The Final Descent

The problem with the Banana Republican Party is that they've become far too enthusiastic with their great descent into squalor...

"What a fool believes he sees

No wise man has the power to reason away

What seems to be, is always better than nothing"

I've said many times that history will not be kind to this era, well we don't have to wait to find out because the first reviews are rolling off the presses. This article in Rolling Stone magazine: COVID Ended Exceptionalism, is brutal even by my standards. It reduces the Fox News led exceptionalism circle jerk to a conspiracy of idiots, now driving a relentless descent into depravity.

The article quotes Oscar Wilde:

"The United States is the only country to go from barbarism to decadence without passing through civilization"

From there, the historical indictment gets considerably less flattering, as the clear eye of history flushes the MAGA turd down the toilet. The problem for Banana Republicans is that they have become far too comfortable with their descent into depravity. These are the same people who re-elected George W. Bush AFTER they knew he lied about WMDs in Iraq. That fiasco turns 18 years old next year and the blunder in Afghanistan turns twenty. The two longest blunders in U.S. history without any comparison. According to today's historical illiterates, the U.S. can never leave these exorbitant wars of attrition because that would signal weakness. History will say those entanglements bled the country white:

"Bin Laden wanted to lure the United States into Afghanistan, which was already being called the graveyard of empires."

Wright, Lawrence. The Looming Tower

 

Of course COVID didn't cause U.S. downfall, it merely revealed what had been so carefully concealed from the rest of the world, beneath the Hollywood facade:

"COVID-19 didn’t lay America low; it simply revealed what had long been forsaken. As the crisis unfolded, with another American dying every minute of every day, a country that once turned out fighter planes by the hour could not manage to produce the paper masks or cotton swabs essential for tracking the disease. The nation that defeated smallpox and polio, and led the world for generations in medical innovation and discovery, was reduced to a laughing stock as a buffoon of a president advocated the use of household disinfectants as a treatment for a disease that intellectually he could not begin to understand"

"Evidence of such terminal decadence is the choice that so many Americans made in 2016 to prioritize their personal indignations, placing their own resentments above any concerns for the fate of the country and the world, as they rushed to elect a man whose only credential for the job was his willingness to give voice to their hatreds, validate their anger, and target their enemies, real or imagined"

The way back is long regardless of who gets elected, however the U.S. will not survive another four years of exceptional depravity.

Which gets us to the theme of the week, deflation. Everyone else talks about looming inflation, so I thought I would spell out what is actually coming - the exact opposite: Deflation.

The problem in a nutshell is that Republican Supply Side policies are inherently deflationary. Robbing the poor to pay the rich. They are all supply side, and nothing on the demand side, because that would be "Keynesian" or socialist, in the words of morons. 

Which is why the GOP likely blew the election when Pelosi offered them a massive $2.2 trillion dollar election winning stimulus package. If they had any brain they would have run to the bank with it, because surely that amount of sugar high would have kept this gong show going another two weeks. Instead they put their stalwart lack of principle ahead of commonsense. They were too eager to screw the blue states ahead of the election to realize they probably threw Big Donny under the bus. 

I put together this handy infographic to spell out the forces of deflation versus inflation. The top section represents deflationary factors: record numbers of layoffs continuing at a rate close to a million every single week. Widespread income insecurity, burgeoning insolvencies, the COVID lockdown, dwindled stimulus, political clusterfuck, and of course record corporate debt. The forces of "reflation" number: human history's biggest asset bubble, record misallocated capital, and of course rampant denial and bullshit. GOP tradition.

Hard as it may be to believe, but bidding up stocks in a pandemic depression is not "reflationary". Which means that until the GOP is replaced and/or we see mass rioting and hence "regime change", the deflationary paradigm will deepen.

If there was any sign of real reflation, bond yields would be spiking along with Treasury inflation expectations, however that's not happening:

Along with the collapse in global stock markets, the impending explosion will bring a dollar margin call, which will be highly deflationary. COVID forced the risk free rate to zero and thereby pushed global capital out into risky assets. Where it will implode spectacularly.

After that, there will be a glut of everything. How long this all takes is not for me to say. In the meantime, the political quagmire will deepen and the COVID pandemonium will continue, until there is widespread vaccination. 

The inevitable insolvency of U.S. states due to the unemployment burden will bring the rioters into the streets en masse. At which point, the Banana Republicans will finally flip from a deflationary stance to an inflationary stance.

And then the Treasury bond market will explode. After that, inflation is possible. However, we are a long way from that point in time.

As far as the casino goes, options expiration passed without major event, however it was a very ugly close. 

Here below we see Rydex asset allocation back to a familiar level.

As we navigate our way through this minefield, we must be ever mindful of the fact that there is ~$360 trillion of misallocated bullshit circling the globe. In an era of rampant sociopaths. 

Soon, thinking for oneself will be the only way to survive this train wreck. 

The chart of the week is the one we've been waiting for, showing record Nasdaq shorts wiped off the map. A necessary and sufficient event for wave '3' down, at all degrees of trend:

Fool me all the time, shame on me

 

Humility Or Humiliation. Choose One.

Under Trump, Banana Republicans took their trademark arrogance and ignorance to level '11' Full Circus. Because anything less than pathological lying would be antithetical to their cherished values. What defines the modern political divide is "we" versus "me". For those steeped in the exceptional "fuck you Jack, I'm Ok" ideology, change would require growing up and taking responsibility for someone other than themselves. Why start now? Better to brainwash the usual idiots into believing that plundering the Treasury is capitalism, and anything that benefits them is socialism. Works every time. Those taught to believe that socialism is the worst case scenario are in for the lesson of a lifetime...

Speaking of which:

Here we see what I call borrowed/stolen GDP - meaning the Federal surplus/deficit as % of GDP. The low point was WWII however as we see we are trending in that direction. The only country that has benefited from GOP policy is the Cayman Islands.

Just over two weeks until the existential election and deja vu of 2016, the Democrats are leading in the polls. Nevertheless, we all know they specialize in giving away elections. In addition, according to the stock market barometer - which has been 87% accurate going back to 1928, Trump will win based upon the current Casino level:

"The S&P 500 stock index’s performance in the three-month period ahead of Election Day, which is Nov. 3 this year, has proven accurate over the past nearly four decades. The equity-market performance measure has been the best predictor of U.S. presidential elections since 1984, proving 87% accurate since 1928"

Got that? Policies don't matter, hooker payoffs don't matter, cheating on wives and taxes - we all make mistakes. Only the Casino matters.

Which means that as long as Trump's decade overbought Tech bubble remains inflated for another two weeks, all bodes well for Trump.

What could go wrong?

This article shows the current level of delusion:

“I have friends and clients and colleagues who come to me and say, ‘Should I hedge? Should I get out ahead of this election?’ And I say no”

"...the tech boom of 2000 has been exceeded in terms of the relative outperformance of technology into the S&P,” Gordon said. “So, I say stay with the trend.”

Because what could go wrong?

Here is another take on today's casino:

“They are buying bullish call options that expire inside two weeks. There was ($500 billion) of bullish call options bought in a four-week stretch by small retail traders,” Smead said. “In ’99 it was $100 billion, in ’07, it was $100 billion.”

It’s not just the younger generations fault, however. Smead says baby boomers certainly deserve some of the blame for riding “the index to a fault”

Which gets us to positioning ahead of this major event.

New Active Manager positioning data shows that active managers - who turned massively bearish in September, have now bought into the blue wave fantasy. The delusion that this election will bring instant stimulus and a COVID vaccine at the same time. 

Here we see Team Groupthink is long in the 103rd percentile which is back to multi-year highs. In other words, when Trump fell in the polls that was bearish, but when Biden surged that was bullish. Because all "uncertainty" has been removed. Civil war can be averted, except these fools bid up their own stocks making a contested election now more likely. 

Doh.

Next we look at market manipulation using options. Here we see via the 5 day call/put ratio, animal spirits have surged back to the same record level from June and September. As we know, June was the cyclical/value peak and September was the Nasdaq/growth peak. This marks a counter-trend high for both:

In summary, as I've said many times, Trump "deserves" to win and have his house of cards collapse all around him like a cheap tent. That said, I am not personally betting that the Trump Casino endorses another four years of Circus Donny.

I never liked the circus. Too many fucking clowns. 

Can you imagine a stock market bubble in a depression pandemic? Only a proven Idiocracy could believe in such a thing.

After the 1929 crash it took 25 years (1955) to breakeven. Not everyone has that kind of time.

Market Manipulation To The Very End

At the end, criminality wasn't illegal, it was in the White House...

What do I mean by commonly accepted market manipulation?

I mean central banks flooding the system with liquidity to inflate all risk assets and encourage speculation. Now featuring a depressionary economy amid record high stock market valuations.

Market cap/GDP:

Trump talking up stocks on Twitter for four years straight, including at the top in February and again at the top in September. Human history's greatest con man.

Feb. 24th, 2020:

Corporations bankrupting themselves to buy back stock from insiders cashing out. While laying off employees at the rate of 800,000 per week.

Corp Debt / GDP:

Wall Street putting out one bullish forecast after another during a pandemic depression. Never once considering giving the advice to sell. Also conflating debt with "GDP" so that copious idiots can pretend the recession is over, despite a -17% budget deficit.

Why didn't we think of this sooner?

I mean, well known manipulation of the options market to bid up Tech stocks. Which is what led to the blow-off top last month, and is driving the market this month as well:

"a large buyer of tech calls dubbed the Nasdaq whale recently resurfaced, purchasing around $200 million worth of call contracts on tech stocks in a single day. The Nasdaq 100 Index has gained in all but two sessions this month and just notched its best week since July after last month’s sharp drop."

Trading in options showed itself capable of influencing share movement in August and September, when dealer hedging -- demand from people who sell options for the underlying stock -- created feedback loops that helped drive the Nasdaq 100 higher. That dynamic can also add fuel to downside moves as well as sellers adjust positions."

Try this again...

The last monthly options expiration before the election is this Friday. What could go wrong?

I mean an IPO market going vertical as Wall Street dumps record numbers of "blank check" SPAC IPOs into a yield-starved market:

"Spacs raise money from investors, via a public listing, and then merge with a private company, in effect taking it public while avoiding a traditional initial public offering.

The current statistics around Spacs are startling: so far this year 133 Spacs have been floated in the US, raising $51.1bn, nearly four times last year’s volume"

Move along, nothing to see here:

Here are some other things that are wrong with this casino:

Thanks to central banks, shorting volatility is now an asset class. Why? Because central banks want everyone to be fat and happy.

Which is why volatility positioning never went net long once during the March meltdown. There was unquestioned belief in central banks.

A belief that is about to explode spectacularly.

For the past two years, the Tech bubble has become more and more manic into the existential election, fed by record amounts of stimulus:

In summary, all of the above widely embraced chicanery has euthanized gamblers to today's overwhelming risks. Which will only serve to spectacularly implode more people, who never ever see it coming. 

With the economy in shambles, markets are now addicted to stimulus. Which is why political gridlock is the biggest risk gamblers face. Trump's Twitter feed looks like the National Enquirer with all of the conspiracy theories regarding the election. His base of useful idiots is getting very agitated. A blue wave is far from assured, and any stimulus is at best months away. Meanwhile, without a widespread vaccine, the stimulus is only reaching a subset of the total economy. A combined stimulus + ubiquitous vaccine could be six months or more away.

All of which is why the lying has been ratcheted up to level '11'. Today's psychopaths are using copious bullshit to "bridge" the gap until something more tangible comes along. But it won't work. We are in a bear market in a depression. Anyone who says anything to the contrary is lying. The very wealthy have been well euthanized by central bank asset inflation. However, the middle class is under the bus and sinking with each passing day. When the Trump bubble explodes, everyone will be on the same page. And the stimulus will flow to the people who actually need it. 

And then four decades of supply side economics will be over, as will the political future for those who bound their fate to it.

What we learn from history is that idiots never learn from history. 

Super Cycle Crash

Conditions are perfect for a bidless market...

Begin with the all important Tech sector. The Nasdaq, along with all of the major U.S. indices, has a three wave corrective appearance. It's a deep correction indicative of the level of shock and awe to come. Similar to the February top, new highs (lower pane) diverging:

As measured by the number of 1.5% days or greater, the Nasdaq (100) has never been more volatile in the past decade than it has been in the past three weeks:

Bueller?

Apple is now leading this rally again, with its new product launch tomorrow of Dumbphone 12, which is one better than 11.

The other big mover was Amazon ahead of Prime day tomorrow:

Of course the Biden rally is supposedly all about the growth to value rotation. What I call the value trap.

Major banks report earnings this week, and no sector more clearly demonstrates the end-of-cycle economic damage:

Here I show banks with volatility going back to 2008:

Large cap value "leading" back to June levels:

Regional banks

We've seen this movie three times now - every two months like clockwork:

At least the TARP was real. This current stimulus rally is running on glue fumes:

In summary, the last asset classes are peaking now:

The decade-long monetary addiction phase is over. The stimulus junkies have now moved on from monetary heroin to something far more deadly - Monetized Fiscal fentanyl. An addiction that will ultimately doom the U.S. dollar. However, between now and then, stands a deflationary margin call on global risk assets.

In the meantime, compliments of unprecedented Federal Ponzi borrowing at 17%/year, gamblers are now pretending that the recession is already over. 

Had all prior U.S. administrations been as profligate as the Trump Administration, there would have been NO recessions in U.S. history, and the Great Depression would have been as ignored as this clusterfuck is being ignored right now. 

The dollar would be already worthless. And Banana Republicans would be living in a country named after their party.

End Of Cycle, End of Circus

Betting against mass delusion is never easy. It's always easier to run with the crowd...

This week, to the pain of skeptics of Disney markets, the entire election risk premium was priced out of markets, despite the ongoing stimulus clusterfuck. Ironically, risk was priced out DUE to the stimulus impasse making a blue wave far more likely. 

Trump tried all week to cut a deal with the Democrats but he was blocked every step of the way by his own party. The Republicans are of the belief that only blue states need Federal aid, which remains the key obstacle to a deal. Today Trump said he was open to a larger package, but McConnell shot it down. As it was in 2008, this is a fatal miscalculation. 

Since the debate and in particular since he got COVID, Trump's approval rating has imploded. Trump is losing his key demographic due to his cavalier attitude towards the virus which selects against older people. This week, having undergone several million dollars worth of royal medical treatment over the weekend, Trump exhorted his base "Don't be afraid of COVID". Those people most likely to die at home alone with the virus were not amused by his latest publicity stunt:

"In 2016, exit polls showed that 52 percent of voters ages 65 and older supported Trump. This year, polling suggests they’ve lurched heavily against him. A CNN poll this week showed Trump winning over just 39 percent of the same age group, compared to 60 percent who support Joe Biden — the latest in a series of polls showing seniors breaking in favor of Joe Biden."

If it's one thing Joe Biden understands it's old age. 

Ironically, the "blue wave" scenario that is now priced into global risk markets, is DUE to the stimulus impasse and GOP unwillingness to help states. Not exactly how Ted Cruz explains the situation mind you - he blames Nancy Pelosi for not throwing the election to Trump with three weeks to go:

"He blamed Rep. Nancy Pelosi and Sen. Chuck Schumer for holding up a deal to provide a new round stimulus and direct payment checks to Americans during the coronavirus pandemic, although it was President Trump who abruptly called off talks earlier this week."

This is yet another example of gamblers front-running stimulus and thereby making stimulus far less likely. When the market is 30% lower, we can expect urgency on a deal. All of which means that risk is massively mispriced, both in terms of the economy and the likelihood of an imminent stimulus bailout. What I call human history's biggest bullshit trap.

The cost of this epic con job will not merely be measured in terms of a collapsed asset bubble, it will be measured in terms of a collapsed economy, a depleted Treasury, and most costly of all, confidence in the system. Those still betting on this Circus are call options on the end of the cycle. This widely accepted chicanery, is putting them right back where they were in the Fall of 2008, behind the eight ball.

On Friday, another gap open melt-up rally within an ongoing melt-up rally.

While the election risk premium is coming out of the volatility futures, the spot Vix remains bid into the impending volatility explosion:

The chart of the week is this one, showing Momentum Tech stocks. Here we see they have had a melt-up rally into the beginning of the past four months. And then a crash:

In summary, the wave count remains intact:

Any questions?