Margin Call On Bullshit

The Fed is driving the bond market to a Minsky Moment, in order to "help" the economy...

"When the tide goes out, you discover who's been swimming naked"

- Warren Buffett

"A battered Treasuries market faces another trying week as it will have to absorb a massive slate of auctions focused in maturities that have gotten pummeled amid a brightening outlook for growth and inflation"

It’s been a month since a disastrous seven-year auction sent the bond market into a tailspin that reverberated across financial markets and helped put benchmark yields on the path to prepandemic heights. Now that maturity is on the calendar again"

One month ago this week is when the Tech rout accelerated due to the spike in bond yields - that was BEFORE the stimulus passed...

Zooming out to the decade view: 

The one year rate of return in long-term Treasury bonds is the worst since 2010. But cyclical stocks are cycle highs

Someone is swimming naked:

One month on from the failed seven year bond auction, the $1.9 trillion stimulus is in effect, the Fed is still on full afterburner, AND as feared last month the SLR is expiring:

February 26th, 2021:

"Bond traders were already on edge as they waited for Fed guidance ahead of next month’s expiry of a regulation that has encouraged banks to buy Treasuries"

The main protagonist in the bond market was the five-year Treasury note, a maturity often associated with long-term Fed rate expectations"

Friday the SLR was rescinded because it had been encouraging excessive risk taking over the past year:

"It is surprising. You can see it to some degree from the markets reaction. I think some people figured if the Fed was going to kill it, they would give it more than 12 days.”

Schumacher noted that banks are bigger holders of 5-year Treasury notes, whose yield edged higher after the announcement"

The supplementary leverage ratio is a product of post-Great Recession banking reforms...Fed officials worry that relaxing the ratio might encourage banks to load up on risky assets like junk bonds, which carry the same weight against reserve requirements as safer holdings."

Unlike every other cycle, there has been no deleveraging in this cycle - quite the contrary there has been a massive increase in risky junk debt. Which is why the Mr. Creosote bond market is hyper-sensitive to reflation expectations. Policy-makers assumed they could build a new bubble on top of the last decade's super bubble: 

Over the past year, massively leveraged risk has been accumulating in corporate debt markets, sovereign debt markets, and of course stock market margin accounts (lower pane). The Fed has lost control of the Treasury market - they can't step on the brakes or the gas, without imploding markets. They are now bystanders to their own Minsky Moment.

Since last month's failed bond auction, the overnight lending ("repo") crisis flared up again, the stimulus was passed, the FOMC reiterated their policy to "run hot", and the SLR just ended. All factors that will put even more pressure on the bond market. 

Failed bond auctions, record junk debt, pump and dump ETFs, FOMO ETFs, brokerages offline every other day, record SPACs, record speculation - just remember:

"No one ever sees it coming"

Financial Weapon Of Millennial Destruction (WMD)

The biggest risk to gamified markets, is the gamification of markets...

For the first decade+ post Global Financial Crisis, Millennials stayed on the stock market sidelines, more prone to joining the Occupy Wall Street movement than joining the investment club. It took a global pandemic depression at the end of the economic cycle to finally convince them to go ALL IN. Now those who have never experienced a single bear market inform those of us who have that WE don't know what we're talking about. Unfortunately for the all-knowing ignorati, the current level of record margin leverage is a financial weapon of Millennial destruction. And there will be substantial collateral damage.

I've heard many perma-bulls rationalize high margin balances by saying that margin levels merely follow the market - up and down. However, any mental midget can see from the chart above, that is not true. One year ago at the start of the market rout, margin balances were at a four year low going back to 2016. I suggest that the low level of margin is one of the reasons why the market didn't outright implode. We will now find out what last year would have felt like, with record margin balances. 

Stepping back for a longer-term perspective, it took the gamification of markets to finally get the Millennials off the sideline. Up until trading became a video game it was too boring to warrant their interest. We have learned recently that their favourite trading app, Robinhood, is merely a Candy Crush front-end for the Citadel HFT dark pool. Which means that under the cleverly marketed auspice of democratizing markets, newbie investors are being fed to the sharks. Since the Gamestop pump and dump debacle, newbie investors have accelerated their adoption of online investing. Now there is an SEC-approved ETF called "BUZZ" that bases its investing decisions around Reddit boiler rooms. Weeks after Gamestop wiped out untold numbers of newbie investors, this week Cramer was out recommending Gamestop as a potential stimmy investment. Cramer knows full well that hedge funds made the most money from that debacle - on the short side. Bill Gross said he made $10 million shorting idiots. Chump change by his standards. 

 

When Congress held their hearings on the entire Gamestop debacle, their primary concern was that brokerages had limited access to retail participation in the pump and dump scheme. It was a fucking circus. Everyone deserves equal right to lose all of their money to market fraud. It's the American tradition. Next thing you know these Marxists will want to regulate Wall Street.  

I normally wouldn't show such a pissant stock as Gamestop, but here we see it is a typical pump and dump scheme. It round tripped from $40 to $480 and back again in a matter of a few weeks. Most of the dumb money got trapped at the top. Then it had a second go around to a lower high that was three waves corrective.

A good indicator for overall social mood at this latent stage. For this week of peak stimulus, Gamestop is down -20%.

I've heard another rationalization recently that if Tech stocks implode deja vu of Y2K that cyclicals are now leading the market, so it won't matter. The strong breadth is proof that there is broad leadership. That specious argument gives me a good segue to discuss cyclicals during this key FOMC/Biden stimulus week. 

First off, it's true that in Y2K cyclicals were lagging badly when the bubble imploded. This time around cyclicals have been rallying since November. So now cyclicals are concurrently record overbought. Why that is good is not for me to say. We have never seen the Nasdaq and Dow multi-decade overbought at all time highs at the same time. This week, Morgan Stanley downgraded small cap stocks on valuation. In addition, the Fed just monkey hammered bank stocks with its decision to rescind the COVID-era emergency "SLR" (Supplemental Leverage Ratio) rule change that exempted Treasuries from being considered assets that need to be collateralized with capital. 

The irony can't be overlooked, as bank stocks finally eclipsed their 2007 level this week:

I will go out on a limb and say that this week during peak stimulus, the November post-election rally in cyclicals has finally peaked:

I would be remiss if I didn't mention that oil got monkey hammered on the week.

In summary, every retail bagholder knows that the time to buy the most overbought sector is 14 years after the prior market high. Millennials know it better than anyone. Because they are the only ones who have no idea how much fun it can be buying the top. 

It's their turn. 

Hyper Asset Inflation Hyper Asset Crash

Monetary policy is no longer helping the economy and the fiscal multiplier has collapsed, so the ever increasing firehose of "stimulus" is having its primary effects on markets...

The greatest risk we face - and one that none of today's pundits are discussing is the fact that ludicrous amounts of stimulus are now needed to move the economy. Stimulus that is having far more impact on markets than the economy. This is a risk that policy-makers have implicitly accepted and of course casino gamblers could not be happier. However what it all means is that the inevitable reversion to the mean will be a devastating crash AND there will be no stimulus safety net. 

Here we see from a chart of cyclicals that long-term bond yields have just now reached the 2009 lows. And yet, all of today's pundits are panicking that bond yields are too high. Why? Because back in 2009 at this level of deflation, cyclicals were down -80% from the highs, whereas now they are up 180% from the lows. Again, all of today's monetary policy is now fixated solely on markets, and because this stimulus is having a dwindling effect on the economy, we now have a case of epic over-valuation and a moribund economy.

Policy-makers are pushing markets inexorably towards an epic crash with no economic safety net. 

The reason why all of today's economic analyses are clueless is because economists are using year over year % gains to measure improvement in the economy. When the baseline is the worst depression in 90 years, year over year comparisons are meaningless. They need to compare to 2019 as their baseline, not 2020. For example, on GDP, the Congressional Budget Office puts calendar year 2021 GDP growth at 6.3%. Goldman Sachs estimates 2021 growth at 8%. However, using 2019 CBO numbers as a baseline, the TWO YEAR growth rate is actually 3.8% which is 1.9% per annum. Somehow, 2% GDP growth and 20% growth in national debt, doesn't sound as good. It implies a fiscal multiplier of 10% - spend $10 of government money to get $1 of GDP. 

We see this type of disingenuous data mining all the time. Here we see that the most recent CPI came in at 1.68%. And yet according to Zerohedge, we are on the verge of becoming Zimbabwe. 

What we have isn't sustained inflation, what we have is asset inflation due to rampant speculation, feeding back into the economy, where it's doing far more harm than good. 

For example, we are told that a lumber shortage has caused lumber prices to skyrocket, which is now tanking the housing market. 

Here we see housing starts (black) with lumber prices (red). Housing starts today are far lower than during the housing bubble, yet lumber prices today are far higher:

Of course monetary policy is now ENTIRELY skewed towards markets. At the 0% bound, there is no room to cut rates to help the over-levered economy. In addition, quantitative easing is solely intended to give risk asset markets the feel good fake wealth effect. The theory is that the economy will eventually catch-up to epic over-valuation. Someday, over the rainbow. 

Unfortunately, there is no such thing as "free money". This is a lesson that today's pundits, the public, and the Fed still haven't figured out. By attempting to monetize the Biden deficit, the Fed is now driving reflation expectations higher. Which means they are in a box - they can keep buying bonds and driving bond yields higher until global risk assets implode, or they can stop buying bonds and watch the over-supplied t-bond market go bidless, imploding risk assets. Either way they have effectively lost control of the bond market. 

This article from Mohammed El-Erian gives the long version of what I just said. And no, the Fed did not just "thread the needle". They bought a one day short-covering reprieve from higher bond yields. 

Here we see the Fed balance sheet and T-bond prices. In the deflationary phase  of 2020 massive bond purchases held up the bond market. Now, in the reflationary phase, the massive doses of liquidity are having the predominant effect of driving up reflation expectations, which is crushing the bond market.

This past year the Fed expanded their balance sheet by $3.5 trillion, mostly buying long-term Treasury bonds. And yet prices have collapsed. What should they do now, buy more?

El-Erian:

"Trying to calm the yield concerns by signaling more purchases of securities, thereby risking yet another leg up in inflationary expectations"

Of course we've seen this movie before but never when the impending outcome was this dire. We saw headfake reflation in 2008, 2011, and 2018. The Dow drawdowns were -55%, -20%, and -20% respectively. 

What it comes down to, is that in order to appease financial markets, the economic bar just keeps getting lower and lower and lower, while asset markets keeping going higher.

This is an asinine divergence that can only end one way. When everyone agrees it's an asinine experiment. In the meantime, they need to get conned by asset inflation and the attendant bullshit, one, more, time...

PEAK SUGAR HIGH

There has never been more combined fiscal and monetary heroin coursing through the veins of Disney markets as there is right now. The Fed's plan is to allow markets to "run hot". So be it...

Yet again we are reminded that today's monetary policy is solely aimed at managing markets at the economy's expense. Most of today's critics blame the Fed for this policy, however these apologists for corruption should be aware that the majority of today's wealthy have no complaints whatsoever. Regardless of who gets the blame, what so many of today's pundits call "running hot" would have been a deflationary depression at any other time in U.S. history. Now that debt is fully conflated as "GDP", the Fed must at all times be mindful of market reaction regardless of the level of long-term unemployment. Now, the market IS the economy. Once again, long before any of the long-term economic damage can be repaired, stock market overvaluation and bond market decimation will require stimulus reversal. 

Today however, the Fed was again dovish meaning they are choosing to allow risk markets to "run hot". Clearly they have no fear that risk assets are becoming overheated. That fear is reserved for moribund economies. 

One might ask, why are Tech stocks bid in light of the Biden stimulus and the Fed easy monetary policy. After all, aren't Tech stocks inversely correlated to interest rates? Yes they have been inversely correlated for months, however one must keep in mind that this week and today in particular is peak stimulus. The point at which the majority of stimulus checks are deposited into brokerage accounts. In other words, lucky gamblers got both their stimulus check AND a dovish Fed on the same day. MAXIMUM monetary and fiscal heroin.

And yet amid record combined fiscal and monetary policy, the S&P 500 eked out 11 points on the day. The Powell curse was avoided today and all it took was $1.9 trillion in stimulus. Needless to say, when the sugar high wears off, I remain somewhat skeptical as to what happens to overheated risk markets.

And, as always us skeptics of Disney markets are in the minority.

“The younger you are, the more I’m begging you to take an aggressive stance on something speculative”

On Cramer's speculative buy list for newbie gamblers he has both Snowflake and Gamestop. Two things that go great together. 

This morning even Cramer was saying that the SPAC market is totally out of control. He says this amount of issuance is going to crash the market at some point. Junk overload.

This marks one year and counting without a RISK OFF event.

In summary, today's Fed actions combined with stimmy overdose just cranked the stock/bond ratio to full level '11'. Meaning an unwind is now unthinkable for trapped gamblers. 

They better hope it's going to infinity, because that is now their consensus bet. 

Another Wall Street "Recovery"

The lesson that apparently very few of us learned in 2008 is that you can't trust proven criminals. For president or any other trusted occupation...

The reason that my predictions around the economy diverge massively from those of Wall Street economists, is because we have very different definitions of "recovery". For financial managers, recovery means that corporate profits and asset prices are back at all time highs. My old fashioned definition of recovery means that the average person feels that things are actually getting better. In this day and age, those two goals are diametrically opposed, so we need not hold out imminent hope on the latter.

After the 2008 meltdown, economists declared the recession was over by June 2009. However, for many households, the economic pain went on for many years afterward. Then as now, the 2008 recession created massive numbers of long-term unemployed workers, on a scale never before seen in U.S. history. For Wall Street, the recovery was almost instantaneous, as it was this past year. 

"The Labor Department’s technical definition of “long-term unemployment” applies to someone who’s been jobless for 27 weeks or longer — a bit more than six months."

In the January jobs report, that was 40% of unemployed folks. That’s not even taking into consideration the people who’ve just given up and left the labor force altogether."

Here we are all over again. Wall Street is busily declaring that the "recovery" is well underway. And for the middle class, the same long-term hangover effect is now in place. Of course this time around we have massive and dramatic stimulus for as far as the eye can see. However, the current unemployment stipend of $300/week works out to roughly $7 an hour. So, for a minimum wage worker that amount gets them back to the poverty line. For high wage workers, that amount plus their normal state unemployment is a pay cut. There is no reflation in either of those scenarios. 

This ongoing deflationary morass is corporate paradise. It's deflation combined with jobless consumers. Cheap capital, cheap labor, and pain-free layoffs at public expense. 

Notice that today's ebullient claims of recovery assume interest rates will remain at emergency levels indefinitely, as will QE, and the Federal debt will continue to explode. What in previous times would have been called a total fucking disaster, is now called "recovery". With each iteration, the bodies get stacked up like cord wood. 

As Japan has proved, this can go on for a very long time. Japan has the largest debt as % of GDP in the world, and yet which currency is considered the ultimate safe haven? The Yen. When markets go into meltdown mode, the Yen is the asset class of choice. And the second safe haven is the Ponzi dollar, third the negative yielding Euro. 

I am not a conspiracy theorist, because I don't consider greed to be a conspiracy. However, we should be aware that the beneficiaries of this 9-11/Lehman/COVID permanent economic Shock Doctrine don't EVER want it to change. So we need not assume that the economic "reforms" I listed recently, are pending. One should ask themselves, how can an economy that is systematically oriented towards making the richest people consistently richer ever create "reflation" for the middle class? Obviously it can't. For the ultra-wealthy, the marginal propensity to spend is extremely low. Most of their wealth gets saved. Which is a major reason why government stimulus is no longer stimulative. The money goes from the Federal Reserve to the U.S. government to the stimulus recipient, to the corporation, to the bottom line, and out to the Cayman Islands. It doesn't get re-invested back into the economy. Almost half of it goes to stonks to front-run imminent reflation. 

Which is also why the velocity of money has collapsed. Banks are happy to sit on excess reserves and earn interest from the Fed. At peak household debt, the stimulus money is not circulating back into the economy. 

The consistent theme that has accelerated over the past decades is for monetary policy to be hyper-tuned to financial markets at the expense of the economy. As interest rates have plummeted during this period, the general consensus for what is a "hot economy" has declined inexorably, and along with it capacity utilization and full time employment. As I've said, this hyper-sensitivity to "inflation" is due to the massive amounts of debt. It has effectively lowered the speed limit on the economy to the zero bound. 

Currently we are told that bond yields are too high, and the economy is over-heating. What they mean is that the financial markets don't like to see big wage gains, so we need to shut down the reflation party before it becomes too inclusive. 

Stepping back for a wider perspective, decades ago futurists predicted that the society of the future would work less and spend more time on recreational pursuits. For decades they were wrong, but after the stagflationary 1970s, the inexorable decline in inflation, full time jobs, and interest rates brought their prediction to fruition. COVID and the virtual stay-at-home economy merely accelerated the trend that was already in place.

The future has arrived:

"Automation, in tandem with the Covid-19 recession, is creating a 'double disruption' scenario for workers," said the report published Wednesday in Switzerland by the World Economic Forum, which warns that inequality is likely to increase unless displaced workers can be retrained to enter new professions."

For the first time in recent years, job creation is starting to lag behind job destruction"

Got that? For the first time ever, technology is now destroying more jobs than it creates. The secular trend of increasing employment that has been in place since the industrial revolution began, is now reversing. 

Now, before everyone jumps off a bridge, I don't personally view this as entirely bad news. I think that the next generation needs to devote their time and training to professions that are less likely to be automated. I think for many older people who are pre-retirement this implies part time work in conjunction with time spent on other interests. I am also optimistic that with Trump we achieved peak Assholism with respect to the policy of robbing the middle class to pay the rich. No one can say we didn't try hard enough. 

What about universal basic income? I think it will be basic but it will not be universal, it will be means tested. And hence it will not be inflationary. Again, corporate paradise. Part time workers subsidized by an unlimited balance sheet. Think $10 minimum wage and $5 basic income. Something along that lines. 

From an investment standpoint, all of this means that we are entering the long sideways. Meaning buy the dips and sell the rips. As far as imminent dollar destruction is concerned, Japan is 31 years and counting with the world's most printed safe haven currency.

What does this have to do with explosion? 

Nothing. It's still well on track, the masses are still going to shit a brick as expected. And then like the Japanese, NO ONE will trust the stock market. 

That will be the time to buy. The rule in all pump and dump schemes is that you can rent delusion, you just can't own it.

Of course there will be re-regulation of Wall Street, but it will come far too late to save the usual bagholders. Those who STILL trust Wall Street and their bullshit recoveries, deserve their certain fate.  

We are very late in the pump and dump cycle:

Stimulated Prosperity

One year later and central banks have succeeded in creating human history's biggest pump and dump scheme. They couldn't have done it without Reddit, Robinhood, and comatose regulators. The over-stimulated losses will be astronomically unaffordable in the worst economy since 1930. All of today's economic predictions are now riding on the biggest bubble in human history...

One year since the steepest depths of the March 2020 crash and what has changed? Gamblers are throwing their third stimulus check into the casino this week in order to bid up their stimulated prosperity:

"During the “hope” period, between March and November, healthcare and technology stocks soared at the expense of financials, airlines and others hit by contracting economies and travel bans. The two sectors now comprise 42% of global equity market capitalisation compared with one-third before the pandemic hit."

On the chart below we see that at the February highs last month, the one year Nasdaq % gain equaled the melt-up in Y2K. As we see, the uptrend line was never broken. The "bear" market of last year doesn't even register on the weekly rate of change (lower pane), that's how fast the rotation from cyclicals to Tech stocks took place. 

Now, deja vu of Y2K, markets are reversing out of Tech back into cyclicals. Gamblers are under the firm belief that cyclicals can take over from the Tech/healthcare sectors that now dominate market cap. Unfortunately, the Dow's outperformance into this top is the greatest in history, going back 100 years. Only today's copious fools would believe this will continue, which is why it goes unquestioned.

This is a far deadlier set-up than what occurred in Y2K. 

Broadening top:

"It is a common saying that smart money is out of market in such formation and market is out of control. In its formation, most of the selling is completed in the early stage by big players and the participation is from general public in the later stage."

"Retail investors are continuing to jump into the market in droves even after the dust has settled from the GameStop trading saga."

How to explain to the grandchildren that a massive pump and dump scheme was the reason traders flocked to the markets at the end of the cycle?

Fear of missing out.

"Do you have fear of missing out on all this wild trading going on this year? Would you buy a FOMO fund if someone offered it to you?

Some investors are betting you will."

There already is a FOMO ETF, it's called XRT. Gamestop is its largest holding.

Of the three major rallies in the past five years - two of which already failed, this one is by far the fakest, and least questioned. 

The global Dow has been decade overbought for four months now. Looking at this chart one would have no clue that this is the weakest global economy since the Great Depression. Job losses are four times worse than the 2008 Great Recession. 

What all of today's "experts" have forgotten is that monetary policy no longer stimulates the economy, it only stimulates markets. On the fiscal side, the U.S. economic multiplier has collapsed to the point at which a 20% of GDP deficit is only producing 4% GDP growth in 2021. As the third stimulus gets distributed this week, risk markets are once again running on glue fumes. Policy-makers have succeeded in creating the biggest divergence between fantasy and reality in history.

Large even by today's dumbfuck standards. 

The top performing sector making new all time highs this week happens to be micro cap stocks - the junkiest stocks in the entire market.

In summary, when the largest financial WMD in human history explodes at the new permanent plateau of delusion, "without warning", the financial dislocation will be epic. 

And the sheeple will no longer trust stimulated prosperity and the "experts" telling them to believe in it.

All it took to achieve record complacency was a global pandemic depression, and record printed money, the secret to effortless wealth. 

Fake Recovery: MAX PAIN TRADE 2021

Of all of the massively overbought and overbelieved fantasies in this era, none will be more painful than the falsehood of recovery now being spun by global central banks...

The pain in the Tech trade is well along and primed to accelerate when the stimmy sugar high wears off. However, this consensus end-of-cycle value rotation will be the most abrupt and painful reckoning in the stock market.

As it was in 2008.

Then as now, gamblers and central banks are oblivious. Drugged by the virtual simulation of prosperity and its acolyte QE.  

In a recent post I posited that reflation is no longer possible under the current paradigm of Global Japanification. The Federal fiscal multiplier has collapsed and the virtualized economy is no longer labor dependent. When the U.S. had a sound middle class and tight labor market, sustained inflation was possible. Now, amid mass unemployment, it's no longer possible. 

There are several major structural changes that would have to take place to change my mind. First and foremost the global debt and asset bubble needs to explode, which will be an extremely deflationary event. Secondly we would need to see increased trade protections as currently the U.S. is importing deflation from abroad. Third, there would need to be a recurring basic income which will merely offset rampant poverty. Generally speaking there would need to be an ideological shift towards more labor friendly policies, and then mass unemployment would have to be alleviated. Of course all of this would take a long time and in the meantime deflation will be extreme.

For major debtholders and those who have over-leveraged themselves to this massive con job, it will be quite painful. On the other side of reset there will be a glut of everything which will take time to clear. Given that as background, suffice to say there is no sustained inflation on the horizon. What inflation exists is commodity inflation feeding back into the CPI, mostly through oil prices.

Given all of that, I see the most painful trade being the unwinding of the record short t-bond trade. When the global RISK OFF crash gets out of control, the Fed will obliterate consensus t-bond shorts. I see long-term t-bond yields heading to 0% by the end of this year. The short squeeze will make Gamestop look like chump change. T-bonds are the only asset class that has a guaranteed bid when this all explodes, and the Fed is already getting nervous.  

TLT (Thirty year bond ETF) has substantial upside over the coming months, and will outperform stocks massively in 2021.

In summary, don't fight the Fed. 

Gamble at your own risk.

Or, you could just bet that this will go to infinity.

Because that is what everyone else is doing.