Appetite For Self-Destruction

As always in bubbles, speculative appetite has accelerated towards the apex of the bubble. Like moths to a flame...

Picture a scenario in which the broader market peaked almost a year and a half ago. Last year's 2019 Fed capitulation rally was propelled to new highs solely by Tech and recession trades. Now, in 2020 over HALF of S&P gains year to date were driven by an even smaller cadre of just five Tech stocks. And since the beginning of February, those stocks went further parabolic due to RECORD call option speculation. 

Now you get a sense of what's coming...

At the height of the Y2K Tech bubble, just as now, many pundits said that value investing was dead. "Valuations don't matter" anymore. Adherence to that consensus view peaked and exploded at the same time as the bubble. Value investing indeed came back from 2000-2003 on a relative basis. However, the S&P 500 still lost -50%. In other words, when the most overvalued and overowned part of the indexed bubble explodes, it takes down the entire market. No rotation to underweighted left-for-dead cyclicals, can stop that from happening when overweighted growth stocks are collapsing.

Since the Trump Casino is closed today for Dictator's Day, I wanted to explain how the options market has taken over the casino. A massively leveraged casino within a massively overvalued casino. First a primer on the options market:

We all know that an option is merely a bet that a stock/index/ETF will rise or fall a certain amount in a given period of time. Most gamblers are familiar with what happens on the long side of the trade: You have a certain amount of time to be right or lose the entire premium/investment. Most have no idea what happens on the other side of the trade, which is why most options expire worthless. Especially short-term options. First off, there is no such thing as free money, so someone buying Tesla call options for example, is essentially renting capital. At an $800 share price, each contract (100 options) controls $80,000 of Tesla stock at the money, using a fraction of that amount of capital. The cost of capital is embedded in the option premium which factors in time to expiration aka. the rental period. Many gamblers have gravitated to the weekly options because they are the cheapest and hence most speculative. Essentially lottery tickets. What they don't understand is that the dynamics of the options market almost ensure they will lose money, especially on that short of timeframe in a crowded trade.

Why? Because as the trade becomes more crowded, the near the money call options skyrocket in cost (premium), forcing gamblers further out of the money to gain leverage. Meanwhile, the market makers on the other side of the trade are hedging their (short) Tesla option position by buying the underlying stock. So when there is a frenzy of out-of-the-money options buying, the stock is propelled upwards by the rented capital. However, as the stock price approaches the most heavily owned strike price, the hedging pressure reaches a plateau wherein the market makers are fully hedged 1:1. At which point momentum wanes and time decay takes over, as every elapsed minute means a lower probability of the stock closing above the most crowded strike price. Therefore market makers can start peeling off their hedge, putting downward pressure on the stock. This momentum reversal accelerates as the stock price leaves the strike price, as the probability of exercise becomes increasingly less likely. In other words, the feedback loop reverses.


Any questions?

All of which is why highs in the call/put ratio, precede large market moves lower. The massively leveraged momentum feedback reverses, and stock gets automatically dumped back on the market:

No surprise, gamblers have gravitated to the best performing stocks of the past year, to play this Corona melt-up.  In other words, they looked around to find the most overvalued and overbought stocks and drove them higher on record call volume.

What could go wrong?

Of the top fifteen, Tesla is #1 of course with an 829% surge in options volume and $80 billion daily average value. Followed by Amazon with a 60% surge and $60 billion in daily value. Apple volume up 111% and $24 billion in average daily value. The two Googles combined, up 150% in volume at ~$17b in value. And Microsoft seeing a 300% increase in option volume and $9.6b in value.

Add in AMD, Nvidia, Netflix, IBM, and Facebook to round out Tech dominance on that list. Meaning that the majority of the Nasdaq's daily active dollar volume is now record leveraged to the options market.

"single stock options volumes are now 91% of shares, a 14-year high"

Which means that as these lottery tickets expire, record amounts of parabolic stock will automatically be dumped back into the market.

Meanwhile, hedge funds, having underperformed for a decade straight, have learned that they need to aggressively overweight Tech. Which is why they are overloaded on MAGA Tech:

The article is subscriber only, but we can see what's in this ETF, here:

It's 52% dominated by the MAGA Tech sectors. It has to be in order to outperform the market year-to-date:

All of which is why the Tech sector is 20 year overbought (based on relative strength (RSI), top pane):

"Apple suppliers in Asia will be closely watched"

1930 Rally

This is the biggest market headfake since 1930. Which means it's 10x larger...

The first question archaeologists will have to answer about this era is, what is the point of freedom of speech if it culminates in non-stop lying? They will come to realize that freedom of speech is meaningless in the hands of a brainwashed Idiocracy living in the fetal position. All it means is freedom of disinformation. Everyone knows that the Russian and Chinese governments control the state media. Therefore everyone in those countries discounts what they say. However, most Americans are under the delusion that corporate media is telling a version of the truth. Their own politicized version of truth. Disinformation is like religion - everyone thinks they're right and everyone else is wrong. The combination of mandatory lying and naive gullibility is what has combined to create the greatest optimism of the entire cycle:

Social media weaponized lying against the populace, leading to this human history's biggest groupthink circle jerk. We learned all this during the election in 2016, but since Trump won, nothing has changed since that time. Quite the opposite, now all of Trump's lies have been weaponized on social media.

Per the theme of this post, current events are playing out very similar to 1929/1930. In late 1929, the market peaked and then crashed. The market stabilized in early 1930 and rallied in a three wave retracement that lasted five months. A global trade war broke out in the Spring of 1930, but still optimism remained high. At the end of April, the party ended, and the market tanked -90% in two years. Herbert Hoover was punted from office.

This time around, the Global Dow peaked in January 2018 two years ago. On a dollar basis only the U.S. has subsequently made new highs. Within the U.S. market, economic cyclicals (Banks, transports, small caps, retail, autos, industrials ex-defense) peaked in October 2018. U.S. GDP growth peaked in 3rd quarter 2018. Stock buybacks peaked in 4Q2018.


Dow Theory never confirmed this dumb money bubble:

In the meantime, global central banks squandered all of their dry powder creating the Trump super bubble. A bubble that has pushed U.S. momentum stocks to multi-decade high valuations. In the process they created an unsustainable valuation gap based solely upon momentum. They also inverted the relationship between global GDP and stock prices for the first time in world history:

https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/WEOWORLD

Regardless of the Tech bubble sugar high, what we are witnessing right now, is the second rollover of social mood from a lower high.

The 1930 analog to super crash.

In summary:

Central banks have created a sugar high super bubble in the context of a burgeoning global depression. Papered over with simulated prosperity aka. printed money. 

In the event, they have pumped up U.S. stock prices to cycle highs, while creating bubbles in global real estate, municipal bonds, corporate bonds, and global sovereign debt. 

Which means they have inflated liabilities in lockstep with assets. When the follow-on explosion takes place, only the asset values will fall. Liabilities will remain at their bubble levels. Fools who believed bigger fools will be trapped with non-amortizing debts, with no ability to sell the assets.

As we see from global GDP above, today's EconoDunces have not taken notice of the fact that Central banks have lost their control over the deflationary global economy, and now only have control over asset prices. Monetary policy has lost its economic efficacy at the zero bound. 

Which has created the lethally chasmic gap between fantasy and reality, as evident in the bond market versus stocks. As the economy deteriorates, low bond yields have pushed more and more money into stocks at the point at which corporate earnings are about to fall off a cliff. Nevertheless, well-conditioned gamblers are eager to front-run central banks into stocks. 

Throw in an existential election, and those who are party to this fraud must soon ask themselves what role in this epic con job did they play?

And when did they stop believing in the truth?

The New Religion Is Money

Today's Consumption Borg is spiritually dead. A belief in anything, is a belief in nothing. Not a good place to be, heading into anarchy. We've never witnessed anything approaching this amount of non-stop lying...

"For some reason I can't explain

I know Saint Peter won't call my name

Never an honest word

But that was when I ruled the world"

https://en.wikiquote.org/wiki/Chernobyl_(miniseries)
"What is the cost of lies? It's not that we'll mistake them for the truth. The real danger is that if we hear enough lies, then we no longer recognize the truth at all. What can we do then? What else is left to abandon even the hope of truth and content ourselves instead with stories?"


I've been watching the HBO special "Chernobyl", as I am clearly behind in my binge watching. The key takeaway is that it's staggering how much a late stage empire will lie to its own people. Throwing them under the bus just to maintain false pretense that everything is A-Ok. Case in point, we're seeing the same extant lying in China as the Coronavirus spirals out of Politburo control. Ricocheting against the U.S. global Ponzi empire swaying like the leaning Tower of Babel. For those young people reading this - never in my 52 year lifetime have we heard as many lies as we're subjected to today. Not even close. This old age home can't handle the inconvenient truth in any direction now. Which is why they've placed their faith in a serial liar. They can no longer tell the difference between fact and fiction.

Which is a very dangerous place to be, spiritually, heading into financial nuclear meltdown. 

"The way markets have been acting this year, treating high-quality American assets as a haven, makes sense. But even a sensible move can reach extremes and create distortions."

The trick is trying to figure out when rational activity takes conditions to a riskier place. It’s unclear we’re there yet."

"In response to the vast uncertainty of Chinese economic performance, the U.S. has outperformed the rest of the world"



As it was in 2015 - until the rest of the world peaked at a lower high and rolled over again:

"And so, we see the liftoff of the Vanguard Mega-Cap Growth ETF versus the Global Dow. The latter is a roster of multinationals that has stalled, while the glamour stocks of the Nasdaq carry the MGK skyward"

The P/E of that Vanguard mega-cap growth basket that so many investors are hiding in is now 30, leaving a diminishing margin for error."

"It’s become commonplace to argue that the stock and bond markets are sending conflicting messages"



One is heading for NeverNeverLand and the other one is heading for recession:

"The forward price/earnings ratio of the S&P 500 now exceeds 19, the high for this bull market, while the expected rebound in profit growth keeps getting pushed ahead into the future by the global industrial slowdown"

We could be dead and be smarter than these people.

"Bank of America global strategist Michael Hartnett, who has been correct in calling for a strong run in risk assets into early 2020, continues to recommend playing this trend until investors grow more clearly “euphoric”

"We're looking for any sign of euphoria"

"Keep playing the momentum Ponzi trend until the greater fool arrives. If it turns out to be you, don't worry, you're used to it"

Five down. Three up. At all degrees of trend.

Buckle up.

Soon, the burden of truth will no longer be on the truth, it will be on Twinkies of men.

And the fools that follow. 

"No Useful Idiot Saw It Coming"

History will say that the Trump era stood for only one thing: greed, greed, and more fucking greed. The apex of forty years of Banana Republican criminality...

The gap between economic fantasy and reality has never been wider. Which proves that the Commander-In-Thief has done his job. Now no one can stop human history's best lubricated circle jerk of like-minded dunces. Last week's Senate impeachment acquittal has sent fake confidence soaring into the stratosphere...

Over on Zerohedge, a handful of their thousand alt-writers have attempted to raise the red flag on casino risk, in between UFO sightings. I give them a C- on the bearish scale and an A+ on the Circle Jerk scale. Half-assed depictions of risk that assiduously avoid pointing fingers at their beloved con man. Ensuring that he takes none of the blame for this epic delusion. After all, this is an existential election in November, with epic greed and corruption now at stake. Suffice to say, they've done nothing to slow the pace of the frenetic GOP circle jerk.

Sadly, the milquetoast bears are constantly being contradicted by their beloved Herbert Hoover who is continually seeking new ways to increase the magnitude of the super bubble. Using what else but more borrowed money:

Which is why, despite the fact that World economic uncertainty is now at record highs, the stock market is now positively correlated with global implosion. Central banks have increased gambler lubrication inline with global meltdown. 

Bear in mind this is through the fourth quarter of 2019, and does not include Corona risk. 

World Uncertainty Index:

"The World Uncertainty Index is a new measure that tracks uncertainty across the globe by text mining the country reports of the Economist Intelligence Unit"

Meanwhile, we learned that the U.S. budget deficit is blowing out to record highs as the economy slows. All of that new debt issuance heading straight for the Cayman Islands via Trump's tax cut. Which is why Trump is now talking about cutting Social Security and Medicare. There's only so much money to go around.

CNBC:

"I stand by our comments that the tax cuts will pay for themselves," Treasury Secretary Steve Mnuchin said at a congressional hearing on Wednesday. "This will be simple math."

We have been told the same blatant lies for forty years straight. Ever since Supply Side economist Arthur Laffer concocted the "Laffer Curve" claiming that tax cuts pay for themselves. The center-piece of Reagan's economic budget. In the event Reagan TRIPLED the U.S. debt in one decade and converted the U.S. from human history's largest creditor nation to history's largest debtor nation. As tax rates approach the zero bound, it becomes mathematically impossible for GDP growth to offset the reduced tax flows. After all, 0% of infinity is zero. The only GDP "growth" comes from the stimulus impact of the rising debt aka. Borrowed GDP. 

Here we see that under Trump, corporate tax receipts have collapsed on a nominal basis down to 25 year lows. On an inflation adjusted basis these are at Depression levels:

Worse yet, GDP growth is stalling despite the widening deficit. 5% of stolen money to barely achieve 2% growth. A recession at any other time in U.S. history, when honest men prevailed.

Here we see GDP growth (blue), a lagged indicator, and job openings the leading indicator:

All of which apparently explains why GOP consumer confidence is now back at all time highs. The same level it achieved post tax cut, right before the wheels came off the bus.

It appears they believe they got away with the crime of the century. And who would tell them otherwise?

They don't trust anyone who can be trusted.

In summary, record risk and record over-confidence have led to the widest gap between fantasy and reality in U.S. history:

Cyclicals are warning what's coming. Contrary to popular belief, Go Daddy is not a leading indicator.

Vixplosion has been delayed, not denied:

China Syndrome

China Syndrome: a nuclear meltdown scenario so named for the fanciful idea that there would be nothing to stop the meltdown tunneling its way to the other side of the world ("China")


According to Zerohedge, the Chinese economy has ground to a halt. If so, Trump just won the trade war. And his booby prize will be global super implosion. Speaking of Camacho-In-Chief, Monday is a trading holiday to celebrate President's Day. What could go wrong?

Below, via the IMF, we see China's GDP growth rate through 2019. I also added in an hypothetical decline of 2% based upon current estimates of the virus impact. Of course if Zerohedge is right, this forecast could be optimistic.

"Millions of small businesses in China could be destroyed by the coronavirus outbreak, which has swept across the country, threatening “social stability.”

"Economically, the impact looks certain to dwarf the financial fallout from Severe Acute Respiratory Syndrome, or SARS, which killed nearly 650 people across mainland China and Hong Kong between 2002 and 2003 with its flu-like symptoms."

While hard figures are even harder to predict, analysts have speculated on China taking at least a 2% hit in GDP growth this year, eating into previous forecasts of just under 6%."

The IMF was forecasting 5.8% for 2020, so a 2% haircut would look like this:

"The new estimates show that oil markets face a significant surplus despite the latest production cuts by OPEC and its partners."

Trade wars, divestments, coronaviruses, and massively subsidized over-production. 

What could go wrong?

In summary:

Mind the Gap 'n Crap

#Winning!!!

"I bought for the tax cut, but I stayed for the pandemic and wretched excesses"

Buy And Explode

We have achieved peak synthetic prosperity, as gamblers chase extreme risk into the apex of a super bubble fueled by wretched excess. But don't take my word for it...

I am constantly not amazed when these bailed out billionaires point to some secondary metric such as "EBITDA" to illustrate the day's excesses while ignoring the trillion dollar money printing operation required to keep this bubble inflated. Were it not for a decade of monetary bailouts, these billionaires would have a fraction of their current wealth. 

Nevertheless, outside of a handful of widely ignored cassandras, the order of the day is keeping the brainwashed sheeple locked in the casino. The mantra buy and hold is rock solid now. Everyone convinced they can ride out an imploding Tech bubble through greater recession. The Nasdaq drawdown was -80% post Y2K; I would expect nothing less than the same this time around, as the broader market left this rally over a year ago.

Below we see the con job of the day, this belief that everything is great in the world except the coronavirus. A fantasy that has given con men cover to continue recommending stocks at the end of the cycle, amid deepening economic weakness. Worse yet, today's collapsing interest rates are used as a rationale to justify asinine valuations, based on earnings predictions which at this point in the cycle have the veracity of a Magic 8 Ball.  

"He said the market is trading at 20 times his estimates for this year’s earnings.

“That is not unreasonable,” considering the low interest rate environment, he said. “But it’s certainly not cheap.”


And when their estimates turn out to be a figment of the imagination, what will they say? What they alway say at the end of the cycle, "Oh well, we were off by a minus sign".

In other words, it has never been more difficult to be a sane investor, because there has never been more mass insanity than right now. The forgotten term "unrealized gains" is the lesson these people have yet to learn. Everyone believes that they alone will retire at the apex of human history's largest super bubble.

Overnight, the first pillar of delusion began to fall as come to find out the virus is not contained, quite the contrary it's rapidly increasing, and/or vastly under-reported. Likely both.

"The hard-hit central province of Hubei reported 242 deaths in just one day and 14,840 new patients -- by far its biggest one-day tally since the crisis erupted last month."


Of course, the futures were down overnight as the rest of the world sold off, but the order of the day in the U.S. was "BTFD". Because everyone knows that an expanding pandemic is a buying opportunity.

Here we see via Momentum Tech that the urgency to BTFD has been increasing for three weeks straight. Every gap up is followed by a rollover with weakness peaking post weekly opex aka. Monday:

Here we see via the call/put options ratio, that speculative surge precedes every implosion. The magnitude of the surge and expiration matches the magnitude of the volatility spike (lower pane). Note, I used the Global Dow to show that U.S. speculative appetite is following global patterns of risk:

The widely ignored Hindenburg Omens have been warning as to what is about to come, as new highs are rolling over and new lows are expanding (not shown):

Yesterday I showed the NYSE HO count, here's the Nasdaq HO count. The right shoulder is now identical to the left shoulder per the moving average:

Prepare for global panic 

aka. "Overnight risk"