And therein lies their blindspot. They fail to see a consumer on the verge of collapse as prices of EVERYTHING skyrocket at the same time. 

Wages are up 8% versus profits up 37%.

Meaning that none of this end of cycle consumption orgy is the least bit sustainable. Somehow it never occurs to these people that THEY bid up all of these prices. 

It gets far worse on the market side, because this stagflationary hypothesis which was also extant in 2008 has caused an EPIC misallocation of capital. And ironically it's this misallocation of capital that has emboldened the Fed to embark on the fastest and most brutal tightening in history.

In Q1 global bonds experienced their worst selloff in history. Meanwhile, the Fed stress indicator which includes metrics such as credit spreads, credit conditions, and other risk premia, just this week collapsed to the lowest level on RECORD. The divergence versus 2020 and 2008 is asinine:

Here we see gamblers crowding into commodities and Google searches for "stagflation" are the highest since 2008.

Commodities are now the Cathie Wood trade of 2022, meaning DEEP BURIAL. 

"Inflation is rising, so buy commodities"

"Commodities are rising, which means inflation"

Bubble denial is rampant

"It’s highly anomalous for housing prices to rise over 32% in a span of two years, and so the trend is causing some economists to start worrying about a possible bubble"

The growth rates we are now seeing exceed those immediately preceding the Great Financial Crisis"

The article goes on to rationalize away bubble risk by saying that in this era there are no "shady lending practices taking place" unlike last time. What happened after 2008, is that large banks were forbidden from making "risky" loans to marginal borrowers. So a new industry of shadow banking hedge funds sprung up to be the intermediaries between the banks and the low quality borrowers. These intermediary lenders have "pristine" balance sheets because they were created AFTER the 2008 financial crisis. However, they are borrowing bank money as a pass through to subprime borrowers. I know all this because for two years out of business school our middle son worked for one of these companies, which will remain nameless. He said that just before the pandemic, many of his portfolio companies were running out of cash and were about to get cut off from funding. The pandemic saved them by allowing them to borrow MORE money. In other words, in this cycle credit risk is "hidden" behind a layer of obfuscation, but it's still there and banks are still very much exposed.

Another thing the article asserts is that this entire melt-up price move is due to the "mismatch" between supply and demand. We heard the exact same argument during the last bubble. When demand reaches a hyperactive state because everyone assumes prices can only go up, that is not sustainable. In addition, in-process supply is at decade highs:

Today's pundits are sanguine because despite yield curve inversion which is now widely discussed - meaning long-term yields are lower than short-term yields - pundits believe  that recession is at least 12 months away. For that conclusion they are data mining prior recessions.

However, what they are ALL ignoring is the asset crash risk which will pull that timeframe forward by 12 months. 

The impending asset crash will bring recession forward to NOW.

In summary, stonks just ended the worst quarter since March 2020, despite the fact that all risks got bought with both hands:

I call it the "We love rate hikes rally". Which will be followed by the "bidless market collapse". 

THE END OF THE PONZI CYCLE

In this market, when one fraud ends, another begins. Bulls have an insurmountable advantage in the war of words - not only do they have the full weight of deception on their side, but they have an audience of eager accomplices. Meanwhile, us critics of criminality are the enemies of all that's fun in manipulated markets, and hence perma-boring...

Sadly, as they will all learn the hard way, having your head up your own ass is not a Black Swan event. 

There's a scene in the movie Sling Blade where the father (Robert Duvall) excoriates his son (Billy Bob Thornton) for killing the wife/mother for cheating on him. So the son kills the father too.

Here we are - there are no innocents left in these markets. There can be no defense from the supposed unpredictability of a "Black Swan" event as so many have done in previous selloffs. 

This is Q1 in a nutshell:

Highest CPI in 40 years (which led to recession in 1980)

Largest oil shock in 50 years (which caused recession in 1973)

Largest global bond collapse on record

Fastest Fed tightening on record (which preceded EVERY recession)

War in Ukraine

And yet all bought with both hands. The ultimate example of moral hazard. Far too many bailouts have led the masses to run towards risk. 

Which is why markets just made a round-trip of record deception. Institutions sold, while retail investors bought the dip with both hands: 

"Institutional selling has been a feature of U.S. stocks since the start of the year. Macro systemic strategists, including volatility-targeting funds and trend-following commodity-trading advisers, dumped $200 billion of global equities in the first two months of 2022"

Individual investors have purchased a net $39 billion of stocks since January, the largest at this point in at least five years"

Institutional selling at market tops has been a "feature" of every end of cycle bull market in history. And late stage retail bagholding has also been a "feature". It's called distribution - and it means large investors selling stocks to the masses. 

If at the beginning of the year anyone told you those above risks would abide in three months, would anyone believe the "market" would still be near all time highs? Of course not. This is now entirely about misallocation of capital.

Deja vu of last year when the growth stock led deflation trade melted up and imploded spectacularly in Q1 - we just saw the exact same melt-up in the reflation trade, led of course by commodities. The war was the catalyst for the manic blow-off top, however the reflation rally had been gaining steam since the election, vaccine rollout, and global re-opening in late 2020. 

Which is why for the first time in this entire rally since the March 2020 lows, BOTH the NYSE and Nasdaq are now overbought at the same time.

You will note that S&P breadth (top pane) made a large leap up in June 2020 which was accompanied by a record breadth thrust in the NYSE (mid pane). Now we see another surge. Also last year saw the manic melt-up in growth stocks, followed by this echo surge. Anyone can see however, that overall S&P breadth has basically collapsed. 

So what we are witnessing is an end of cycle melt-up in ALL risk assets at the same time, amid daily increasing odds of recession. All accompanied by mass denial that it's the end of the cycle. 

Many pundits have been saying recently that as long as the twos/tens didn't invert that the rest of the yield curve inverting did not mean recession. Well, now they are wrong, because twos and tens just inverted:

"Some analysts say that the Treasury yield curve has been distorted by the Fed's massive bond purchases, which are holding down long-dated yields relative to shorter-dated ones"

[There is only one problem with that hypothesis which is that the Fed is no longer buying bonds]

"Analysts say that the U.S. central bank could use roll-offs from its massive $8.9 trillion bond holdings to help re-steepen the yield curve if it is concerned about the slope and its implications"

This last part is the dumbest thing I've read in a while. The Fed's asset purchases aka. QE inflate markets and increase reflation expectations. The Fed's asset unwind aka. QT does the opposite - it tanks asset markets and it increases deflation expectations. So how could it possibly steepen the yield curve? 

But here is the key takeaway all bulls were waiting for:

"The time delay between an inversion and a recession tends to be, call it anywhere between 12 and 24 months"

Still plenty of time for gambling, so says Wall Street.

Which gets us to the casino:

At today's close, the NDX (not shown) was RECORD overbought going back to 1998. 

Here is the Nasdaq Composite with the Nasdaq breadth oscillator:

As I said above, NYSE breadth is the most overbought since June 2020. Which is the last time bond yields spiked this amount. After that reflation trades (Energy, Financials, Industrials, Transports) imploded. 

Crude has tested the 50 dma twice. If it breaks, next support is -25% lower at the 200 dma. With far greater potential downside if that breaks.

Recession stocks are leading the end of cycle rally.

Go figure.

In summary:

Here we are back at multi-year overbought. The epic risks of the last three months were sold by the smart money institutions who raised cash. Therefore knowing what we know now. Buy or sell?

If you had been bearish and you wish you had been bullish, here's your chance. And if you had been bullish, and wish you were bearish, you can now flip.

BUT, this time EVERYONE knows the risks. 

THE GLOBAL MINSKY MOMENT

Today's policy-makers are racing full speed towards the Minsky meltdown:

"Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate"

The pandemic and its *special* bailout programs allowed companies that were essentially insolvent to rollover their debts. 

One, more, time. 

The Fed missed their window to raise rates, and now they are tightening into a deleveraging phase:

Amnesia or dementia? Of course it will make no difference in the end. Except with respect to the treatment for the impending mass mental health breakdown. 

This society specializes in doubling down on failure. Not only are the Dotcom Tech bubble and 2008 Housing bubbles long forgotten, but every policy mistake in between as well. To believe in this fraud one must forget the 2018 Fed implosion. The 2015 China meltdown. The 2014 oil collapse. And the 1998 Russian default. 

This monster is the SUM TOTAL of all of that, now accelerated by a Fed hellbent on implosion. This tsunami of risk is so large that its gargantuan magnitude is imperceptible in open water and will only be visible when it breaks on shore and obliterates everything in its path. 

The Fed is flooring their rate hike plans while keeping their eyes firmly locked on the rear view mirror of stale and irrelevant data. They are in Thelma & Louise end of cycle policy disaster mode. What hubris they had keeping QE and rates at full throttle for FAR too long, they are now repeating by cutting liquidity FAR too fast. 

Unfortunately, today's pundits squandered their credibility telling everyone for months that the Fed is behind the curve. So now they are trapped by their own consensus of idiots. 

For their part, the sheeple are just massively confused. They are being constantly told to ignore all mounting risk. Which is why social mood is collapsing. Never before have we seen such a large collapse in consumer sentiment BEFORE an asset crash and before Fed rate hikes. One can only imagine what depth of despair awaits this crime scene when asset collapse stirs the profoundly stoned masses from their narcoleptic coma.

"Home prices soared 18.8% through 2021, marking the largest annual gain since at least 1988

Still, for all the wild price gains in the housing market, the landscape doesn't share the risks that emerged during the late-2000s bubble, the Fed governor added"

Below we see the University of Michigan current economic conditions. This is the mid-month (interim) reading, which is the lowest since 2008. In the bottom pane I show the 30 week % change in the 30 year mortgage. Combined we see these are the worst correlated readings since Paul Volcker pulled the plug on inflation in 1980.

Thelma and Louise are about to go through the windshield:

Even before the Russian war in Ukraine, global risks were mounting inexorably. In the meantime, China Evergrande and its derivative dominoes have been spreading throughout the Chinese economy. This week, China is experiencing its biggest COVID lockdown in TWO YEARs. For those who still think they invented this virus, you have mistaken idiocy for a conspiracy.

Russian default is coming around again in early April:

"The last payment was a small investment in credibility, but when Russia has to start writing billion dollar checks it’s a different calculation”

The Fed's implosion of the global bond market is a Black Swan event in broad daylight. It's not only Russia and China that are caught up in this meltdown.

This is the worst quarter for EM dollar bonds since the Russian debt default in 1998:

What does this all have to do with the Casino?

Right now bulls believe there is too much bearish sentiment for stocks to go down. Unfortunately, as we see via the AAII survey, bearish sentiment does not prevent the market from sliding down the slope of hope:

Anyways, sentiment is just opinion polls. Only positioning matters, and positioning of course is FAR too bullish to mark any sort of tradable bottom yet. 

The equity call/put ratio remains near pre-pandemic highs:

In summary, the full force of Wall Street criminality is arrayed against the public right now. They are intentionally being kept in the dark and fed bullshit. As far as the masses are concerned, they wouldn't have it any other way.

No one wants inconvenient facts and data to get in the way of their cherished opinions, or to interfere with their daily subscription bullshit enema.