China Implosion: Lehman Moment

Historians will look back and say that the Corona Virus was the straw that broke the camel's back...

One off events rarely if ever crash markets. Even the Pearl Harbor attack - the quintessential black swan event - was a huge buying opportunity, as the U.S. economy was gearing up for war. 

It's economic conditions and positioning going into the event that really matters:

"Short-term stock market timers, on balance, have been extraordinarily bullish for a couple of months now. Even a few days of such excessive bullishness would normally lead to market weakness, much less a few months of such exuberance. So conditions were ripe for a pullback.

"...there has been no other three-month period since I started compiling the data in 2000 during which the average HSNSI level has been as high as it has been since October"

If it weren’t the coronavirus, in other words, something else would have been the straw breaking the camel’s back"

I 100% agree, however, I would add that the weak global economy in no way supported today's bullish sentiment. Therefore it was a combination of delusion, economic weakness, and now pandemic.

The combination creates the tipping point, similar to Lehman in 2008. The collapse of Bear Stearns, WaMu, CountryWide, Merrill Lynch, Fannie Mae, Freddy Mac, and AIG all preceded Lehman.

It was only a "black swan" event to people who watch South Park all day

"Markets are underestimating the potential fallout of the coronavirus outbreak, which could be a “Lehman-type” moment for the global economy, according to economic research firm AdMacro."

“A huge tranche of the urban population is shut down, a huge tranche of business, so a lot of Chinese companies are just going to have to declare force majeure and shut down orders.”

In a statement issued Monday, Perret-Green said the coronavirus outbreak represented a “Lehman-type moment tipping point” which could “tip the global economy into effective recession.”

I think we all see where I'm going with this:

As much as U.S. gamblers would like to ignore this virus and pretend it's merely a China problem. The fact remains that it's not under control:

"Raymond James health care policy analyst Chris Meekins said he suspects official Chinese statistics on coronavirus infections is “really a fraction” of those who actually have contracted the disease — in part because of the country’s established history of underreporting its public health crises."

“If China’s been reporting about 800 [infections] with 25 deaths, we think the number is probably 10 times that number in China right now because you had a number of misdiagnoses”

There have been two overnight Corona-related gaps in the past week. Each one has a similar retracement pattern as Skynet works overtime to fill the open gap:

Hong Kong returns from lunar New Year holiday tonight (Wednesday HK). Only to find that U.S. gamblers have been selling down their (cross-listed) stocks. I suggest there may be a few margin calls...

When you consider a market primed to implode due to "Fear of Missing Crash" FOMC melt-up mode, it doesn't take too much imagination to figure out how this all ends.

In the meantime, the order of the day has to be "BTFD"

Super Bubble Damage Assessment

In a momentum bubble, fundamentals don't matter. As the bubble diverges from the underlying fundamentals (earnings, economy), only momentum technicals matter: moving averages, trendlines, and support levels. Momentum speculators place stop losses at these key support zones. It's only when momentum breaks to the downside that the diverged fundamentals begin to matter again, as broken support levels reveal the chasmic gap between price and fundamentals...

In an indexed super bubble, fundamentals are of no consideration. According to modern portfolio theory, market index funds are the most "efficient" way to invest, because the vast majority of active managers can't consistently beat the market. However, the drawback to this approach is that inbound money automatically flows to the highest market cap stocks regardless of fundamentals, which is how an index super bubble is created. Traditional value investing goes out the window. At this juncture, the five highest market cap stocks - all Tech companies - now command 18% of the S&P market cap, and 50% of the Nasdaq 100. More importantly, they command a far greater share of the recent market return. The inflows to the index artificially inflate the returns of the largest cap companies. For example, the largest cap stock Apple, doubled over the past year despite no change in the underlying fundamentals.  

These five mega stocks all report earnings over the next five trading days. Apple tonight, Microsoft and Facebook Wednesday, Amazon Thursday, Google Monday.

“A ratio like this is unprecedented, including during the tech bubble"

Where it gets far worse is the fact that investors are crowded into the most over-valued growth stocks even as the economy is slowing down. In Y2K the GDP growth rate was 5%, whereas currently it's 2% despite an asinine 10% combined fiscal and monetary stimulus (annualized). Riding into a recession in the most overowned and overvalued stocks, is a disaster.

The Y2K drawdown in Tech was -80%. In the S&P 500 it was -50%. 

Worse yet, today stock market capitalization relative to GDP is the highest in U.S. history:

Getting back to technicals, here we see the Nasdaq replaying the January 2018 melt-up implosion (VolPlosion 1.0). New highs (lower pane) reached a similar level and overbought status (RSI) similar extreme as well. Each break of the 50 dma (blue line) saw a test of the 200 dma (red line). Which happens to be another -10% below the current level.

That is the best case scenario for bulls:

Emerging Markets are already through the 50 day (blue line)

Crude oil is through the 200 day (red line) and looking similar to October 2018. The one year trendline is now broken:

Outside of Utilities, defensive recession stocks are rolling over as well:

Here we see NYSE breadth rolled over at the exact same level as January 2018:

The crash ratio is pinned to the extreme. Five stocks now holding up the casino...

The wildcard of course is the Fed who meet today and tomorrow. Now that the repo crisis has passed and the much feared end of year liquidity collapse has been avoided, I highly doubt they are in a mood to bail out casino gamblers. After all, they know that in monetizing Trump's deficit, they created this bubble.

"The Federal Reserve’s low interest rates, the perception that there is a high bar to future increases and expansion of its balance sheet are helping to lift asset prices, Federal Reserve Bank of Dallas President Robert Kaplan said.

“All three of those actions are contributing to elevated risk-asset valuations,” Kaplan told Michael McKee in an interview Wednesday on Bloomberg Television. “And I think we ought to be sensitive to that.”

In other words this belief that they will now bail out markets amid the perception that they have created a bubble, is sheer Wall Street fantasy. What someone would believe if they were not hedged. Sadly, on a long enough timeline every moron implodes. 

The bailout will surely come. After the crash.

And that will be too late for the MAGA Kingdom. Existential lying can get them into the Trump bubble, but it can't get them out.

MAX RISK. MAX COMPLACENCY. MAX SUMAMABITCH!!!

This frenzied MAGA circle jerk has created human history's biggest con job, in the quest to destroy democracy. Sadly, it won't work, but not for lack of lying...

Trump squandered all of the fiscal and monetary stimulus creating human history's biggest asset bubble, which is why confidence in his asset bubble is at a Y2K high. You can't make this shit up. 

The average person today has no idea if this is the greatest economy in twenty years. All they know is what they are told constantly - that this is the greatest economy in U.S. history.

No one in the lamestream media openly questions this fraud. Because to rain on today's confidence parade is not conducive to ad-sponsored popularity. This is human history's greatest example of the emperor has no clothes. Every fool afraid to question the standard narrative for fear of feeling stupid.

Today's gamblers are of the belief that it doesn't matter what drives asset prices higher, so long as asset prices keep going higher. They take their cues from a super asset bubble that everything is going just fine, and then they pump more money into the super asset bubble. Not once stopping to think that maybe valuation matters. Zerohedge and Wall Street have done their part to convince everyone that the central bank safety net will prevent any major dislocation. It didn't work in 2008 and it finally kicked in -20% in 2018, but now drawdowns magically won't exceed -5%:

"this means that the Fed's safety net will prevent a major selloff even if, or rather especially if the coronavirus epidemic results in collapse in economic supply chains and economic devastation"


In other words, the Fed now has the ability to not only create record bubbles, but also to prevent them from ever imploding. The only question for today's Idiocracy, is why didn't anyone try this sooner? This is the type of magical thinking and EXTREME moral hazard one would expect at the end of a decade of non-stop monetary bailouts. The idea that no amount of leverage and speculative risk will be punished. Where have we heard this imagined reality before?

Hugh Hendry, China circa December 2014, just prior to market crash:

"The Chinese state is the largest shareholder in the Chinese financial system. That surely makes its ability to stave off a liquidity crisis pretty much limitless"


If you call a -60% drawdown staved off risk, then that's true.


On the topic of China, that country is seeing its worst GDP growth in 30 years, imploded by the trade war, the swine flu, Hong Kong riots and now a pandemic. Which is coming at the worst possible time. Emerging markets are bidless as Chinese markets are not open this week due to the Lunar Holiday:

"Now for the good news"

This fantastical belief that the U.S. is decoupled from the rest of the world's problems, or better yet the beneficiary of Chinese collapse, is the biggest fantasy of all.

Morgan Stanley specifically favors defensive stocks which have been on a tear lately and are now massively overvalued. The fact that recession stocks are now leading doesn't appear to register as a risk.

"Remarkably, the index is on track for a 7% return for January with a week to go, a 200 basis point beat vs. it’s prior best January return since 2000"


The belief that massively overvalued Utilities can support the entire market in a RISK OFF selloff, is a fantasy. The second smallest sector in the entire market. 

All of which means that unforeseen mega implosion can only come as a super shock to this society. No one has equipped them for what is coming. In fact, according to the same Gallup article above, concerns over the economy are now at a RECORD low.

Risks are at a RECORD high. Concerns at a RECORD low.

Any questions?

"Of the three asset crashes I didn't see coming, I rate this one the highest"

VolPlosion 2.0: Endgame

With the conservative media focused solely on blowing smoke up everyone's asses to rig another election, it falls on us realists to explain how the Trump Super Bubble explodes spectacularly without any warning. As I write, the casino just gapped down due to Coronavirus, as global pandemic presents the latest buying opportunity for the MAGA Kingdom...

"JP Morgan analysts think the coronavirus fears will soon blow over and Wall Street will rush back into stocks"

First, step back for a review: The topping process began two years ago this month with the left shoulder melt-up into VolPlosion 1.0. The circumstances abiding this right shoulder melt-up are eerily reminiscent. Here are the similarities and differences:

Similar:
January melt-up: In 2018 was due to the tax cut, now due to the Fed Repo madness which reached its peak at the end of 2019

VolPlosion positioning: Similar levels of vol shorts, and similar flattening of volatility curve as spot VIX rises faster than the futures

FOMC: Fear of missing collapse. Similar level of extreme positioning and speculation ahead of a Fed meeting

Davos confab featuring money managers talking up risk in the new year

Earnings reports/stock buyback blackout window


Here is what is different:
The rest of the world is lagging, the Global Dow has not confirmed the S&P/Dow highs
In the U.S., the new Dow highs are unconfirmed by Banks, Autos, Transports, Energy, Retail, and Industrials ex-defense, small caps, average U.S. stock, and entire economy
Global growth is slowing, deflation is rising
Central banks are maxed out
Existential MAGA circle jerk featuring unprecedented lying ahead of the election



The key difference from an implosion standpoint however is that whereas in 2018, the reflation trade peaked in October, this time around it already peaked in December 2019. Which is why banks and energy stocks sat out the January rally.

Which is why we are about a week ahead on implosion versus last time. 

As I write early Monday morning post-open, gamblers are still in BTFD mode in the U.S.

However, Emerging Markets are getting annihilated

"BTFD"

No sign of capitulation means the selloff is just getting started...

Breadth worst since August, approaching a 90% down day

Momentum has officially reversed

You know you're an optimist when...

Paradigm Shift: People Before Profits

By not impeaching Trump, the Republican party has forever branded itself the party of Donald Trump. Morally, intellectually, and financially bankrupt. After all, he didn't get himself elected...

Politics comes down to profits versus people. For forty years straight, since the 1980 Reagan revolution, profits have been winning the battle. In the event, Democrats were dragged far to the right as well, as economic McCarthyism became the order of the day. The bastardized term "socialism" has become a useful and yet meaningless pejorative to mean anything that would rebalance the economic equation back to people. Wealth inequality itself is not necessarily bad, UNLESS the system turns into a zero sum game, which the U.S. economy devolved into decades ago. 

Under Trump, the GOP made a whiplash U-turn away from their failed policies of free trade and mass immigration. Both of which have been highly accretive to corporate profit. Now they've become the party of trade wars and closed borders. To be sure, not all factions were onboard. Libertarians and many conservative media outlets found their traditional messaging was now deeply out of synch with the new paradigm. Nevertheless, synthetic prosperity via monetized deficits got them onboard as well.

Of course it was all a scam. The populist president has spent half of his first term eliminating healthcare coverage for working people, and the other half taking wealthy inequality back to 1929 levels by plundering the Treasury. Once again, the GOP successfully figured out how to put profits ahead of people via their Manchurian Candidate.

Be that as it may, we now find ourselves at an interesting juncture in which Bernie Sanders is powering ahead in the polls even as Trump maintains his loyal base. A right-left political divergence unprecedented in U.S. history.

This election will be entirely about putting people before profits. One of these candidates has a proven track record for putting people first, and the other has a track record for putting profits first. Trump's biggest asset is also his biggest liability - human history's biggest mega bubble. Ticking away like a time bomb ahead of the election.

It's interesting that the people who got Trump elected under his fake populist message have not even the slightest clue what it will cost them in the end to believe that delusion. They are after all his greatest supporters. Value voters who are cleft of values and can no longer tell fact from fiction. Which was the ultimate Pyrrhic victory of Faux News, to replace fact with opinion, until such a time as the masses would clamor for opinion over fact. A lethal addiction.

The lesson to put people before profits was overdue a decade ago, but for some reason we had to spend another decade pretending the system works, despite the fact that it had already clearly failed. At this late juncture, Trump's masses are living under the delusion that his Twitter bullshit has fixed the underlying problem. The belief that his soothing lies could repair four decades of criminality by taking criminality to new and unthinkable levels.

America's conservative movement is a spent force, ideologically, politically, and economically. Only they don't understand this. Yet. The fact that they are 90% bought into human history's biggest mega bubble will close the gap on that final conceit.

It's too bad no one could warn them. They don't trust anyone who can be trusted.

They are the party of Trump after all. 

The Promise Of The Joker And The Fool

I decided a long time ago that it's better to be a man before your time than a man after your time. Never more so than in an age of mass insanity. Sadly, in the company of fools, there is no strength in numbers. Today's masses are human call options on Donald Trump...

In an echo chamber of like-minded fools it's very easy to lose one's bearings. Those of us cassandras who've warned of history's largest Ponzi scheme were written off a long time ago. Fair enough. What remains of economic punditry are those who made the conscious decision to go ALL IN on Disney markets and otherwise ignore ALL risk.

Case in point, it seems a lifetime ago that Sunday night futures were tanking on the weekend news that Trump had killed the Iranian commander Soleimani. The (Jan. 6th) Monday morning gap open was the bottom for the week as WWIII got bought with both hands. Two days later, Iran counter-attacked the U.S. base and in the pre-market hours Trump signaled "all clear", at which point the rally accelerated. All of January has been a melt-up ignoring all risk.


The impeachment rally was accelerated by the Iran attack.

The hook is set.

They had a chance to get out, but they remained in the casino for the Keynesian bombing of foreigners

They stayed for the implosion of China.

And smash crash 2.0

They stayed for Y2K 2.0 

And global growth collapse

2008 FinancialPlosion

And 1997 currency crisis

All at the same time. 

People will want to know "how did this happen?". Why didn't anyone see this coming. The fact is that EVERYONE saw it coming. However, ignoring bad news and otherwise being a perma-optimist has become a major feature of this society.

Those of us who still recount risk, were long ago written off as permanent cassandras. Which is how risk has grown unchecked amid rampant complacency. In the age of central bank alchemy, we could not compete. Every fool knows that printed money is the secret to effortless wealth. Combined with an election year, it's no surprise that the truth didn't stand a chance.

World economic uncertainty hit a new record high in the fourth quarter of 2019 just as the RISK ON melt-up was accelerating. What can be more bullish than record uncertainty?

https://worlduncertaintyindex.com/


Today's gamblers are attracted to risk like moths to a flame, because to them it means more monetary dopium: 

This manic reach for risk in the face of record uncertainty can only make sense in the context of moral hazard:

mor·al haz·ard
"lack of incentive to guard against risk where one is protected from its consequences"

Economists are well acquainted with this commonsense concept, nevertheless, it's just one more principle they've wholesale abandoned to their newfound belief in printed money. The extreme irony that central bank induced moral hazard eliminated all consideration for moral hazard, leaves a new definition:

"The incentive to forget moral hazard when one's own assets are being bid up by free money" 



I don't know if this Coronavirus is going to spread worldwide and cause epidemic panic, all I know is that there is no way markets are priced for that risk.

China has been imploding off and on for several years now. This could very well be the final nail in the coffin for that country from an economic perspective. The fact that Trump has made an entire platform out of imploding the second largest economy is risk #1 for global investors. Not only thoroughly ignored, but actively embraced as an economic strategy. His success will be measured by global meltdown.  

Make no mistake, we are living in an insane asylum run by total idiots. It's all just part of the scene to write off cassandras as permanent pessimists. Ignoring risk is just part of being "cool" nowadays. Nevertheless, the grasshoppers will soon learn that risks can be delayed temporarily, but not denied forever. 

Based upon today's record complacency and leverage and record risk, you can fully expect this will be a lesson they will never forget.

I've said the exact same thing for over ten years now - This Ponzi scheme can only end extremely badly. I believe a decade was more than enough time for ANYONE to prepare for the inevitable. 

From a Darwinian standpoint, clearly not everyone was meant to see this coming. 

Freedom is entirely wasted on those who don't think for themselves. Which is why the freedom movement has never caught on politically. We live in a society that is brainwashed for conformity from birth. Unfortunately, when you live in a society of fools, conformity can be lethal.

In the end, no one will believe that they sleepwalked into this much risk. Just going with the flow of mass buffoonery.