Systemic Risk Update

Crash is too polite a term for what is about to take place. Crash implies a linear trajectory for asset prices. One that has a beginning, a middle, and an end capitulation phase, followed by an eventual rally. Instead, what is about to take place will be a non-linear thermonuclear asset detonation. One that has far reaching impacts the likes of which we've never seen before...

Whereas 2021 was the year of openly welcomed market manipulation: By central banks, Reddit boiler rooms, and Wall Street momentum algos, 2022 will be the year when the record overvalued super asset bubble explodes. All while the investor Idiocracy was worried about baristas earning $15/hour. If you think that a Y2K Tech bubble and 2007 housing bubble both imploding at the exact same time will be "inflationary",  you came to the wrong place.

CNBC: In 2022 Investors Fear Inflation The Most

All of the risks I am about to discuss for 2022 have already been previewed in 2021:

SPAC fraud

Reddit pump and dumps

Hedge fund explosion

Ark ETF/Tech implosion

Crypto crash

EM currency implosion

Evergrande meltdown

Central bank hawkish pivot

Omicron pandemonium

ALL of it got bought with both hands. 

The epicenter of this explosion doesn't matter nor does the trigger or imminent cause. It could be Omicron, Evergrande, the Turkish Lira, Bitcoin, Millennials waking up bankrupt etc. etc. It doesn't matter, because all risk assets are now highly correlated.

Before I freak anyone out, I happen to believe that t-bills and money market funds are still safe. I could be wrong, but I do not specialize in end of world scenarios.

I envision a major financial dislocation that basically wipes out this era of rampant fraud and speculation and puts an end to the mass consumption lifestyle. A 2008, sans bailout. Is this partly wishful thinking on my part? Maybe. But not nearly on the scale of wishful thinking taking place in financial markets right now. As I pointed out in my prior post, those of us watching this slow motion trainwreck are considered "market timers". However, the REAL market timers are those who assume they can ride out human history's largest asset bubble as if they are surfing a tsunami to a stroll on the beach. 

Nassim Taleb coined both terms - "black swan event" and the concept of systemic "fragility". The term "black swan" of course refers to a rare and unforeseeable event that causes major dislocation in financial markets. However, in that same book (Fooled By Randomness), Taleb describes a novice trader who finds early success in trading during a bull market. This trader begins to feel invincible and therefore doubles down on every bet. Until such day as the market turns bearish and the trader implodes spectacularly. Black swan event? Hardly. Call it Millennials circa 2021. If Taleb hadn't invented the term black swan event, Wall Street would have invented it anyways. Why? Because it gives them legal cover from their end of cycle chicanery. Think 2008 when Goldman was selling  AAA rated subprime CDOs that were expressly designed to explode. Then they were buying credit default insurance to collect the payoff from the ensuing collapse. And when the system itself exploded, they were bailed out 100% on the dollar by their alumni in the U.S. Treasury. That level of criminality can only take place under the cover of a widely believed black swan event.

Likewise, Taleb believes he "invented" the term anti-fragility. In his book "Antifragile" he describes all kinds of manmade systems that benefit from stressors and shocks. However, Mother Nature invented all of these concepts long before PhDs came along to publish them. Throughout the natural world, organisms are strengthened by facing adversity. When a society as a whole is protected from their bad investment decisions by central banks, then that embeds latent fragility in the form of increasing speculation. When historical volatility is used as the primary variable for determining algorithmic leverage, then that creates a feedback loop by which increased leverage further dampens volatility leading to increased leverage. A compressed spring that explodes in the other direction when the breadth divergence from index manipulation grows to an epic scale, where it is now. All of which fool's errand can be blessed by financial PhDs employing Greek numerology backstopped in case of inevitable failure by a "black swan event" that is always one standard deviation outside the parameters of their idiot model. It helps to have a society of serial morons available as well.

Here we see the Info Tech sector and the 30 day moving average of Nasdaq lows. What we notice is that new lows are approaching a level previously associated with BEAR markets while the index itself is at an all time high.

 

It's not hard to imagine that following the pandemic and the inflation of the super asset bubble spawned by the global central bank bailout, that there now exist RECORD accumulated fragilities that will not withstand a risk off event. We got a small taste of that earlier this year during the Gamestop debacle. There were more broker outages last January than there were during the March 2020 meltdown. Crypto alone is 2x subprime in magnitude. 

Here we see that Nasdaq down volume has been increasing for YEARS as speculators onboard more and more and more leverage.

Therefore, what I envision coming soon is widespread trading system outages. Server failures. Internet connections over-loaded. Help desks non-responsive. Investors panicking, unable to get out. Limit down moves followed by limit up moves which will lock prices and prevent markets from clearing. Margin clerks front-running their clients to liquidate their most prized assets because the junk assets are bidless. Risk asset correlations at 100%. 

And then will come the rumours. This or that entity is now in default, followed by massive hedge fund redemptions. Does anyone remember the Archegos Capital Management implosion circa March of this year? Back in February the global Nasdaq reached a peak and imploded. Archegos held several Chinese internet stocks that were imploding. They also held several U.S. media companies. When the prime brokers realized they were ALL exposed to massive margin loan losses they started selling down Archegos assets indiscriminately, leading to MASSIVE losses for Credit Suisse and Nomura two brokers that were laggards in the fire sale. 

ViacomCBS was one of the stocks that was affected by this liquidation event. Here we see that it has in no way recovered. 

Picture this scenario on a 100x scale. Because that's what is coming. 

When the smoke clears will there by buying opportunities? Yes, many. However, these will mostly be relatively short-term trades. Few assets will be safe holding for long periods of time until the full extent of damage is revealed. 

TBD.

Timing The Mega Crash

Whenever people ask me when will the market crash, I say it's inevitable. The next question: When is that? After all, in the year that saw the launch of an actual 'FOMO' ETF, no one wants to leave the casino before it explodes...

The two key determinants of the magnitude of a crash are positioning and point in the cycle. Today's investors have been well-conditioned to believe they can get bailed out from any type of "Black Swan event", including one caused by Fed policy error itself. Which is why they are now taking far more risk at this latent juncture than at any time in the past even while knowing the Fed is now in the midst of a likely policy error. All the inevitable consequence of moral hazard.

"lack of incentive to guard against risk where one is protected from its consequences"

"Our clients are fearful, but none of them are at the point of getting out,” he said. “They haven’t got the guts to pull out"

What are you going to do? Dump all your large-caps and invest in all emerging markets stocks. No one is doing that”

he has told investors sitting on huge gains in stocks such as Microsoft that it is time to sell some of their holdings. That’s not a conversation he says has always gone well"

There is no alternative,” he said. “From what I see investors are more skittish, but they are not acting on it"

Got that? It takes guts to get OUT of this market, not in. Cash is trash, and sheeple forget that after Y2K Microsoft was dead money for 15 years after losing -60%. Right now they're all waiting for Apple to eclipse a $3 trillion Germany in market cap to propel the S&P higher. I predict Tech will go down -80% and it won't come back for decades. It will be a total disaster for today's dumb money investors who learned nothing from Y2K. It took until 2015 for the Nasdaq to overcome its 2000 era high. Now they're all piled back into it like it's the Fort Knox of investments.

Insiders on the other hand are not "skittish" about getting out. Satya Nadella dumped HALF his shares in a two day period.

We all know that when this latest Fed taper explodes, pundits will blame Fed policy error, for legal purposes. Whereas they have been blaming the Fed for being too slow in raising rates, soon they will "pivot" to blaming the Fed for being too fast in raising rates. What they want is a Goldilocks market, not too hot and not too cold. And if it all explodes, they expect instantaneous bailout. 

Unfortunately, the two main determinants of the magnitude of a crash are positioning going into the crash and where we are in the cycle. In this case, investors are positioned record aggressively for this point in the cycle. What is extremely ironic is that today's pundits evince supreme confidence in Fed control over the cycle, and now the Fed is actively tightening, yet investors are STILL leaning into risk. Why? because they have a bi-polar view that Fed incompetence creates buying opportunities, and Fed omnipotence prevents them from getting out of control. A theory that will not sound as intelligent after the fact as it does now.

Worse yet for today's morons, is that the Fed has been warning all year about elevated risk asset prices:

May 2021:

"Vulnerabilities associated with elevated risk appetite are rising. Valuations across a range of asset classes have continued to rise from levels that were already elevated late last year"

Fed Chairman Jerome Powell has repeatedly said that as long as interest rates stay low, the valuations are justified"

November 2021:

"Across most asset classes, valuation measures are high relative to historical norms. Since the May 2021 Financial Stability Report, equity prices rose further"

The share of investment-grade issuance with the lowest investment-grade ratings remained at historically elevated levels"

A steep rise in interest rates could lead to a large correction in prices of risky assets"

It's all there. Everything a Sesame Street bull needs to know, but was afraid to ask. 

Putting together cycle risk with positioning, here we see the Fed balance sheet monthly % change. Back in 2008 the Fed eased on a record scale and yet stocks bottomed five months later. They declined -40% from October 2008 for a total -55% decline. Meanwhile, we see that the pandemic in 2020 arrived at a point earlier in the cycle than 2008 and with far less leverage than abides today. This amount of leverage at this point in the cycle portends far more extreme dislocation than anything we've seen in recent decades. 

Zooming in on low volatility stocks, we see that positioning is the highest level of the cycle, while breadth is at the worst point in the cycle while recession stocks are leading. This is a far more lethal set-up than what abided in March 2020. 

What this all sets up is a 1930 style value trap. After the crash, investors will be told that it's time to buy/hold stocks. No one will want to tell them their losses are permanent. For a while as in 1930, the market may slowly begin to rise for a period of time. However, under the surface, companies will be going bankrupt en masse. At that point, the strategy of continually borrowing our way out of debt will come to an unforeseen bad ending.

Cycle denial will be lethal for those who are addicted to bullshit.

2022: END OF THE PONZI CYCLE

It's that time of year when all pundits make predictions, so I offer mine as a counterpoint to this era's mass delusion and mass deception. 2021 was the year of MAXIMUM pump and dump: The epic transfer of wealth from the working class to the ultra-wealthy under the auspice of "democratization of markets". In other words it was the traditional end of cycle distribution of stock from wealthy insiders to the final bagholder public. Going back a year I never predicted this much criminality would ensue during 2021, starting with the Gamestop debacle. I didn't envision Millennials embracing end of cycle fraud on record margin. Therefore, I don't buy into today's standard view of "good news more people got conned" democratization of deception. I believe that Millennial margin call, along with end-of-cycle inflation-driven panic buying and Fed double taper will combine to create the hardest landing in history, without any comparison...

In addition to lethal doses of monetary heroin, this era's excess stock market returns are a function of an aging society reaching peak retirement. Passive "dumb money" inflows have been creating their own Ponzi-like market returns. We are now told that "valuations no longer matter". There has never been an asset class in human history wherein valuations don't matter. When asset valuations are predicated strictly upon inflows they temporarily detach from their intrinsic values and then they ultimately crash back down to reality. The greater the distance back to reality, the harder the fall. At the end of the longest uninterrupted profit cycle in U.S. history, it's a long way down. Therefore it can come as no surprise that I disagree with today's mainstream predictions. I just read this 2022 prediction and I agreed with all of the facts, yet I arrived at the exact opposite conclusion:

"In recent years, traditional valuation metrics like price-to-sales and market- capitalization-to-GDP have rocketed beyond historical highs...Passive strategies are valuation-agnostic and buy whenever new money arrives"

Just like in 2018, when required year-end selling caused an illiquid stock market to plummet over 9% in December, Required Minimum Distributions (RMDs) may not be done wreaking havoc in 2021"

Curve flattening is an indication of a Fed policy mistake, namely, boosting rates into an environment where economic growth is slowing"

Does this mean U.S. stocks will end 2022 in the red? Probably not"

Got that? Valuations no longer matter. Meltdowns are opportunities, and a slowing economy is good reason to buy stocks. Somehow I see those exact same risks as ending horrifically badly.

First off, today's inflationists believe that the policy error was keeping rates too low for too long. But what if they're wrong and the bond market is right? It would mean the inflation they fear is cyclical not secular and therefore the panic buying feedback loop and resultant Fed hawkish pivot occurred at the worst time in the cycle. Deja vu of 2008. The author above believes that the Fed can quickly pivot to a dovish stance and bail out all markets at the same time. Picture J. Powell juggling pies while stumbling down the stairs - it's sheer and total fantasy. For one thing, Millennials are ALREADY on the verge of margin call and when that happens the dislocations will spread far faster than subprime in 2008. 

Granted this fraud has continued at such a manic rate that  even Michael Burry of "The Big Short" fame already capitulated earlier this past Fall.

My prediction is that we have now seen peak consumption orgy and the hangover will be BRUTAL. In this late cycle we saw above average retail sales, durable good sales, home sales, and car sales. All far above trend in both price AND quantity. All driven by inflation hysteria and of course the central bank wealth effect. Both of which factors are highly correlated on the upside AND the downside.   

Here we see retail sales have been far above trend since the pandemic started:

Whereas 2021 saw the removal of all pandemic supports for the working class, 2022 will see the removal of all pandemic supports for the investor class. What I call welfare for the rich. And my overriding assumption is that they are not going to like it.

Which will bring about MOAC: Mother Of All Crashes. Given the level of current risks, this implosion will very likely set the record for speed and depth of crash from an all time high. Granted, none of my outcome predictions are new. However, what's changed over recent months is the Fed policy stance,  record market inflows, record risk positioning, record speculation, AND the beginning of bubble collapse. In other words, the passive-index bubble has hidden all of these burgeoning risks from the masses, leading to mass complacency.

The last two times the Fed tightened in December - 2018 and 2015 they were forced to quickly reverse policy in January. In both those times the market was down -20% before they reversed. My view is that once the crash begins they won't have as easy a time of it as they did the last two times.

In momentum markets such as this one, the buyers are above the market and the sellers are below the market. When there are long periods of time without selling then the sellers all hit the market at the same time on the way down. This creates a bidless market. We have already seen this in many of the speculative asset classes, but we have yet to see it in the major averages.

This week I created my own composite technical risk indicator. It combines % bullish S&P 500 stocks, % Nasdaq above 200 dma, % NYSE above 200 dma, NYSE highs-lows, and Nasdaq highs-lows. I converted each indicator into an index between 0-100 for relative comparison across time periods. And then I created a composite index and compared to time periods when the S&P 500 was above the 200 day moving average.

What we find is that this particular indicator hits extremes only on very rare occasions. In this case only three times in 14 years. However, in each of the prior instances, the market rolled over. In 2007 it rolled over from the all time high into a steep bear market. In 2015, the market rolled over and crashed in a matter of a few days.

When we zoom in on the 2015 crash, we see that the indicator peaked only days before the actual crash. We also see in the lower pane that NYSE breadth was in a sideways correction and unable to breakout to the upside. Similar to what we are seeing now.

As another gut check circa 2015/2016 we see that when the Fed raised rates in Dec. 2015, the market imploded. However, Nasdaq highs-lows now are ALREADY at the same level as they were back then with the market down -20%. In addition, RISK ON positioning is far more aggressive this time around.  

Which is why I predict far greater dislocation this time around. The market is as bifurcated as the economy. 

The bottom line is that the Fed can't bailout everyone from their bad investments at the end of the cycle. Here we see GAAP corporate profit (inflation-adjusted) now compared to prior cycles. Clearly, there has been no "reversion to the mean" for corporate profit for a long time.

Unfortunately, this society only discovers "right" when wrong explodes. Their sanctimonious outrage is stoked by their Ponzi scheme losses. Always looking for someone else to blame. What's coming in 2022 is what the Chinese now call "common prosperity". Meaning, first asset markets must crash and THEN there will be more political consensus about prioritizing people above corporate profit. It all starts with what I call "shared consequences". 

After this era explodes, the definition of "retirement" will change from the Suze Ormanesque multi-millionaire retirement to something more basic and realistic given the acknowledgement of zero sum returns implied by 0% interest rates.

Just remember, the Fed's own so-called "RISK" model is constructed in such a way as to view extreme yield seeking and speculation as "low risk". 

Why?

For maximization of profit and minimization of legal liability.

At the end of the Ponzi cycle.

The Pandemic Wealth Hypothesis

What we have witnessed throughout this pandemic is the largest transfer of wealth from the working class to the ultra wealthy in human history. All under the ubiquitous premise that the pandemic improved the economy and increased overall national wealth. This entire con job is now massively levered to a generation that has gorged itself on junk assets. When they explode, multiple generations will learn the lesson of a lifetime...

Wall Street and its acolyte financial service industry makes its money from RISK ON positioning. In a 0% world, they make nothing from RISK OFF. Which is why they never advise investors to take down risk and why they NEVER see any type of financial dislocation ahead of time. And STILL the financial media at large refer to these people as  the experts.

Throughout 2021 risks have grown steadily all year. It started with a growth stock melt-up at the beginning of the year liquified by record global monetary stimulus. And now fittingly, it's ending with a growth stock meltdown amid the withdrawal of monetary stimulus. And yet, the predictions of financial pundits have remained the same throughout this entire time. They saw no risk in the melt-up and they see no risk in the meltdown. 

They are experts at ignoring risk.

And why would wealthy insiders warn of a massive wealth  transfer taking place in broad daylight when in fact it's been taking place for decades and only went into overdrive during the pandemic? 

It's Shock Doctrine on steroids.

It's amazing the amount of risk people can ignore, when they've been conditioned their entire lives to believe that extreme imbalances are normal. The continuous decay of society has become their "steady state", because to their eyes it's imperceptible.

Consider the fact that John Glenn orbited the Earth back in 1962 and yet this year multi-billionaire Jeff Bezos visited the edge of space for a few minutes in what the media reported as a major accomplishment. Now that is frightening. In the Planet Of The Apes the people became so dumb, the apes took over. At this rate that movie is starting to look like a documentary.

Getting back to this epic wealth transfer, it's now a done deal. The "stocks" today's bagholders now own are saddled with record amounts of corporate debt at the end of the cycle. Meaning the stock market has now turned into a massive call option on global RISK OFF which is long overdue. 

And so it is that all of the risks of 2021 have coalesced into the end of the year. Which means that Wall Street is now getting paid out record bonuses for leading a pump and dump scheme the explosion of which will make the Housing Crisis seem like a picnic by comparison.

Record issuance of junk stocks during a pandemic and not one pundit sees anything wrong with this. They are corrupted to the soul. 

Which gets us to the Santa Rally which officially begins next week and carries two days into the New Year. Historical odds are high that in this low liquidity environment stocks remain artificially pinned to the new permanent plateau of mass deception. Of course, past performance is no guarantee of future results.

Should anything untoward happen during this timeframe, then Wall Street's low volatility "delta hedges" will quickly turn net long and result in an avalanche of forced selling. Since the days of 1987 Wall Street still hasn't learned that there is no such thing as "dynamic hedging".

And for all this risk, today's pundits predict even better things in store for 2022. 

Here we see Dow internals are now at the same level as they were at in late 2015 just after Fed "Policy error" that precipitated global meltdown at the start of 2016.

In summary, this entire fraud is now dependent upon Santa Claus. 

And if he doesn't show up this year, at least we all know why.

Way too much openly accepted criminality.

Manias, Pandemics, And Crashes 2.0

As many futurists had predicted, technology has made this society profoundly weak and ignorant, totally incapable of accepting the truth in any direction. In today's Disney culture, sugar coating bullshit is deemed a virtue...

Today's economic pundits feel the overwhelming need to "protect" society from the truth. I heard this specious argument many times throughout my corporate career - we must always sugar coat the truth so we don't create a sense of panic. Fast forward to today and we live in a society in the permanent fetal position, now totally incapable of accepting reality in any direction. Our corporate ordered society is highly trained to focus solely upon the messenger while ignoring the veracity of the message.

In this blue pill Matrix-like environment "perma-bears" are easily ignored, having been thoroughly discredited for wrongly deriding central bank alchemy for the past decade. Therefore, now even as all stimulus is being removed, today's perma-BULLS feel invincible to ignore lethal amounts of risk.

There are many comparisons we can make between now versus past markets. Jeremy Grantham recently stated that this market is more lethal than both 1929 AND Y2K. I would 100% agree with him.

"One by one, we’ve checked off every condition that the glorious bubble needs. And in terms of crazy behavior, this has been crazier, by a substantial margin, than 1929 and 2000” 

Add in a global housing bubble, looming Emerging Market currency crisis, and of course record cycle risk. It's a bad time for sniffing glue on a global scale. What I call monetary euthanasia. 

I frequently draw market analogs to various recent events such as today the COVID meltdown, or the Dec. 2018 monetary "policy error", the 2015 China crash etc. However while being similar in certain respects, ALL of those will pale in comparison to this banquet of long overdue consequences.

Will it be the end of the world? No. 

However, it WILL be the end of the age of DENIAL, which will end in a fiery financial explosion remembered for decades.

And with that event, this current belief system that one can trust people who have ALREADY proven they can't be trusted - will die a hard death. There are times when the consequences of being wrong are of such extraordinary magnitude that they far exceed any solace from having ever been previously "right". This is one of those times when history will not smile on a generation of terminally useful idiots who trusted the EXACT same criminals who lied to them at the end of the last cycle. 

Ok, let's discuss the casino. On Twitter today I drew analogy back to Monday February 24th, 2020 which was the day when the global COVID crash began. First, it too was a Monday and it was post-Opex. Secondly, the pandemic had already been raging worldwide, but gamblers had been ignoring the growing risk up until that day when it all of a sudden mattered. Now of course we are hearing Omicron is threatening new lockdowns, two years into a never-ending pandemic. Hardly a Black Swan event. The next commonality was the seven NYSE Hindenburg Omens, which is similar to the recent seven Nasdaq Hindenburg Omens. That Monday was the biggest opening opening gap since Brexit, and today was the biggest opening gap since THAT Monday (leaving aside the ensuing meltdown). 

Appropriately, I called that post "Buy The Fucking Crash", because that's what gamblers were doing then, and that's exactly what they are doing again today. No sign of fear whatsoever. And then there is this chart which I haven't shown since that time, which I called the "Crash Ratio". It's the ratio of the Mid cap index to the S&P 500. And as we see it's currently even more dire than it was in February 2020:

Cycle Risk is something I've been pounding the table about recently, because it's a risk factor that no other pundit wants to discuss. It was the same way in 2008. Back then the cycle never officially ended until many months after the crash. It was only ever acknowledged in hindsight. Today of course the concept of cycle risk is totally at odds with the predominant view of "runaway inflation", which has put gamblers in the RISKIEST assets to own at the end of the cycle. If this current inflation is secular and intractable then commodity/reflation trades make sense. If it's cyclical as I say it is, then those same trades will perform the worst in recession.

In addition, this cycle risk I speak of is ALREADY well advanced. It starts by sucking in record amounts of capital into a cycle top wherein wealthy insiders cash out at public expense. That event is now COMPLETE. As I pointed out in my last post, that was 2021 in a nutshell.

The next phase of course is the meltdown itself, which will be attended by copious amounts of lying, per the theme of my above discussion - sugar coated bullshit.

That is the lethal phase of cycle risk because that locks the sheeple in the casino never ever attempting to get out. All on the belief they can ride out global depression in massively overvalued "stocks".

We have now entered that phase of deception. 

2021 YEAR OF PONZI

History will say that today's pundits stood by and watched an entire generation get monetized, and said NOTHING...

What we learn is that in a state of denial amplified 10x by record greed, investors will never reduce risk allocation, they will only increase their ignorance of growing risk. Now, at this latent juncture, the investor class is solely concerned with economic inflation, while at the same time racing to buy asset inflation at a pace equal to the past 20 years COMBINED. What they are all assiduously ignoring is the extreme bifurcation of the economy driven by central bank sponsored asset speculation. During 2021, the working class has seen ALL of their pandemic supports removed and their spending power HALVED, while the Casino class has seen their bubble wealth soar and their spending power DOUBLED.

How could this possibly end with anything less than biblical dislocation?

Record Americans Won't Be Buying Gifts This Year

"The lower income group is spending almost half of what they used to spend. And the higher income group is almost double what they used to spend two years ago"

"Big spenders mask those not spending"

What today's investors view as a strong economy is merely themselves staring back in the mirror. They're fat and happy, so they assume everyone else must feel the same way. 

Of course in aggregate all of this RECORD newly issued junk stock must be owned by some bagholder. Therefore, it's impossible for everyone to rebalance to cash at the exact same time while teetering at the new permanent plateau of human history's largest asset bubble. So instead, we see denial and ignorance of risk reaching a new all time high with every passing day. For the vast majority of people, believing this could all end badly is not even in the realm of possibility since they are massively levered to this super asset bubble in every direction. Their very REAL liabilities have increased in lockstep with their very ephemeral asset values.  

Which is why today's pundits now routinely ignore the largest critical coalescing risks:

Millennial margin call in progress

EM/carry trade unwind in progress

Liquidity/system risk in progress

Tech bubble collapse in progress

Cycle risk in progress, due to ubiquitous inflation assumption

Then there are the widely known and FULLY accepted risks that are routinely rationalized away with scant concern.

Record margin, record option speculation

Record bubbles across every asset class

Record cash out by insiders and ultra-wealthy

Record IPO/SPAC issuance and Wall Street profit

Record wealth inequality

Record breadth divergences

The year got off to a fast start last January with Millennials lured in record size by the Gamestop pump and dump scheme. New broker account openings hit records across every retail platform, led by Robinhood. In retrospect that turned out to be the peak of fools rushing into the Casino. Subsequent Nasdaq peaks have been met with ever-widening breadth divergences as more and more Millennials get silently margined out. The major indices are now held up by a mere handful of massively overvalued mega cap stocks. The Russell small cap growth index has been carving out a ONE YEAR top in the making.

Still, we already know that rampant morons will claim that no one saw it coming. If for no other reason than legal defense.

Q4 has seen the highest number of Nasdaq new lows attending a Nasdaq all time high (+/- 5%) in history. And the next highest number was the top in 2007. 

As they were just prior to the COVID meltdown, recession stocks are now "leading" the market. Today's investors won't admit this is the end of the cycle, because it would conflict with their "inflation" hypothesis. They will come around eventually. The longer it takes, the more pain they will endure in the meantime.

Cycle denial will be exorbitantly expensive.

This week the Hang Seng was the first major global index to approach the COVID lows. By no means the last.

Throughout the year we saw new ETFs introduced for Bitcoins and Social Media pump and dump schemes. In addition, this year saw both the widely awaited Coinbase IPO and the Robinhood IPO. The real Robin Hood of old stole from the rich to give to the poor. The Robinhood gamified broker app is a gamified front-end to Citadel HFT dark pools designed to lure newbie investors into day-trading themselves into penury. It has efficiently monetized an entire generation. And yet not one pundit today sees anything wrong with this massive zero sum fraud. History will say they won the war of words by losing the war on reality. Convinced that central bank imagined reality would bail them out indefinitely.

Fast forward to this week and now global central banks are tripping over themselves to unwind excess liquidity. In other words, the year of Ponzi is ending amid cycle high extreme risk AND the explicit removal of central bank support. 

Just perfect.

Here Comes Santa Crash

It's the year of Madoff, late in the Ponzi cycle. Now today's Ponzi schemers will find out if they've been naughty or nice...

The Fed just launched double taper as expected. Which sets up 2018 redux, except with a much harder landing. Not only is the Fed boxed in by their own buffoonery, this time the majority of today's pundits have been pounding the table on inflation. So it will take some time until they are begging the Fed to reverse policy. 

Which will be filed under careful what you wish for, this time of year.

Granted, 2021 has seen the largest wage increases in decades, having lagged productivity growth for decades - all of which  gain accrued to corporate profit. And yet shockingly, concern for the middle class vis-a-vis "inflation" only appeared since wages began rising. The REAL inflation in college tuition, healthcare, and housing that has been crushing the middle class for decades has been ignored all along. What we learn in this Supply Side nirvana is that wages as a share of the economy can go down for four decades, but they can't rise for even one year without sparking widespread panic among investors. Nevertheless, the definition of inflation is not a one time unsustainable price increase. As we learned yesterday, retail sales are already beginning to roll over, because "inflation" is weighing on sales. Except, inflation can't weigh on sales because that would imply lower demand. And at the macro level, the definition of inflation is demand that exceeds supply.

"Rising prices on gas and groceries are prompting Americans to pull back in other areas, raising fears that lingering inflation — coupled with a new covid wave — could be slowing economic growth"

I know, it's "stagflation" circa 1979. Get those boogie shoes.  

What I notice is that not EVEN ONE of today's pundits ever mentions the end of the cycle. De-leveraging now is totally unthinkable, because it would rubbish the stagflation fantasy on the way to a totally uncontrolled deflation with a Fed leaning altogether the wrong way. So it's up to me to mention the unthinkable. If that frightens anyone, you are free to return to CNBS and have smoke blown up your ass constantly. Even today's "bearish" pundits couch their forward views with "these valuations imply negative returns for a decade" bullshit. No they don't. What they imply is a MASSIVE one time drawdown accelerated by rampant panic, ending in mass capitulation. And rioting. And then eventually a market that slowly recovers over the balance of the decade. This "negative" returns for decades bullshit is strictly for academics who ignore the trajectory implied by current positioning and valuations. In the 1930s there were 10 bull markets (+20%) and 10 bear markets - roughly one each year. Most people didn't stick around for the ride. 

Granted, this market has done its best to lure in all suckers. It has remained perma-bid to all time highs DESPITE a Fed embarking on a double taper AND a Nasdaq in a stealth bear market. On Twitter I showed this chart of new Nasdaq lows at an S&P all time high hit a record yesterday. Prior to that the record was last month, November 22nd, when the Nasdaq hit its all time high (so far). Before 2021, the record lows at ATH was 185 going back to 1996. Before that, the record was 175 going back to the 1980s. This current record goes back to 1978, life of the data. 

 

Looking at new Nasdaq lows on S&P up days compared to December 2018 (2020 data suppressed), is that they look very similar. EXCEPT, this time the S&P remains pinned at all time highs.

The extant belief today therefore is that we remain perma-bid at all time highs while the Fed removes all stimulus. Unfortunately, as I've said over and over again, this Fed has a track record for imploding global markets, and once again they are on track for success. Back in December 2018 Powell raised rates and predicted more increases to come in 2019. Only TWO weeks later the S&P was in a bear market and Trump/Mnuchin vowed a change in monetary policy right at Christmas. Powell caved a few days later. In 2019, there were three rate cuts and balance sheet rolloff ended. 

I predict the same thing this time, except FAR MORE dislocation before Powell capitulates. First off, Biden will never interfere in monetary policy. Secondly, this time there are far too many inflation hawks to allow for a quick pivot back to easing policy. The FOMC is now several meetings away from that time of reversal. And when I mean meetings - those will include middle of the night conference calls. Be that as it may, margin clerks work far faster and Millennials don't have that kind of time. 

What we notice from Emerging Markets vis-a-vis 2018 is that back then they double bottomed in December post-FOMC and LED the world higher. This time, they are breaking to a new low. We also notice via U.S. margin debt through November is that U.S. gamblers are totally oblivious as to what's coming.

People think I must be massively short this market and therefore want it to crash. I'm not. I've never shorted a stock or an index in my life. I am a volatility trader, and what I like is two way markets. I did very well this past month as the market rose and fell while most bears got rinsed. What I DON'T like is rigged markets that suck in record amounts of capital in order to be destroyed. I also don't like rampant pump and dump schemes targeted at the naive and gullible. 

But those of us who don't, are clearly in the minority right now. 

Soon I predict we will be in the majority. However, in the year of Madoff, most of today's Ponzi schemers will arrive at that conclusion far too late in the Ponzi cycle.