Heads In The Cloud aka. Waterfall Crash In Real-Time

Gamblers are BTFD on news of the overnight China implosion. This is their last chance to get in, before meltdown. And they will not be denied the opportunity...

The unfounded contortions currently employed to rationalize this mega Tech bubble are pushing the limits of fraud, even by today's Trumptopian standards. Social mood is reaching manic stupid heights of willful gullibility. The only thing that has kept this gong show from exploding already, are parabolic Tech moonshots by trillion dollar companies. Social mood will be the final arbiter of insanity as manic morphs to panic...

"It worked":

"People were talking about a bubble. I said what bubble?"

On Friday this past week, Amazon rejoined the $1 trillion market cap club, which now includes Apple, Microsoft, and Google. However, by the end of the day, Amazon's market cap was back under $1t. A Key reversal of fortune.

Zerohedge just gave us the litany of Goldman Sachs excuses for why "this time it's different".

"Kostin, who has a 3,400 year-end price target understandably does everything in its power to mitigate fears that the Nasdaq is about to experience a second catastrophic plunge"

First off, Goldman completely ignores the market cap concentration risk, which I call the "crash ratio". The fact that five stocks now comprise 50% of the Nasdaq 100 and 18% of the S&P 500.

In addition, they focus on today's lower valuation ratios (P/E multiples), by totally ignoring the fact that profits as a % of GDP are almost 3x higher now than they were twenty years ago. In other words, on a cyclically adjusted normalized basis, today's profits are in no way sustainable.

Worse yet, they ignore the past year's multiple expansion which occurred solely due to the Fed lowering interest rates into a slowing economy. In other words, they ignore the deflationary/recessionary backdrop. Which means that today's forward profit estimates have the veracity of a Magic 8 ball. Recession concerns are driving valuations to extreme levels in the reflexive belief of lower interest rates.  

Which means that whereas in Y2K, that bubble burst was not coincident with recession, this bubble burst IS coincident with recession.

As this article describes, all four of the largest companies have converged on the EXACT same business model: Cloud computing. Basically the migration of decentralized enterprise computing to factory-style centralized mass processing. One can make the case that this not new business model is "priced in". 

"Apple, Amazon, Microsoft and Google parent Alphabet have all looked to services and cloud businesses for growth in the past couple of years. In turn, the market has rewarded the companies richly, as each of the tech companies’ market values have climbed to record levels."


The question on the table is how much is social mood driving the market versus the market driving social mood. Now trapped in some sort of manic melt-up which has pushed consumer confidence to a twenty year high. At the worst possible time. 

Below we see the weekly Nasdaq RSI (top pane) which is more overbought than it was two years ago. In the main panel I hid the Nasdaq and instead overlaid the world ex-U.S. to show the three wave social mood pattern. In other words, despite driving to new highs, the Nasdaq is following the same ebb and flow of risk appetite as the rest of the world. Which is the long way of saying we are now at third wave down in social mood:

This is the right shoulder crack high, which will be far more lethal than the left shoulder and head:

Overnight, despite the PBOC interventions, Chinese markets were a bloodbath. As it was in 2015, efforts by the government to prevent meltdown did not work:

"The wipeout came even as the central bank made its biggest cash injection to the financial system since 2004 and despite apparent regulatory moves to curb selling."


Here in the U.S., the overnight futures found their footing just above the 50 day moving average. The key Maginot Line for accelerated meltdown. This pattern so far is identical to the one in 2018. The market opened green on the Monday two years ago. The close will be more interesting.


As over-valued Tech stocks make their final moonshots, economic cyclicals have been going bidless:

Nasdaq down volume is already the highest since the last major selloffs:

Google is the last of the mega cap Techs to report, today after the close:

This is their last chance to get in before meltdown.

The Fool, Or The Ones That Follow?

Faith in Trump indicates that America's biggest problem by far, is the self-imploding education deficit. Most evident in today's CEOs. The rest of the world knows, you never go FULL Donny...

The bullshit is flowing like a river, because today's gamblers are heavily positioned for ROI: Return on Imagination. This week, faith in simulated prosperity will be tested to the maximum:

Sadly, I noticed that NorthmanTrader has lost all conviction. One more quasi-bear has capitulated to Disney markets:

"Be clear: I’m not calling for a top here, that’s a fool’s errand. After all so far all we’ve seen is a minor pullback off of very overbought conditions. Heck, tech hasn’t even begun to correct yet."


Got that? It's a fool's errand to believe that Trump's bigger, fatter, uglier bubble will end any time soon. Apparently, it's the wise man who bets Trump's mega bubble will grow to the sky. This from a bearish blogger. The Wall Street river of crap, is far worse. 

"Tech hasn't even begun to correct yet"

I suggest that's not true. The leading sector for the past year is in hard reversal of fortune:

It's a fool's errand to try to be a two-way trader in a one-way market. This one-way trip was only about believing that Trump's ever-expanding bullshit bubble would grow to NeverNeverLand, OR believing it would crash with biblical dislocation. There was never any middle ground. Which is why today's traders lack all conviction, while Trump's true believers are massively over-positioned for Return On Imagination.

Of fools or the ones that follow, consider that Trump ran on a platform of Wall Street reform, paying down the debt, and monetary sanity. That's what he promised in 2016.  Subsequently, his major accomplishment has been to invert ALL of those promises and instead weaponize record stimulus and record Wall Street complicity in order to generate human history's largest bubble. The exact opposite of what he promised. Something no Democrat could ever get away with. Why? Because Republicans are still the self-proclaimed party of business. Today's business leaders still trust Trump. The same way they trusted Herbert Hoover in 1929 and GW Bush in 2008.

The markets haven't even opened yet, and the central bank bailouts are already in motion. Beginning of course in China. This week will be a very good test of faith in central banks.

"It is the first time that the central bank has made such an announcement and also marks the largest single-day reverse repo operation it has ever conducted.


According to Reuters calculations, 1.05 trillion yuan (US$151 billion) worth of reverse repos are set to mature on Monday, meaning that 150 billion yuan in net cash will be injected."


In other words 85% of the stimulus is merely to roll over existing repos. I'm not sure if that is going to work.

Picture a scenario in which global investors begin to lose confidence in central banks. At that point, all hell will break loose. My worst case scenario wouldn't be bad enough if that happens. Markets will break. The same way China's stock market broke in 2015, amid non-stop PBOC bailouts. Shut down. 

Which is the point of this post, gamblers walked into this buzzsaw way overloaded on ROI.

Here we see via the options markets, gamblers starting to take down their impeachment euphoria:

Active managers deja vu of the October 2018 top:

The third Rydex asset positioning reversal from extreme bullish levels:

Crude oil speculative bets, still massively positive (not shown).

Despite oil at critical support:

Skew peaked in December, black swan bets were falling into the black swan event:

Volatility speculators still have more than DOUBLE the short position (lower pane) they had two years ago prior to VixPlosion:

Once the 50 day breaks, it's another 6% to the 200 day.

The bailout King said the same thing in 2018, right before the crash:

It can come as no surprise that the bullshit is flowing like a river. Gamblers were caught totally off guard and out of position.

Which means that central banks have their work cut out for them. Because if they fail to levitate every risk asset from EM currencies to oil to USDJPY carry trades etc. 100% correlated global markets will go limit down. And stay down. 

This unprecedented super bubble was only made possible by the double standard under which Janet Yellen was fired for perceived easy monetary policy under Obama, while Jerome Powell was threatened to be fired if he didn't ease on a record scale for Trump.

Because every fool knows that only Republicans are allowed to make big, fat, ugly bubbles.

Explode.

Blue Monday

Buffoonish over-confidence defines the reign of Trump and buffoonish over-confidence is what will end it. Today's morons paid for this vacation from reality with their own retirement. I hope it was worth it...

As the world's most realistic, aka. "bearish" blogger, the burden of truth remains on me to document history in real-time. As always, I leave it to the MAGA circle jerk to explain why pandemic is a buying opportunity in Disney markets. Those readers who long ago wrote me off as too bearish, will be the ones filling their drawers during this dislocation. As always, I am massively long brick shitting volatility. We all have a role to play in the MAGA Kingdom...

The worst crashes in U.S. history were all on a Monday. This is not a prediction, merely an observation. In this post, I will review all of the major crashes and discuss similarities and differences to this super crash scenario. I would be remiss if I did not reiterate that this is BY FAR the most lethal set-up in U.S. history. Never before has there been this wide a gap between fantasy and reality. And for that we can thank the supreme abuser of fiscal and monetary stimulus gimmicks to rig elections.

The MAGA Kingdom is Disney markets on steroids:

"The enlightened are convinced that they understand everything which has become illusory about today's markets...They know that today's central bankers are spinning a falsehood of recovery; they steadfastly refuse to be suckered in by the euphoria of a monetary boom...Everyone else, currently drugged by the virtual simulation of prosperity and its acolyte QE, will be destroyed"

First off, as I said at the top, Monday was the biggest percent down day in October 1929 and October 1987, August 2015, and February 2018. Which is why the former three events are called "Black Monday":

"Black Monday is the name given to stock market crashes that occurred on three different Mondays. They are October 19, 1987; October 28, 1929; and the market correction of August 24, 2015."

The last time stocks crashed on a Monday was two years ago February 5th, 2018 aka. VixPlosion 1.0. As I described in detail on Thursday, the set-up is essentially identical. Same timeframe, same melt-up overbought condition, same post-FOMC short-covering. However, this time markets are much weaker. The global economy is much weaker as well. 

The average global stock is already in third wave down.

In other words, history will say that Black Monday 2018 WAS the beginning of a global sell-off. Wave "1" down. Regardless of what happens on this Monday, this selloff in progress is kicking off third wave down. Which will be far more extreme:

In retrospect, market historians will say that the 2019 rally was merely a Tech bubble that left the majority of the market behind. Banks, Transports, Autos, Retail, Materials, and Industrials ex-defense, never confirmed the all time highs.

For those who were not around during Y2K, the bursting of the Tech bubble twenty years ago, was brutal. The Tech sector was down -80% in two years.

Notice, I haven't even mentioned the Coronavirus or pandemic. Why? Because market crashes are more a function of investor positioning ahead of the event as they are of underlying events. In other words, an underlying event that is well anticipated and hedged ahead of time will likely not lead to a crash. Whereas mass complacency WILL create a crash. As I showed yesterday, we are seeing extreme speculation AND mass complacency. No sign of selling capitulation. Mark Hulbert recently said the same thing, the Coronavirus is the proximate catalyst for an inevitable selloff due to speculators being way over their skis on risk. Recall, there was NO catalyst for the selloff two years ago. The market just peaked and crashed. This guy from Marketwatch says the same thing about this set-up:

“We certainly did not predict the Coronavirus, but it may prove to be the catalyst to tip this market that is trading at truly historic valuation levels after a record long U.S. economic expansion,” he told clients in a note this week. “Median EV-to-sales for the S&P 500, based on our work recently reached an insane, euphoric level of 3.6 times, two times than the tech bubble peak.”

Which is why it's important to differentiate between one time crashes and long-term selloffs. Not all crashes lead to ongoing declines and not all major declines begin with crashes. The Lehman selloff had no single days that could be called an out-of-control crash. Which is why that selloff went on for months and ended -55% at the lows. An outright crash would have likely brought a bottom much sooner. The lethal scenario of course was 1929 - a massive crash, a multi-month rally, and then relentless bear market -90% over two years. However, what we will see below is that ALL crashes have been at least short-term lows for markets. Because they involve extreme volatility, panic and capitulation that  leads to a bounce of varying duration. In other words, if the market opened higher on Monday, that would not be the sign of a bottom.

VixPlosion 2018 and smash crash 2015 were quite similar. Both were near-term bottoms that lasted several months. And then larger declines ensued. In both cases, the major vol spike lasted two days.

Here we see VixPlosion 1.0:

Volatility peaked on the Tuesday, however, the market bottomed on the Friday later that week. Then there was a retest in April on much lower volatility. The rally lasted through December 2015 (not shown), and then the larger selloff ensued.

1987 is the most famous recent market crash in U.S. history. It was also a great buying opportunity.

The market peaked in August, declined, rallied back to the 50 dma and then rolled over. The market crashed -20% on Monday, the biggest one day percent loss in U.S. history. The market bottomed on Tuesday. VIX hit 150. The successful retest came six weeks later on nominal volatility. One year later, the market was making new all time highs. 

And of course, I described 1929 above. The lethal scenario. Crash. Headfake rally. Massive decline.

Which gets us to now.

If we take an amalgamation of the above scenarios, my personal prediction would be massive crash and dislocation lasting at least one week. ETF stop losses. Margin calls. Extreme volatility. Then, at some point, central banks will panic, driving an extreme vertical rally. Followed by economic implosion as investor confidence plummets. In other words, the 1929 scenario.  

The structural differences between now and these prior crashes are the over-reliance on computers, now responsible for an unprecedented 80% of trading volume. The machines can in no way handle the extreme level of selling pressure they are about to endure from Tech RISK OFF. And then of course there are the ETF stop losses which caused major problems in the 2015 selloff. ETF allocations have only grown in magnitude since that crash.  

"There is some reason to believe algos cause volatility, especially when trading thins and the humans overseeing them vanish"

The impact in fast-moving markets can be outsized if the models rapidly push prices towards existing buy/sell order levels, trip them and trigger other orders."

When the 50 dma (blue line) broke during VixPlosion 1.0, the VIX exploded. The market bounced right at the 50 day on Friday (yesterday) in the last fifteen minutes of trading. 

Any questions?

From a political standpoint, Trump's re-election odds will plummet. Sanders and Warren will rise in the polls. Investment advisors will implore everyone to maintain confidence in Disney markets, but what's left of the smart money will hit the central bank bid, knowing it's their last chance to get out of Trump Casino.

At that point, today's Idiocracy will learn the hard way the difference between the economy and the stock market, as corporate profits implode. Central bank asset levitation gimmicks will do nothing for the economy with interest rates already at record lows. The dumb money will be left holding the bag.

Today's morons have paid for this year vacation from reality with their own retirement.


Position accordingly. 

In summary, by the end even the biggest dunce will figure out that Donald Trump is not their saviour. Quite the exact opposite.

Historians will never believe there was a society as dumb as this one. 

The Big Long aka. Global Panicdemic

It's hard to remember what it was like when the inconvenient truth was valued and not feared. When the honest people were considered the honourable ones. Not the detritus in leadership today. We are witnessing an epic historical moment. The time when an erstwhile corporate empire goes supernova amid climactic fake optimism...

The Big Long:

This is how it ends, with a political movement based solely upon revisiting the mythical past. There's nothing real about it. It's all just a Jedi Mind Trick paid for with record stimulus. Japanification fueled by 10 megatons of fiscal and monetary payload.

When the Japanese attempted all of these stimulus gimmicks they were roundly criticized by economists in the U.S. for not taking on the hard reforms to create a sustainable economy. Fast forward past 2008, and U.S. economists are doing the exact same thing - ignoring real economic reform. Because that was when they were forced to realize they had spent a career studying failure. More than anyone they were happy to embrace Disney markets. The alternative was to admit failure.

Fast forward and the belief in printed money is total. Gamblers have been conditioned to be complacent. Which is why in the midst of global meltdown they merely shrug their shoulders, or better yet buy the dip. Because it's only a matter of time before the central bank bailout arrives.

Here we see selling pressure has become more and more complacent over time. 

Japan and China have both learned the hard way that there are limits to bailout-o-nomics. The limits arrive exactly when gamblers begin to believe that central banks are invincible. Ironically, Hugh Hendry who coined the phrase "Disney Markets" and even described the very mechanics of delusion, discovered the hard limits of moral hazard in 2015:

"China is set to record its weakest growth in GDP in 25 years. Yet it seems to have entered a bull market and may be where we deploy much more of our risk capital next year. That's because the recent exuberant run up in onshore Chinese equities seems to me to amply demonstrate the power of imagined realities."

After that delusion he lost his hedge fund. 

Chinese markets have been closed all week, so I will show Hong Kong as a proxy for then and now AND 2008:

The MAGA Kingdom is now the epicenter of imagined realities. The epicenter of denial. And the epicenter of moral hazard. The unquestioned belief in central bank invincibility, leading to over-leverage and super crash.

Only in a certifiable insane asylum would a random blogger such as myself have to describe this insanity to anyone. We've been long awaiting the day when the sheeple at large are no longer amply rewarded for bending over with their heads in the sand eagerly awaiting their daily talking point enema from Sean Hannity. While their assets are artificially levitated by central bank money printing. 

That day has arrived.

Our days of rage are over. However, for those taken in by this biblical delusion, theirs are about to begin. Nevertheless, after the rioting, the new day will dawn. And the new policy-makers will be forced to realize that the days of continuously recycled gimmicks are over.

Hard to believe, I know.

Biblical Impeachment aka. Meltdown

No surprise, the Roman Senate is set to acquit Trump of rampant abuse of power. Why? Because he embodies all of their same values - supreme greed, corruption, fraud, and of course environmental desecration on a biblical scale. Which is why with eight months until the next rigged election, and Democrats who can't find their ass with both hands, it's up to global markets to impeach Trump, and his merry band of loyal criminals...

Two more Hindenburg Omens this week.

Picture a scenario in which a Manchurian Candidate hand picked by Vladimir Putin wins election and then spends the next two years fending off legal attacks over his rigged election. In the event, dozens of his election cronies are indicted and sent to jail. Then, the same week he himself is finally exonerated due to lack of proof of direct collusion, he picks up the phone and calls ANOTHER Russian stooge government and demands that they help him rig his NEXT election. You can't make this shit up.

I realize what I described has been adamantly rejected by Faux News and all of its senile acolytes, but this is the story that history will tell. This will be the legacy of the Banana Republican party. The total destruction of democracy, in order to keep Caligula in power. 

But of course the 2016 criminality merely led to greater abuses of power. Because not only did Trump perfectly time his tax cut to buy the mid-term election, the Republicans purposely modified paycheck withholdings to give the illusion of a larger tax cut ahead of the mid-term election:

January 10, 2018:

"The IRS is facing its first big challenge implementing the new tax law: deciding how much in taxes to withhold from millions of Americans’ paychecks. The agency is under pressure to take as little as possible so people will see big increases in their take-home pay ahead of this year’s midterm elections. But that would come at a cost: smaller or even nonexistent refunds next year, though millions rely on them to plug holes in their family budgets."

We know what happened. While tax refunds in aggregate remained about the same thanks to the tax cut for the wealthiest households, MILLIONS of middle class families were bilked out of their annual tax refunds.

No consequences.

All of which fraud has led to the biggest election rigging gambit of all. A Fed pivot in 2019 to save Trumptopia from crashing, featuring three "mid-cycle" rate cuts, and a fully monetized deficit. The largest balance sheet expansion since 2009. And now the Fed has NO exit strategy for monetizing Trump's massive deficit. Because the bond market can no longer absorb this much Treasury issuance. A fact NO ONE wants to admit. Combined fiscal and monetary stimulus running at 10% of GDP. Yes, you read that right. On a scale unprecedented in U.S. history. Concerns for deficits and future generations no longer even a consideration, amid 5% borrowed "GDP". Unbelievable.

The Fed safety net was squandered to rig another election. Which will lead to the hardest economic landing in U.S. history.

And of course, all of that hyper-stimulus went straight into the veins of financial markets, causing the largest uninterrupted melt-up in 48 years. While the economy itself rolled over in the other direction. Setting up the largest gap between stocks and bonds in U.S. history.

On Tuesday I described the end-of-cycle Lehman type conditions that attend this longest expansion in U.S. history, with China as the locus of implosion. Yesterday I described the 1987 stimulus over-dose risk and unresolved liquidity collapse. Also yesterday, I explained that VixPlosion is right on schedule. So, it's only appropriate that this (non) impeachment week also features a Y2K blow-off top in progress.

While everything else is going RISK OFF due to the Coronavirus, a handful of the most over-owned and over-valued mega cap Tech stocks are going parabolic into the trillion dollar stratosphere. Giving the illusion of a strong market. The most recent being Amazon which reported earnings Thursday evening. A divergence that has expanded crash risk every day this week:

Which is why it's fitting that we learned this week that consumer confidence is the highest since twenty years ago, in Y2K.

By way of showing just how well this entire con job has worked.

All manipulated by *free* money:

Which gets us to smash crash 2015. As we recall, Hugh Hendry predicted tremendous opportunity in Chinese stocks due to their 25 year low GDP growth. Or to paraphrase his words, the Chinese government has unlimited ways of fueling imagined realities in Disney markets. Well it turns out that was not true. The Chinese markets soared and then crashed. At first U.S. gamblers believed they were "decoupled" from China risk. Therefore they continued speculating. Biotech in particular was on fire.

The last time we saw Amgen doing this was in August 2015.

Good times. 

Fast forward and China is once again crashing, amid 30 year low GDP growth and Chinese markets re-open to global pandemic on Monday.

"The United States, Japan and others tightened travel curbs to virus-hit China on Friday while businesses struggled with supply problems from an epidemic that has infected nearly 10,000 people and been declared a global emergency."

Position accordingly.