Greatest Fraud Ever

In order to believe that this is anything other than the biggest fraud of our lifetimes you have to either be brain dead or a con man. In far too many cases these days - both. Too many people nowadays believe that non-stop lying is perfectly acceptable. The president and his loyal acolytes for example. This lesson will fix that assumption. Permanently...

One year ago in December, the Fed imploded the casino with a quarter point rate hike. The so-called "greatest economy in U.S. history" couldn't handle a 2.5% Fed funds rate. Making it BY FAR the worst economy in U.S. history, for those still keeping track of reality.

FRED: Capacity Utilization

Capacity utilization has been trending down for forty years straight. As underemployment grew rampant:

One year later, the Fed has unwound three quarters of the 2018 rate hikes. Therefore everyone can breathe a sigh of relief. We can stop worrying about the real economy and focus back on simulated prosperity.

The denialist fantasy of the day is that the Fed's successful "mid-cycle adjustment" exactly coincided with the milestone mark for the longest expansion in U.S. history.

This extraordinary feat is either due to unprecedented skill OR unprecedented mass buffoonery.

One thing we know with certainty, is that most people today believe that it's unprecedented skill. Which is proof that we are witnessing unprecedented mass buffoonery. 

The other thing we know with certainty is that the Fed can't afford to be wrong.

"We're at the middle of the cycle"

"Wall Street analysts say the 5G wireless upgrade cycle will benefit Apple (AAPL) and communications chipmakers in a big way starting next year"

"Bank of America also said Apple's 5G iPhone will be a positive catalyst for wireless chipmaker Qualcomm (QCOM)."

Globalization has generated forty years of non-stop deflation and eroding capacity utilization in the developed nations. What I call "underemployment": The continual replacement of good jobs with junk jobs, making up the difference with debt. Along the way, debt has been necessarily fully conflated with "wealth". People believe they are owners when in fact most are merely renters. What we have today is rented prosperity. 

Asset bubbles have been tremendously efficient at transferring wealth from the majority to the few. Be that Bitcoin schemes or S&P 500 index bubbles. The majority rush in at the end and hand off their wealth to a small minority cashing out. We've seen the same thing over and over again in this cycle. 

Under Globalization, the hardest working people get paid the least. And have no upward mobility. And yet still somehow otherwise intelligent people believe this model is "sustainable", despite decades of failure.

That is the unaffordable assumption. 

That and believing Trump is the "saviour".


"I thought with his track record for bankrupting casinos, he could borrow us out of this mess. All it would take is record someone else's money"

The Perfect Shit Storm

We're just blogging for the archaeologists now. The first question they will ask is how did so few zombies see this coming? Who wants to take that question...

We are seeing a culmination of risks at this juncture that is beyond anything we've seen in our lifetimes. As always the burden of truth falls on us minority believers in inconvenient reality:

https://www.policyuncertainty.com/index.html


Average true range (lower pane) captures overnight gap moves, unlike most volatility measurements which are intra-day.

Begin with this end of year liquidity implosion:

ZH: Liquidity Crash Is Imminent


What the Zerohedge article takes pains not to mention is that this problem was due to the chasmic Federal deficit, which is the equivalent of quantitative tightening on a record scale.

“The dramatic increase in Treasury issuance takes liquidity out of the system,” Kaplan said

What the Zerohedge article kind of gets right despite avoiding the root cause is that there is now a massive duration mismatch between Fed liquidity operations and the underlying liquidity constraint. The Fed is buying short-term debt, while the Treasury is issuing RECORD long-term debt.

This is to avoid the "optics" of financing the Trump deficit. 

Federal debt $ rate of change:

Meanwhile, Jamie Dimon, CEO of JP Morgan, has been blaming regulations for the liquidity shortfall, but the Bank for International Settlements isn't buying it. Their assessment is that "too big to fail" U.S. banks are now too much larger to fail:

In other words, let's say the Fed assured everyone that they were fixing the overnight bank liquidity problem, but instead of doing that they bid up revenueless junk stocks while putting everyone into a deep narco coma. 

Would that be a problem?

Another factor never mentioned on right wing media is the fact that insiders have been cashing out for two years straight.

Now at the fastest rate since you know when:

While home gamers are taking record risk

Add in this fake trade deal which has done nothing other than generate a massive short-covering rally. 

And the fact that central banks have lost control over the underlying economy. They are merely controlling the misallocation of capital.

Creating asset rotations that are not based upon anything real.

The important thing is that once again simulated prosperity is at an all time high:

Because another Tech bubble has been assiduously ignored

And because the beloved narco pharma sector is going parabolic. Again.

But the main reason they don't see this coming, is because they are all glued to the circus. 

And the Entertainer-in-Chief

NO WAY OUT

"No Way Out" is a late '1980s movie about a Russian mole who successfully infiltrates the Washington power structure but then gets embroiled in a clusterfuck with no way out...

Kind of like this "good and easy to win" trade war, that is now totally out of control. Trump will be seen as the president whose entire administration was based upon false promises, superficial gestures, and incessant bullshit. Supported by a loyal base not having even slightest clue this is all heading for implosion. To say that history won't be kind, is an asinine understatement. 

"It's all coming together now"

Speaking of no way out, it appears that gamblers haven't given a lot of thought as to what happens AFTER the fake trade deal is reached. The new "best case scenario" for markets in the China trade war is "no deal"...

"The U.S. and China have tried to salvage a potential “phase one” trade agreement, a deal that would involve Chinese purchases of U.S. agriculture first announced in October. The sides have failed to sign a partial deal."


In other words, this year will most likely be a repeat of last year's December G20 "truce", except at a higher level of tariffs. One year of non-stop bullshit to go nowhere. 

So far, markets are muted during this "FOMC Drift" period aka. the "best 24 hours of the year". However, there is reason to believe that the rally into this all-important "trade deal" has reached its terminus.

The primary U.S. beneficiary of the no new tariffs "none deal" is the technology hardware complex including Apple:

"The Dec. 15 deadline for the U.S. to levy a 15 percent tariff on about $160 billion of Chinese goods, including smartphones, laptops, electronics and clothes, is Sunday. The tariffs would be the first direct blow to the tech industry, which has been relatively insulated from the trade dispute."


One can make the case that the "good news" is priced in. This rally is essentially identically to last year's:

"The good news is, no news. Now buy "stocks""

Chinese stocks, identical to last year's fake truce:

Among the sectors that won't appreciate the good news regarding the endless trade war, are the stocks assuming this would all be over by now:

Industrials

Transports

A full year of Dow Theory non-confirmation:

$USDJPY RISK OFF has preceded every selloff in the past two years:

aka. "Overnight risk"

Then there's this bit of good news waiting on Thursday in the UK:

Somehow, what was limit down news for the pound and S&P futures in 2016 at the Brexit vote, is now "good news".

Again, one can make the argument that all of the "good news" is priced in, since it wasn't good news in the first place.

The Reign Of Corruption. Is Ending...

This last melt-up rally has been fueled by the belief that the reign of corruption will continue for another cycle...



And no, they don't see it coming. Because who could warn them, they don't trust anyone who can be trusted...

Last week, the bulls and bears alike got rinsed as the market collapsed Monday and Tuesday and then catapulted higher back to unchanged on the week.

Where it gets interesting is that the stocks leading this last phase of glue sniffing are the two sectors that benefit the most from Elizabeth Warren sliding down the polls: Healthcare and Financials.

It's abundantly clear that the "big money" now betting on a Trump win has rotated massively to these two sectors. Last week's selloff was the biggest since August, and yet it's not even a blip on these charts. 

"Jefferies’ Holz wasn’t necessarily surprised to see the health care ETF’s improved performance over the last two months as Warren’s polling and odds declined over October and November"

Last week's correction was a minor pullback prior to a blowoff top in Financials, led by the the largest U.S. bank:

With respect to time, this top is perfectly symmetrical. Eleven months on the left shoulder and eleven months on the right:

Vol reversal each time from this level in the past 18 months:

Speculators have found a new toy. The riskiest stocks in the market:

Any questions?

Is it a coincidence that Biotechs dominate the list of recent IPOs?

Including the best performing IPO since August?

No.

Which stocks peaked last in (December) 2018?

Healthcare providers

Filled the open gap from last year's crash, now rolling over again:

Overlay narco pharma with Hindenburg Omens

Showing us the three "highs" in social mood

The smoking crack zone: 

As I've said, the market and Trump's approval rating will collapse in lockstep, as everyone realizes the "paradigm shift" is on the way.

And no, they don't see it coming.  

VIXPlosion 2.0: Is Inevitable

Normally, using the word "inevitable" in conjunction with markets, is begging to look like a fool. Be that as it may, perma-bears are like a stopped watch, we only have to be right once. Because we don't expect this gong show to last forever...

Way back in the summer of 2017, Morgan Stanley posited what would happen to the volatility complex if the VIX explodes. A few months later we found out. Inverse volatility ETFs got obliterated. It was a binary trade, now you see it, now you don't. Inverse ETFs can't trade below $0, however, a short position can move past 100% negative margin - say for example when the VIX gains 300% in two days - The ETFs essentially exploded.

  

All of which points to a fundamental flaw in the stock market arising due to the Black Scholes Nobel-prize winning options pricing model. The problem with the model in a nutshell is that it uses historical volatility to price future dated options. Unfortunately, historical (realized) volatility tends to decline precipitously at market tops. 

Assumptions of the Black-Scholes model:

The returns on the underlying are normally distributed.

Nevertheless, this pricing anomaly could be offset IF market participants viewed this risk mis-pricing anomaly appropriately and bid up these options to better represent risk at market tops.  

Enter "skew" which is supposed to offset this underlying pricing anomaly:

"The crash of October 1987 sensitized investors to the potential for stock market crashes and forever changed their view of S&P 500 returns. Investors now realize that S&P 500 tail risk - the risk of outlier returns two or more standard deviations below the mean - is significantly greater than under a lognormal distribution"

Basically saying that risk rises as the market goes up in (over) valuation. Something that a PhD Nobel Prize winner couldn't figure out, because it requires too much commonsense. 

The problem with (put) skew is that it's expensive. It reduces money manager P&L and the premium deterioration only gets worse as the market melts-up. Ironically, just as risk is reaching the highest level. 

Which is why it's just cheaper to assume the Fed has a "safety net" beneath this market aka. the "Fed put":

It gets far worse.

Due to the futures market, and the fact that future dated volatility is generally priced higher than spot volatility - the embedded cost of carry condition known as "contango". As the futures approach maturity they generally lose value. Which makes for a short bet that is highly lucrative until it explodes spectacularly.

Here we see the now record VIX short and the decline in volatility into the recent melt-up. What we also see is that the last two times volatility exploded, the VIX futures position was already substantially unwound ahead of time. However, this time it's not. Why? Because it's the end of the year, and everyone knows the market always goes up in December.

March, 2019:

  

"We are the party that understands how to make money"