A Fatal Bubble

The asinine arguments being used to justify this unprecedented bubble will be fatal to those who believe them. Only an abject fool uses a global depression to rationalize high stock prices. On the other side of this "event", it will be cold comfort to claim that "no one saw it coming". Contrary to ubiquitous belief, when it comes to mass delusion, there is no strength in numbers...

The same argument is used over and over again by every Wall Street analyst - interest rates are low and central banks are pumping money. These groupthink analysts are driven by their need to crowd their investors into this lethal bubble before it gets larger. Another ludicrous rationalization they share is to use the Dotcom bubble as a basis to justify ludicrous valuations. Interest rates are lower now, whereas the Fed was tightening back then, and of course today we have fiscal stimulus. Everything is better right? They are comparing record profligacy in a pandemic depression now, to the strongest economy in decades during Y2K, in order to rationalize an epic asset bubble. The Dotcom bubble came amidst a booming economy and a Federal government surplus. It was the best economy since the 1950s and nothing anything like it has been seen since - the closest being the peak of the housing bubble. Somehow these fools actually believe that the inverse of the best ever economy is a superior environment for owning stocks. The weakest economy in 90 years, zero percent interest rates, and of course epic money printing.

All of which means no economic safety net. 

When the Dotcom bubble exploded, the Fed took rates down 5.5% to buffer the economy, which is why the recession of 2001 was relatively light. This time, the Fed will be able to cut rates 0%. Which means that the pending $1.9 trillion fiscal stimulus equal to 10% of GDP, will be wholly inadequate compared to what is going to be needed. Today's economists, market pundits, financial advisors, and CNBC media mannequins have all lost their minds. In doing so, they have put the entire system at risk. On the other side of this explosion, the sheeple will lose all faith in central banks, economists, financial advisors, and markets.

The average person may have an excuse to believe "the experts", however those make-believe experts who are abetting this epic disaster have no excuse. 

For those readers who are making their buy list of what to pick up on the cheap post-explosion, be careful not to catch a falling knife. Too many companies onboarded debt during the pandemic under the ubiquitous belief that a new cycle was beginning. They assumed they would delever their balance sheets post-pandemic. When that recovery is replaced by human history's largest margin call, those companies will be dead money. I am of course referring to cyclicals such as hotels, retailers, and airlines. Some will survive but the majority won't. The ones that survive will be extremely valuation challenged until capacity comes out of their respective markets. On the other side of this meltdown, there will be a glut of everything - retailers, shopping malls, aircraft, hotels, condos, Bitcoin rigs, and anything else that can be sold to raise cash.

Below is a chart of revenue passenger miles going back to year 2000. After 9/11, every major U.S. airline went bankrupt (Chapter 11) except American. However, after 2008, American was the only airline that went bankrupt. Why? Because unlike the other carriers they never delevered after 9/11. They were the sole survivor but they were a zombie company, that got wiped out by Lehman. Until American Airlines came out of bankruptcy in 2011, the other airline stocks were dead money, because there was too much capacity in the industry. When American re-structured and reduced capacity, airline ticket prices took off and the stocks went along for the ride.

Now they are all zombie companies once again. And this time the plunge in passenger miles makes 9/11 look like a picnic:

Barring imminent meltdown this may be my last post before the long weekend in the U.S., as Monday is a market holiday. 

Suffice to say, I am epic bearish right now.

All of these seemingly unrelated "events" taking place in markets are sending a blizzard of red flags.

Looking at risk exposure, we see that the Rydex ratio just hit a new all time high today:

 

Nasdaq down volume just hit a two day record in an up market. 

We've never seen that before.

Momo Tech continues to defy gravity. For now.

Stacking these indicators against the global Nasdaq shows a reach for risk we've never seen before. In the middle pane at the bottom is the market breadth indicator showing the manic reach for micro cap junk stocks.

The event that will end all of this insanity is called "sell". And no one caught up in this manic everything bubble sees it coming.

The one thing they all have in common, they all believe they can get bailed out from their own epic stupidity.

A delusion the Japanese have been recycling for thirty years.

Race Into Risk

There exist no superlatives that are sufficient to describe the level of risk at this lethal juncture. Newbie gamblers are convinced it's their abject lack of knowledge that gives them an edge over staid investors. They will be surprised to learn that's not how this works...

Recently I was updating my checklist of the risks that await unsuspecting gamblers on the other side of this manic melt-up, none of which are factored into current economic projections:

Impending currency crisis

Impending credit crisis

Mass unemployment

Monetary depletion

Over-capacity/everything glut

Loss of confidence in central banks

COVID mutation

Financial re-regulation

Stimulus dependency

Today's gamblers have been assiduously brainwashed into believing that this fake recovery is real. When it's only a stimulus driven illusion aided and abetted by their own misallocation of capital.

Of all of the February highs, this pandemic driven melt-up is by far the least sound from an economic perspective.

Here we see the ten day moving average at each of the key February turning points:

Recall that the Dotcom bubble experienced its final melt-up into early March, 2000. Then as now when the New Year struck, markets went late stage parabolic. Aside from epic greed, clearly central bank over-stimulus and Biden's election are key factors in this global melt-up. Another factor I mentioned in my last post is Chinese New Year. It appears that Asian gamblers have been front-running the New Year knowing that there would be five trading days when they would be offline, starting this Thursday in Asia (tonight in the U.S.) through next Wednesday.

Year to date, Chinese internet stocks are the top performing country-specific ETF traded on U.S. exchanges. Picture what happens when there is no one around to keep these stocks going vertical. Last year it didn't go so well:

There are other non-country specific sectors of course that are even hotter, specifically Bitcoins and pot stocks, now up 200% year to date on epic volume:

But how to explain this rampant pump and dump mentality that is now driving markets? Suffice to say, if Bernie Madoff was still in business today he would be a renowned financial celebrity almost as dangerous as Suze Orman. 

Dave Portnoy is one of the most widely followed celebrity pump and dump leaders of this era. His day job is running Barstool Bets which is an online sports betting company that was acquired by Penn National Gambling early last year. Using his newly acquired wealth, he re-invented himself as an expert investor during the pandemic when all of the sporting events were cancelled. Portnoy evinces a simplistic sports betting view of markets that has now taken over markets - you bet on the Buccaneers, you win, bet on the Chiefs, you lose. Unfortunately, in markets it doesn't work that way. Those who follow Portnoy into his stock bets are bidding up his returns at their own expense. His portfolio is the beneficiary of his large following, each of whom will experience a diminished level of returns, most of which will be negative. This simplistic idea of bidding up one's own returns is now endemic to markets - evident in everything from Bitcoins to pot stocks. The Reddit gang has decided they've discovered the secret to effortless wealth. However, for their gambit to continue working they need a constant stream of new fools to follow. 

Recall it was the Gamestop pump and dump that triggered record downloads of the Robinhood trading app two weeks ago. We now learn that half of the Gamestop buyers were first time traders.

“After studying some of the insights, we learned that half of the consumers that we saw deposit money into Robinhood and purchase GameStop stock – 50% of them had been new, first-time traders. And on top of that, 50% of them made their largest ever DIY day trade ever over the last four weeks"

This story tells the tale of how it ended for these newbies:

"GameStop stock’s climb in recent days captured the international spotlight as a “David vs. Goliath” tale for the digital age: a madcap web of everyday Joes winning billions of dollars from short-selling hedge funds that had bet on the stock’s collapse."

But with the stock having plunged about 80 percent since last week’s peak, the whiplash also highlights how so many investors, lured by the promise of a gold rush, have been quickly dismantled, with help from stock-trading discussion boards and apps that make it easier than ever to invest — and lose — a fortune."

Here we see that - no surprise - dollar volume in Gamestop peaked the day the stock hit $480:

Elon Musk who has recently been pumping Gamestop, Bitcoin, and of course his own ludicrously overvalued stock, has now been pumping a penny crypto called Dogecoin. A crypto that was started as a joke. 

Which is why on some message boards they are now calling him Enron Musk.

"The billionaire’s endorsement last week of Doge as “the people’s crypto” — cheered by KISS rocker Gene Simmons and rapper Snoop Dogg — sent trigger-happy Reddit traders stampeding into the canine-themed coin. As a result, its price is up around 1,000% year-to-date, eclipsing Bitcoin’s rise."

The deeper fear is that if Dogecoin ends up just another YOLO (You Only Live Once) pump-and-dump in the crypto timeline, it will reflect badly on all tokens — even Bitcoin"

What if it reflects on massively over-valued and over-owned car companies? That will be the REAL pain trade for Enron Musk followers - when sales collapse and the company is no longer cash flow positive. 

Of course, all of this frantic reach for risk means that an entire generation is on the cusp of being financially obliterated. Today's regulators are sitting on their hands with the view that organized pump and dumps can't be regulated.

When this all explodes with extreme dislocation they will all change their minds about that at the exact same time, but it will be far too late. The dislocations we've seen to date DURING this melt-up phase are merely a warning as to what is about to come. 

 

As a measure of reach for risk, we see here that Microcap stocks - the riskiest stocks in the market took a mere 7 months to eclipse their early 2020 high. And subsequently they have gone parabolic. Back in the 2008 Lehman timeframe these stocks took six years to eclipse their 2007 high.

This epic Ponzi scheme is on borrowed time and money.

2021: Year Of the Explosion

Global markets have begun a new tradition of melting up into February and exploding. After which amnesiac gamblers rejoin "No one saw it coming". Why should this year be any different...

I am assuming this phenomenon has something to do with Chinese (Lunar) New Year making people go crazy. Forgetting how things turned out the year before. In the past four years, only Feb. 2019 was the outlier, because the market was coming off of the 2018 implosion. Of course the 2021 explosion is patent pending. 

But, so far so good on the melt-up side of things:

The Barron's cover story this week was the impending Alzheimer's crisis. Too late, it's already here. It's attended by the ADHD crisis, and the social media mindless Borg crisis. Under Trump, Facebook and Twitter almost imploded democracy. He couldn't have done it without them. Mark Zuckerborg's sum total contribution to society is propagating QAnon conspiracy theories. After the Capitol was ransacked, there were 147 Republican Congress members who came out of hiding from their own mob and refused to certify Joe Biden's presidency, per the GOP's new election over-turning strategy known as "certify and die". Their specious claim was that the election results were compromised. Election results obtained via the exact same election systems that got THEM elected. According to their own dumbfuck logic they should be decertified and sent back to the used car lot from whence they came. According to the QAnon wing of the party, no politician is legitimate except their own King of the Assholes, Circus Donny. Rupert Murdoch has finally achieved FULL Idiocracy.

All of which mental health deficiencies are what keep causing this society to recycle the same failed policies over and over again each time expecting a different result. Among the conclusions Janet Yellen reached last week while evaluating Disney markets is that it's "too soon" to say if changes are needed to address recent volatility. Nothing could be further from the truth. It's TOO LATE to fix broken markets, which happens to be the exact opposite of too soon.

As I write, markets are going FULL batshit in the February melt-up tradition. Recall that two weeks ago Gamestop was trading in the $100 range until Elon Musk tweeted the word "Gamestonk" which vaulted the stock to $480, after which it crashed. Most people were wiped out, with a few well-publicized exceptions who made millions. Incidentally, the guy who was leading the entire pump and dump made $33 million at the peak, but it turns out he is a registered broker with FINRA. So not only will he be barred from the financial services industry he will likely be sued into penury.

“An average Joe can go on a website and say, ‘I like XYZ stock.’ A broker can’t do that,” said Ms. Light, a former chief counsel for enforcement at Finra."

Moving on from Gamestonk, more recently Elon Musk has been pumping Bitcoin on a regular basis. Today we learned that Tesla bought $1.5 billion of the crypto currency. So it can come as no surprise, that BitCasino just hit a new all time high. Recall that Bitcoin's last meteoric rise peaked in December 2017, a full month before stonks peaked. This time, it appears that all markets are 100% correlated to meltdown.

In my opinion there is no way Bitcoin will ever be a serious currency because it's far too volatile and its voracious electricity consumption grows in relationship to the price. Currently it's operating at a Pakistan level of ongoing energy waste. If you are waiting to buy it, wait until it crashes 80% again first. 

To put the cherry on top of this annual Asian-led market melt-up, the CIO of Ark Funds is now known as the "Money Tree" in Korea:

"In South Korea, retail investors are swarming to buy thematic products and Cathie Wood has become something of a celebrity

“Performance leads to inflows,” said Mohit Bajaj, director of ETFs for WallachBeth Capital. “All their funds have done very well, which had led to such huge amounts of money going into them."

In summary, markets have now achieved ludicrous mode:

"GameStop mania was a wake-up call, but now the capital markets have truly reached ludicrous mode"

Tesla shares and bitcoin both traded higher after the [$1.5 billion] announcement. This follows social media posts by the auto maker’s influential boss, Elon Musk, that already had helped drive bitcoin’s price to a record."

That adds to the speculative fervor already gripping Tesla’s stock price in a feedback loop. Indeed, the manager of the most popular active fund recently, Cathie Wood of ARK Invest, has made big bets on both Tesla and a trust that owns bitcoin, fueling a record pace of inflows"

This Ark Robotics fund below is at the happy intersection of EV/autonomous vehicles/Tesla, and of course artificial intelligence the true impetus behind this entire momentum rally:

All Clear Pump And Dump

Either policy-makers know what's going on and are turning a blind eye to extreme risk, or they are as dumb as a brick. I am going with the latter hypothesis. Suffice to say, this will be the Super Bowl of crashes...

"It seems like asset bubble warnings are emerging everywhere you look these days...a growing legion of retail investors are challenging Wall Street orthodoxy and sending shares of previously unheralded stocks into the stratosphere...Trendy bets are all over the place, with cash pouring into assets from solar power and cloud computing, to exotic new investment vehicles like special purpose acquisition companies (SPACs)"

So what’s behind all the speculation? In a nutshell, the global pandemic. Policy makers have rolled out trillions of dollars in stimulus to cushion the economic blow, money that could well end up pumping asset bubbles

With even the riskiest debt now paying less than ever, investors are chasing every catchy extreme in search of the next big payoff"

"As the craze for SPACs, special purpose acquisition companies, on Wall Street continues to play out, the “Mad Money” host turned cynical, saying the market has been “flooded with cash to the point of absurdity.”

SPACs are similar to IPOs, except the money is raised up front and then the acquisition target is selected. The theoretical benefit of a SPAC is that it lets public investors get in on the ground floor of investment. Think of it as public venture capital. However, the private companies that are the targets of acquisition are usually extremely speculative and often have no revenue or earnings. This shows SPAC issuance by year. So far 2021 (bright red line) has double the issuance of 2019. The light red line is an extrapolation based upon current issuance. 

In hindsight today's sleeping regulators will realize that junk SPAC issuance was a key contributor to collapse, as it sucked liquidity out of the market. 

Of course this all ends badly, but this time policy-makers won't have the tools to repair the economic damage. What we are already witnessing is the convergence of fiscal and monetary policy, with oversight by a fractured Congress. The consequences of a bubble explosion now could not be more extreme. Collapse of wealth and income is inevitable especially for those high income households who do not see this coming. Those who are lower income and/or have minimal market exposure will be less impacted by impending asset deflation. 

It seems like ages ago but recall that last week was a total gong show - every major broker had multiple outages during the week. Last Friday, the casino ended at the lows of the week camped at the 50 day moving average. However, in retrospect it was a bear trap, because the market vaulted back up to all time highs this week. Fast forward one week later and all concerns over last week's dislocations have been forgotten. Never mind that the set-up is the exact same as last February - a bear trap bounce at the 50 day followed by a whiplash bull trap all time high:

And what caused this massive ramp to new all time highs amid mass trading outages? As I reported earlier this week, Robinhood saw record app downloads last week, peaking on Friday at 600,000 in one day. For the week, 2.1 million new downloads

"The platform "experienced record growth during some of the most challenging days operationally this past week as Robinhood continued to lead the industry in app downloads last week by a wide margin"

But the story gets even crazier because it wasn't just Robinhood that saw major trading app downloads last week:

Week over week, Fidelity app downloads increased 900%, E*trade was up 720%, Ameritrade 575%, Schwab 339%.

Across all platforms combined, broker app downloads increased 300% last week over the prior week.

So we need not wonder why the market was bid this week. All it took to garner a mad dash into risk was RECORD Nasdaq down volume on a mere 4% decline in the S&P 500. Higher down volume than Lehman. 

A minor preview of what is coming:

Meanwhile, bulls will be happy to know that Yellen completed her inquiry into last week's gong show and she concluded that Disney markets are "resilient". Mind you, resilient and frenzy are not normally words that make sense in the same sentence:

Gamestop is a reminder of what happens in EVERY pump and dump and Ponzi scheme. The early stage "investors" make a lot of money and get interviewed on CNBC, while the vast majority of people get left holding the bag. 

Our middle son made another $250k last week in Gamestop and then he put it all into SPACs. I almost shit a brick. But I've been informed the old man doesn't know what he's talking about.

FINRA just posted margin balances through December. What we see is that gamblers were deleveraging into the top one year ago in February 2020. However, since the pandemic, they have been loading up on risk. These margin figures are lagged of course, however, one would be delusional to believe that the spike in trading accounts we saw last week did not further increase leverage.

Who knew that all it took for rampant speculation was a global mass death toll and shutdown of the economy?

In summary, there are rampant bubbles, ignored warnings and market glitches. The response from policy-makers is "all clear" and the reaction from traders has been record trading app downloads and record leverage. 

No, they don't see it coming.

And no, the old man is not wrong. 

The Crack High Boom And Bust

As biblical irony would have it, socialism for the middle class will be the trigger that explodes socialism for the rich...

The key question every gambler wants to know is what will be the "catalyst" for exploding human history's largest monetary asset bubble. Great question. The answer is now obvious - the same thing that burst every other market bubble - higher interest rates...

"There is no means of avoiding the final collapse of a boom brought about by credit expansion" - Ludwig Von Mises

Way back in 2018 I predicted on my prior blog (PonziWorld) that Trump's tax cut would monkey hammer global risk markets due to the "crowding out effect". A concept that economists used to comprehend but which they've now abandoned in favour of unlimited profligacy. Crowding out simply means that the U.S. government is borrowing large amounts of money which raises interest rates and boosts the dollar. The increased deficit sucks in money from around the globe. As we see above, that is exactly what happened in 2018. Now, the same thing is happening with Biden's pending stimulus plans of $1.9 trillion which is in addition to the $.9 trillion passed in late 2020. U.S. bond yields are rising, and the dollar is rallying. Here we see the inverse dollar with last March's dislocation in the middle of the chart:

Today's economists and Wall Street forecasters are of the view that this is a new bull market in a nascent recovery. In order to propagate that view, they have conveniently forgotten that there was zero de-leveraging from the last cycle. Which if it were true would be the first time in U.S. history that an economic cycle seamlessly extended to another cycle without any deleveraging of risk. A bull market built on top of another bull market.

Here we see U.S. corporate debt (% of GDP) after every other recent recession returned to roughly the 40% baseline. We are to believe that won't happen this time. Or if it does, it will be painless. 

The alternative view which I propose is that stimulus gimmicks have merely postponed the day of reckoning. The COVID crisis has clouded both the economic outlook and economic judgement. If this stimulus passes, then for the second year in a row, the U.S. deficit will be 15% of GDP. Yes, you read that right. Had this much money been borrowed in the Great Depression, it would have been a minor recession. And maintaining that level of borrowing in subsequent downturns, the dollar would be worthless by now. It's this society's infinite profligacy that has fooled the majority into believing this is all just recovery as usual. Debt is now conflated as "GDP". 

I have long predicted a middle class bailout, and that is exactly what is taking place right now - even faster than I thought it would arrive. However, due to the COVID lockdown, the reflationary impact is still muted. By the second half of 2021 that will not be the case. Bond yields are not waiting around to price in rising inflation. Looking at the reflationary timeline, this current rise in bond yields and dollar rally are necessary and sufficient catalysts for bubble explosion and global credit crisis:

Where this all gets interesting of course is the fact that this week is the third anniversary of Vixplosion. Back then as now markets had been melting up into the tax cut, however as soon as the tax cut came into effect, global risk exploded.

In my view of the market, the Vixplosion in 2018 is the left shoulder of a three year topping process, and this impending implosion will be the right shoulder.

The World ex-U.S. best depicts my view of this topping process. Notwithstanding untold trillions of global monetary stimulus, the rest of the world in dollar terms is only now back to the levels of three years ago.

In summary, the consensus view is that this is the beginning of a new bull market. Whereas my view is that it's the end of the longest bull market in U.S. history. And therefore when today's useful morons realize they got conned into buying a market top again, there will be "societal acrimony" on an epic scale.

And the days of socialism for the rich will be over. 

All Time High On Stimulus Crack

Picture the most brutal crash in history from all time highs that "no one" sees coming. Because that is what is going to happen...

The biggest risk to the casino happens to be the exact same factor that every Wall Street analyst currently uses to rationalize today's bull market - WAY TOO much stimulus. Unfortunately, today's gamblers have happily overdosed on monetary and fiscal crack, and of course lethal doses of bullshit, their other major addiction.

Which is why they have no chance of seeing this coming. 

There exists a belief globally that no amount of stimulus is bad for markets. Every central bank operating independently of every other central bank now believes this to be true. Speculators are merely along for the joy ride. 

Far worse yet, is the fact that every government wants their own currency to be suppressed relative to every other currency. A concept that in aggregate is impossible. Nevertheless, due to the global pandemic depression, there is now a race to the bottom for global currencies. The most common way to suppress a currency is to lower interest rates and flood the markets with new currency aka. Quantitative easing. 

Consider this message yesterday from the Reserve Bank of Australia:

"Reserve Bank of Australia chief Philip Lowe praised the country’s quantitative-easing program and warned it would be premature to consider withdrawing monetary stimulus when global peers are extending theirs"

The RBA extended its bond-buying program Tuesday to avoid a spike in the currency, following in the footsteps of the U.S. and Europe in prolonging stimulus."

Central banks are now locked in a vicious cycle of increasing monetary stimulus in order to keep up with other central banks. All while global asset prices go vertical.

In addition to insane amounts of global monetary stimulus, in the U.S., Democrats are pushing for a second much larger fiscal stimulus coming a little more than a month since the last stimulus was passed. Recall that Tech stocks were stumbling at the end of 2020. However, then the stimulus bill was passed they took off again.

Coincidence?

Early last week, legendary investor Jeremy Grantham warned that this latest stimulus is the cherry on top of the global financial weapon of mass destruction. Since that warning, the plan has been moving forward at light speed:

"He said the "sad truth" about the last federal coronavirus relief package enacted in 2020 was that it didn't increase capital spending and didn't increase real production but certainly flowed into stocks"

Of course Grantham is not the official spokesperson for all of the families that actually needed that money in order to eat. Nevertheless, the point he makes is the same point I make all the time - soon policy-makers will face the hard choice between markets and the economy. If Grantham is right, that choice is near at hand, because this crack up boom is about to go bust.

I put this chart on Twitter today showing that the global Nasdaq just reached a new all time high. These are the riskiest momentum stocks in the world. The index is now 30% above the 200 day moving average, which means that even a garden variety pullback to support would mean a crash. The index has been above the 200 dma for nine months. There has been no major RISK OFF event since the rally started almost one year ago. 

All of which means that global RISK OFF is no longer an option.

Who did this?

My opinion is that last week's mini crash and 60% vol spike was the warning. And gamblers ignored that warning and instead bought the dip. This next leg down will be brutal.

Semiconductors have already left the party. Tech won't get far without semis participating in the rally:

Tony Dwyer of Canaccord lays out the lethal consensus viewpoint that will obliterate gamblers - a "correction" is overdue, but the bull market is just getting started.

“A mistake people could make here is by becoming overly negative in anticipation of a correction,”

He lists monetary and fiscal policies for a positive backdrop and the benefits of low interest rates.

“You want to add exposure into weakness,” Dwyer said. “We’re early in this economic recovery.”

We may be early in this recovery, however, the bubble from the last cycle never popped. The belief that it will keep growing to infinity is a first order fantasy. 

aka. Wall Street consensus

Currencies have likewise rolled over deja vu of last year:

The Global Dow would concur - "correction" has begun:

Appropriately, this delusional market is now being led by pot stocks.