Wednesday, June 30, 2021

When Genius Failed To Exist

Today's financial pundits are mental midgets standing on the shoulders of intellectual giants. Therefore they are oblivious to the fact that this gamified alchemy is the exact opposite of what created prosperity in the past...

The stock market just closed out its (Second) best first half since 1998 which directly preceded the LTCM (Long Term Capital Management) debacle. We also learned back in April that more money poured into stocks since the election than in the prior 12 years combined. Since that time, inflows have continued their record pace - ETF inflows are almost at a new record only six months into the year. What we are witnessing is the ideal recipe for panic meltdown. 






Going back to 1998, Long Term Capital Management (LTCM) was a massively leveraged hedge fund managed by financial PhDs who were considered geniuses on Wall Street and in academia. The collapse of their fund in the second half of 1998 almost brought down the global financial system. They had made various asinine assumptions about the correlation of risk assets that were true most of the time but categorically failed when markets went into meltdown mode following the 1997 Asian Financial crisis. In other words they were oblivious data miners who assumed the past could be endlessly extrapolated into the future, hence they blindly ignored all imminent signs of risk and focused solely upon statistical probabilities. Which is the way all of today's quantitative/algorithmic trading programs work. Ignorance is bliss. More on that later. The book that described the entire debacle was called "When Genius Failed". Hence, the title of this post. The net result of that collapse was a massive Fed bailout that inadvertently lubricated the melt-up phase of the brewing Dotcom bubble. 

The Dotcom bubble itself was abided by the asinine belief that valuations, profits, and even sales no longer matter. All that matters is internet page views aka. "eyeballs". That new "business model" consisting of massively unprofitable companies going public at a record rate soon found the natural limit of fools with money to burn on worthless IPOs. At that point, the "smart money" rotated to the Big Cap safe havens - Microsoft, Intel, Dell, and Cisco. And then those stocks imploded bringing down the entire casino.

A divergence very similar to what is happening today:







When the Fed sponsored DotCom bubble collapsed, they lowered rates to a multi-decade low 1.5% which set off the melt-up stage of the brewing housing bubble. At the time, Fed Chairman Greenspan lauded the "financial innovations" taking place in the subprime lending market and he encouraged borrowers to load up on adjustable rate mortgages (ARMs). ARMs had been previously unpopular in the U.S. market because they shift all interest rate risk from the lender to the borrower, offset by a minor interest rate reduction. Within months, Greenspan jacked up rates 17 meetings in a row and imploded everyone who took his advice. But not before Wall Street had figured out how to package subprime dog shit into self-destructing weapons of mass destruction that inadvertently imploded the global financial system. 

And here we are again in the midst of a monetary fueled housing bubble:




So, what to do? The Fed bailed out Wall Street on the systemic meltdown they had created. AND paid them in full on their bets that the whole shit show would collapse.  Then the Fed lowered interest rates to 0% and started pumping money directly into financial markets. Thus inventing socialism for the rich.

Fast forward to today and the Idiocratic beliefs that attend this post-pandemic bubble are first and foremost the ubiquitous faith that assets are worth whatever price the last fool paid for them. In addition, the belief that central banks are omnipotent. The other obligatory delusion is the studied ignorance of accumulated market fragility which is a net result of 13 years of continuous monetary bailouts.

At this lethal juncture, low volatility is conflated with low risk. Which has been proven to be an asinine assumption over and over again these past years and decades. Nevertheless, serial bailouts have kept this critical hypothesis alive. 

"Volatility is the most common risk metric of a stock. The main aim of the volatility targeting technique is to manage the portfolio’s exposure in such a way that the volatility of a portfolio is as close to the target value as possible. In other words, to ensure that the amount of dollar risk remains the same. To do this, the portfolio manager has to increase or decrease the amount of leverage, depending on the volatility"


Here we see that S&P 500 volatility is at a three year low:





Here we see that these algo controlled "volatility targeted" markets are making new all time highs this week amid the lowest number of stocks confirming this rally in 18 years. I calculate the number of stocks BELOW the 50 day moving average at every S&P all time high: 





Below we now see that this past month June 2021 officially has all top ten highest option skew values in recorded history going back 30 years. Which from a statistical point of view is a Black Swan outlier event. In a random distribution, the probability that a top ten skew value will appear in a given month over 30 years is 1 in 36 (2.7%). The chance that all ten would be in the same month is .027 to the tenth power: (0.00000000000000027). In other words, "someone" is making massive bets that this gong show is ending.

As a reminder, skew represents deep out of the money option bets on a "Black Swan" market event:

"The SKEW index is a measure of potential risk in financial markets.

SKEW values generally range from 100 to 150 where the higher the rating, the higher the perceived tail risk and chance of a black swan event"

As we see the highest values happen to be the last four trading days of the best half since 1998:







Amid all of this asinine risk, it's ironic that FINRA finally got around to fining Robinhood for causing "widespread and significant harm to customers" during the Gamestop debacle. Which incited the suicide of one young trader who woke up to an erroneous -$720,000 account balance.

However, in the meantime since that debacle in late January, the Robinhood platform has added record numbers of new users, Congress has officially sanctioned Reddit pump and dump schemes, and margin debt has reached new all time highs. In other words, this fine is totally meaningless with respect to addressing the increasing fragility of market structure. A fragility that is hidden behind the collapsed volumes and volatility that have been extremely profitable for options market makers.

Suffice to say that the number of young people who are now at risk of waking up to negative account balances is quite unthinkable. All aided and abetted by a profoundly corrupt financial services cartel that has now captured regulators and effectively neutered them. 

Which ensures that they are always barking up the wrong tree. Penalizing the pissant Robinhood platform while the real risk is officially sanctioned.



"This week alone, 18 companies are seeking to go public, including Chinese ride-hailing company Didi Global in what will be the biggest IPO of the year...That’s the most companies in a single week since 2004"

 June was also the busiest single month since August 2000"

The majority of the returns are going to the (pre-IPO) institutional buyers.” 

FOMO [Fear of Missing Out] is the biggest thing"


(FYI, my IPO data includes SPAC IPOs)
















Tuesday, June 29, 2021

MISSION ACCOMPLISHED

To read today's Idiocratic news, one would believe that everything is back on track in the economy. Unfortunately, nothing could be further from the inconvenient truth. However, we CAN assume that the Wall Street recovery is complete...


"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way—in short, the period was so far like the present period"







It's a testament to the attention deficit of this gambling addicted society that they conflate manipulated stock market prices with the underlying economy. For the past 13 years since the 2008 bailout, stocks have rallied at every sign of a weakening economy, because it meant more central bank socialism for the rich. Which also explains from an archaeological standpoint why a global pandemic at the end of the longest cycle in U.S. history was viewed as a reason to go ALL IN. 

No surprise, Biden's economic plans have been roundly derided by the right as socialism for the middle class. Zerohedge and their patented inflation hysteria have been at the forefront of  this disinformation campaign regarding the economy. When they run short of their own in-house fiction they quote Wall Street's liars to bolster their credibility. Now, at this most parlous juncture they are declaring victory for the GOP states that ended the Federal pandemic unemployment benefits early. They cite a sharp dropoff in unemployment claims as proof that cutting people off from unemployment programs worked. I suggest that declining unemployment claims are a direct result of the programs ending, not proof that the GOP economy is "fixed".

The long-term problem with the U.S. economy derives not from emergency unemployment programs, but instead from the habitual mass layoffs that have attended every downturn of the past several decades. Each time mass layoffs occur, there is far less labor participation in the economy, as people retire early or are forced to take part time jobs. Good jobs are traded for junk jobs. This fact is captured in the Job Quality Index which has been falling for 30 years straight

Another way of looking at the problem is via the long term unemployment ratio below:

The % of unemployed over 27 weeks has sky-rocketed back to global financial crisis levels. Which is an indicator of how many people are on the verge of "retiring" early. When they "retire" they will be conveniently removed from the official unemployment rate. Problem solved.







As we see above, what happened during the pandemic is that once again U.S. companies panicked and laid off large swaths of their workforce. Arguably, the ranks of low wage unskilled workers are the easy problem to "fix" as Zerohedge gleefully points out. But, the harder problem to fix will be in the highly paid skilled workforce which is now facing an acute labor shortage that unfortunately won't be fixed by McDonald's help wanted signs. 

What do Boeing and GE have in common? Weak balance sheets due to massive stock buybacks. So what did they do in the pandemic? They laid off tens of thousands of workers. 


"Aerospace companies relied heavily on layoffs to cut costs and save cash. U.S. aerospace and defense companies have announced more than 115,000 job cuts since the World Health Organization declared the Covid-19 outbreak a pandemic last March"

it’s hard to imagine that many skilled workers would give preference to the aerospace manufacturers that laid them off when the going got tough"


Indeed. Loyalty cuts both ways. 

Today's inflation pundits are praying for stagflation, both to prove Biden wrong AND to keep a bid under their collapsing reflation trades. In today's terms they are "right" only in their proven ability to attract legions of useful idiots.

A skill I have yet to obtain.

Sadly, all of this delusion is running on glue fumes. Which means that the REAL test for this skydive into economic pavement is pending global margin call.

At that time I predict a sea change in attitude towards bailing out the rich is on tap. Today's amnesiacs must be reminded of the fact that 13 years of monetary socialism for the rich has only "saved" capitalism by making the divergence between wealthy and poor far greater in the meantime. 

I believe that such an unforeseen event will be sufficiently cataclysmic to ensure that apologists for epic greed and criminality are silenced.


For good.







Thursday, June 24, 2021

No Refunds On Delusion

In a nutshell, this society is a very useful Idiocracy...








First I will sum up the events of the past two weeks:

Going into last week's FOMC meeting, inflation hysteria was reaching a zenith. The WSJ warned that the Fed was leaning hawkish into the meeting, yet somehow the Fed's shifting forward the schedule on tightening STILL shocked markets. The very same pundits who had been screaming the Fed was behind the curve somehow didn't see the Fed changing course, even though it was their hysteria that forced the Fed to pivot their stance on rate hikes. There were many reasons why today's pundits were biased towards the inflation hypothesis. CEOs were using inflation as an excuse to raise prices. Billionaires were using it as an excuse to deride wage hikes. Ponzi schemers were using inflation as a reason to bid up over-priced homes, cyclical stocks, and Bitcoins. As always, there was plenty of conflict of interest to go around. 

Since that Fed pivot, there appears to be a lot of confusion over what just happened. Some pundits are of the mind that a Fed tightening will be good for cyclicals, however, that is not the case. Their argument is that higher interest rates are good for financials and other "short duration" trades. However, what the Fed-speak did was to flatten the yield curve meaning short term rates rose and long term rates fell. Future growth rates declined at the prospect of a tighter Fed. None of which is good for cyclicals. Which is why over the past week Wall Street has been rotating back to "long duration" trades - what I call deflation trades. This means long T-bonds and long Tech stocks.

It turns out that the cure for high prices is high prices. Inflation scaremongers should remember that fact, but they won't. So we will see this movie again no doubt.

These are not bright people. But they are useful idiots.

Here we see what "inflation" looks like on an absolute basis instead of the year-over-year pandemic comparison that has generated so much hysteria:




 


This is all very much deja vu of 2018 when the Trump tax cut came into effect and the global reflation trade imploded. Today in addition, we got news that Biden reached an agreement with the Senate on an infrastructure bill - one more thing that is fully priced into "momentum value" stocks. 

The entire rest of the world ex-U.S. is effectively part of the reflation trade. From Emerging Markets to the commodity heavyweights (Australia/Canada). While European value stocks are the best performing market year to date. 



 


All of which is why the Dow has yet to confirm the new all time high on the S&P and Nasdaq. Not only is the Dow heavy on cyclicals, but it's price weighted so it's not as overly influenced by the mega cap Tech stocks. Apple, which is the largest market cap stock in the world, is only weighted 20th in the Dow 30 index.









Here we see that breadth and new highs on the S&P 500 have collapsed. Only a very few massively overvalued and overbought mega cap Tech stonks are holding up the index.







Even within the Nasdaq breadth is abysmal






What's so good about conning people into believing something that isn't true?

It's extremely lucrative for those who are looking to sell things to unsuspecting sheeple. 






In summary, overnight risk has increased exponentially over this past week.









Tuesday, June 22, 2021

Too Big To Bail

Global central banks have finally succeeded in creating a bubble of a sufficient magnitude that it can't possibly be bailed out. What more reason to go ALL IN?







The uneven effects of Globalization were accelerated by COVID. The super asset bubble inflated billionaire wealth to all time highs, while it collapsed the incomes of the working class. Policy-makers sensed the system was at risk and rushed in with unemployment stimulus. Nevertheless, the inequality time bomb has been ticking away silently in the background. Picture what happens in a meltdown scenario - the public will be in no mood for private bailouts amid record wealth inequality. In other words, this epic mega bubble has no safety net. Monetary or otherwise. 

Whoever was making massive options bets last week around the FOMC meeting has continued their bets this week. Option skew measures "Black Swan" market risk as imputed from deep out of the money options. 

Of course, most of today's pundits would say this is a meaningless signal with questionable accuracy. They are ignoring the fact that it worked well albeit not immediately in 2018 and again in 2020, -20% and -35% S&P declines respectively. However, these recent skew readings have been literally off the charts. The top of the skew range is supposed to be 150, whereas these current readings have been between 150 and 160. The past four weeks now has nine of the ten largest skew readings in the past 30 years. So what if instead of being a meaningless signal, these readings were telling us that the big money believes this is the end of the super cycle. What if these readings were predicting an epic collapse of biblical proportions?

We know one thing for certain, they would be assiduously ignored. The other thing we know is that ALL of today's pundits now ignoring this signal will claim that no one saw it coming. 

Top ten skew values since 1990 (data begin):





Aside from elevated skew, there is not even the slightest sign of fear in these markets. The Ponzi class has no clue what's coming. As we see via this chart of NYSE selling pressure, this pattern of complacency has been building over the past decade. Last year's pandemic selloff elicited less panic selling than 2015 and 2011, to say nothing of 2008:






Since the "bombshell" FOMC meeting last week, the Tech sector has been leading what remains of this "rally". Today, the Nasdaq made a new all time high, finally breaking above the February/April double top.

Here we see that breadth and new highs are diverging massively at this new all time high:







Looking at the Global Nasdaq we see two melt-up highs since 2010. The 2015 rally is at the mid-point of the cycle.

That 2015 rally and crash was the "Shanghai Surprise" when PBOC liquidity bid up Chinese Tech stocks to ludicrous valuations. Then they crashed -60%. This latest melt-up is the U.S. analog to that discontinuous price "discovery".

This is the new imagined reality:







Cyclicals on the other hand are looking very Lehman-esque these days.

One example is PNC Financial which made an overthrow high in 2008 as well. It turned out to be a bull trap, since the Fed was preoccupied with fighting rising inflation expectations deja vu of today. 

It turns out that those propagating inflation theories back in 2008 were wholesale idiots, just as they are now. But unfortunately, this society doesn't trust anyone who can be trusted. 







Raymond James Financial, same idea.

People had far too much confidence in the Fed and therefore they didn't manage risk. They sailed straight into disaster. No deviation from the set course.  







Of course most gamblers in 2008 didn't get bailed out, they got margined out. Only the people who actually created the entire financial disaster got bailed out.

And now everyone is betting it will happen again.

Because they believe in the "system".

And I am saying, that's a bad bet this time.

This time around someone with deep pockets agrees with me. If 2008 is any guide, it's Wall Street themselves buying this protection. Just as they did in late 2008 flipping from the Big Long, to the Big Short, using credit default swaps, just in time for subprime meltdown.  

Betting their own muppet clients are about to get wiped out by fraud and criminality.

Is this a great fucking system, or what?






Saturday, June 19, 2021

There Is No Safe Space From Reality

One thing both the far left and far right have in common is an extreme aversion to reality. Since 2008 central banks have sponsored this vacation from reality by consistently bailing people out of their own stupidity, which has encouraged ever greater stupidity. Now this Idiocracy is painted into a corner with no way out. It was inevitable they would come to believe that markets drive the economy, instead of the other way around. Yet, no one wants to question this paradigm of moronism, because they don't want to look stupid. They believe in the strength of numbers...








The reason why this society doesn't see this ending is because they are now fully addicted to cheap money. This latest global housing bubble is exhibit A of a gambling addiction that has far more fear of missing out than of bubbles crashing. This week, global risk markets had a taper tantrum over the prospect of higher Fed interest rates TWO YEARs from now. What a joke. At any other time in history, these interest rates would be considered a disaster from an economic and financial standpoint. Dire emergency measures indicative of ZERO future economic growth. Today these record low rates are considered an opportunity to ignore valuations and bid asset values to infinity. The value of a perpetuity over 0% is theoretically infinite according to Finance 101. Unfortunately, in the real world there is no such thing as a perpetuity. When the cycle ends, the cash flow on insolvent assets turns negative. The value of an insolvent asset at the end of the cycle is ZERO. Today, as the global economy struggles to re-open amid massive amounts of new debt, gamblers are bidding up their own assets like it's 1929. There is now an entire generation of gamblers who believe that bear markets are a relic of the past. Defeated by free money and infinite leverage.

This week the Fed monkey hammered the reflation trade by merely suggesting that a rate hike could happen in 2023, almost two years from now. Never before has there been such a long runway given for a planned rate hike and yet it still caused a major market selloff. The question on the table is, did it kick off the final meltdown? Gamblers are now caught between the Scylla and Charybdis of a moribund economy and risk assets bid to record valuations in anticipation of strong economic growth. There are two paths this can take - imminent economic collapse to justify low interest rates, OR sustained growth justifying higher interest rates. These monetary addicts want low interest rates and high growth and now they're having a temper tantrum because both does not exist in the real world.

I leave to CNBC, Wall Street, economists, inflation assholes, and politicians to lay out the case for owning massively overvalued risk assets. Basically all of the people who benefit from the monetization of useful idiots. 


Fortunately, I don't have this conflict of interest, so here below is what could go wrong:

First off, now a small handful of massively overbought and overowned Tech stonks must carry this entire market. The Nasdaq has made three attempts at a breakout since February, each time amid weakening breadth.








Here we see via the (inverse) dollar, the $USD is carving out a similar pattern as last year. Basically a headfake selloff followed by a face ripping rally.







On Friday, the global Dow closed below the 50 day moving average for the first time since the election:







The stock / bond ratio is rolling over hard from record overbought:







As bond yields roll over, cyclicals are going bidless due to the FOMC meeting commentary and also due to late week hawkish comments from St. Louis Fed President James Bullard.

FYI, Bullard is giving another speech on Monday.

An astute observer will notice that last June when cyclicals rolled over, the 50 dma and 200 dma were at the same level. This time, the 200 dma is a bear market away and cyclicals have been above the 200 day for an entire year:











Thursday, June 17, 2021

Massively Leveraged To Collapse

Peak asset values implies peak credit expansion. Peak credit expansion means peak "reflation"...








What today's pundits and gamblers ALWAYS forget is that when asset values collapse, liabilities remain the same. Home values plunge below mortgage balances leaving buyers stranded underwater with no way out. The lesson not learned from 2008.

Forty straight years of deflation later and these people STILL haven't figured out that debt is deflationary. During the pandemic global debt sky-rocketed. No surprise, today's debtors are praying for inflation which benefits the borrower at the expense of the lender. Deflation, just the opposite - debt service grows over time as wage gains stagnate relative to mounting debts.

Here we see via Treasury yields that the speed limit of this economy has been constantly falling over these past decades as debt burdens mounted. Each recovery exhibiting less vigour.

Now the fiscal multiplier has collapsed to a point that a 20% of GDP deficit is expected to produce a mere 5% GDP "growth" over last year's anemic lockdown GDP.

Over 2019's prior peak, 1.8% annualized.



 


We are seeing typical end-of-cycle indicators with respect to asset values, credit expansion, IPO issuance, and of course "inflation". 

Nevertheless, from a borrower's perspective, this delusion can never end. 






Yesterday's FOMC non-event somehow shocked markets when they learned that the free money party won't last forever. No one saw that coming. A few minor shifts in tone and no change in policy sent the massively overbought cyclical bubble into a taper tantrum.

For three months stonk investors had been ignoring the bond market's message, compliments of ad-sponsored bullshit issued by media outlets that specialize in monetizing useful idiots.

Inflation isn't just transitory, it's already over.











Cylicals are at key support which has not been violated since the election.






The new fantasy is that Tech stonks will now take back leadership from imploding cyclicals. Never mind the fact that Tech stocks remain multi-decade overbought.

The COVID rally is the current era's analog to the post-LTCM Y2K melt-up. Both were driven by coordinated global central bank liquidity:







This week we got news that during May record margin debt expanded once againWhich coincides with a new low in Rydex cash balances.

Which means this society is record leveraged to a fraudulent Wall Street recovery. 








In summary, just as COVID was an ignored warning for an unhealthy society heading down an unsustainable path, so too are all of today's economic and financial signs being ignored.

This society is addicted to debt AND addicted to fiscal/monetary stimulus - a combination that does not work together. Yet, these fools believe they are successfully avoiding reality in every direction. Too dumb to realize how dumb they are. 

In for the surprise of a lifetime aka. a re-test of last year's lows. 







I would be remiss if I did not point out that of the top ten largest "Skew" readings in history (30 years), an astounding seven are in the past three weeks. Four this week alone. The random chance of that happening is 0%.

Skew measures tail risk as imputed from out of the money options. The range of skew is supposed to be 0 to 150. However, all of these recent readings are in the 160 range:

Top ten sorted by skew:



 







Someone always knows something.








Monday, June 14, 2021

The New Permanent Plateau Of Idiocracy

In the biggest asset bubble in human history, this Idiocracy has convinced themselves that prices can't go down, they can only go up. Because to believe the alternative is unthinkable. Which is why as prices go up, IQ must go down...



June 10th, 2021:
Consumer Prices Jump Most Since Lehman 2008:





Over one year from the onset of the pandemic and the biggest asset bubble in human history has reached lethal proportions. Valuations are totally meaningless at this point in time. At the best of times Wall Street predictions have the veracity of a profoundly corrupt Magic 8 ball. Now they are ludicrous predictions regarding post-pandemic profitability built on top of the asinine predictions regarding the post-pandemic economy. 

The only quasi-objective measurement of valuation is market cap over GDP which has reached suicidal levels that portend years if not decades of negative returns for current holders of stonks at these levels.

The period after the Y2K high is sometimes called "The lost decade". However on an inflation adjusted basis it was a lost 15 years:






The U.S. is now firmly down the path Japan took thirty years ago. It's called deflation denial.

Japan has had many false dawns over these past three decades - too many to count. Each one landed them back at the zero interest rate bound. 

For those who want a straightforward explanation of inflation versus deflation - here it is:

Deflation is when wages are going up slower than prices. Inflation is when wages are going up faster than prices. Which do you honestly think we are in? Exactly. We are at no risk of hyper-inflation. Back in the 1970s, the economy was at full capacity utilization and private sector unionization was all time high. Now today, both capacity utilization and unionization are at an all time low. There is no cost of living increase at Chipotle.

Under this current paradigm, there is constant downward pressure on wages - from outsourcing, immigration, automation, and now mass unemployment. Worse yet, monetary policy is solely focused on financial markets which is why there is constant hysteria over the slightest inflation. Our entire society is now enslaved to financial markets.

Those who think that prices can't go down have severe amnesia. 

For example, they've forgotten that home prices collapsed in 2008:






They have forgotten that oil went negative last year. Which is the MAIN reason why the CPI is so high this year:





They don't remember that you can't bid up your own assets. 

Although not for lack of trying.






When this super bubble explodes sending the price of everything down at the same time, then this society will finally understand the concept of deflation.

They will panic. Central banks will panic. 

But it will be far too late, because confidence in Disney markets will be lost. 

Permanently. 

And then everyone will be on the same page.