The Efficient Explosion Hypothesis

There is now a lethal consensus of perma-bulls who are hellbent on mass financial implosion. There is nothing we can do to stop them except get OUT of their way. As we know, history is replete with examples of the madness of crowds, soon this one will take its rightful place at the top of the list. Where it will remain for centuries to come...

Those of us on the periphery of this mass delusion don't "exist" from a statistical standpoint. The mainstream of current thought is dominated by Wall Street hustlers, Ivy League academics, ad-sponsored pundits, and all of their blind followers desperate to believe that failure at the zero bound can always get bailed out when it implodes. 

On any given day the statistical probability of a "Black Swan event" is de minimis. Which is why pundits who wake up every day and have to infotain their audience, always give the same optimistic message - statistics are in their favour. In a world of statistical "independence" the odds of waking up to explosion are low. Which is why pundits never connect the dots or correlate risks. Because to do so would doom their cozy consensus. In their world all risks are independent of one another. 

In the real world however, financial risks compound over the course of the cycle. The longer the cycle the greater the accumulation of leverage. All financial risk assets reach a correlation of 100% during global meltdown. This is Minsky hypothesis 101. 

Add in the fact that 0% interest rate policy has institutions desperately hunting for yield at the end of the cycle and we now recall why AIG was selling insurance to Goldman Sachs on self-exploding CDOs back in mid-2008. Because they assumed they could at least make the quarter. Which after all is the only thing salesmen care about. Conflict of interest is rampant and it's clear that no one on Wall Street is willing to ever say "sell". Closet indexing is rampant and hedging is totally obsolete. There is no "upside" from going against consensus.

We have reached a juncture now wherein obligatory false optimism has merged with the pathology of denial. The best thing I can say about today's bullish financial pundits is that they are useless. 

We learned this week that the Fed is set to once again accelerate their liquidity reduction. Back in November they began single taper. In December they began double taper. Now according to Fed minutes they soon plan to start downsizing the Fed balance sheet at an accelerated rate. This "news" of course came as a total shock to the market. Why? Because the Fed had previously indicated that taper was a pre-cursor to interest rate increase. However, now they plan to raise rates AND REDUCE long-bond liquidity at the same time. Which proves they are now just as concerned about runaway Tech stock inflation as they are about the runaway price of eggs. An oversight that is at the core of their policy error, and yet not one pundit today discusses that part of the policy problem.  

BOTH Japan and China have already learned the hard way not to mess around with asset bubbles at the zero bound. Why? Because when they explode these bubbles have much greater economic impact and policy-makers have much less buffer to support the economy. This is a lesson that today's over-confident buffoons STILL have not learned.

Of course this current cycle of "inflation" should have been familiar by now, because it's literally the exact same sequence of events that followed Trump's election and tax cut in 2018. Back then, the Fed used fiscal expansion as a backstop to begin aggressively dialing back monetary heroin. However, then as now, gamblers were already as high as a kite and therefore they got monkey hammered in Q4 2018.

I call this cycle the stimulus Ponzi cycle, and it's as dumb as it sounds.

I make no predictions going into tomorrow's jobs report, only to say that the ADP report on Wednesday was 2x consensus at 800k jobs. An NFP that size on Friday would explode the Tech sector. 

And what could be more biblical than a jobs report exploding the casino and thereby revealing all of the criminality-as-usual lurking below the surface.

This chart exhibits the full extent of delusion at this juncture. 

There is now a widely held belief that no matter how large a dislocation the Fed causes they can always bailout the casino. Which is why now despite the Fed embarking on a campaign of accelerated tightening, speculators are still maximizing risk allocation. It was inevitable after serial bailouts that the day would come when investors would double down on meltdown. This is a hard lesson the Chinese and Japanese have already learned. 

This chart showing the divergence between oil stocks and airlines indicates we are on the cusp of a Lehman Moment. One in which the Fed is too preoccupied with inflation to realize the meltdown has already started. 

The divergence between the S&P 500 and consumer sentiment is the widest in four decades. The last time it was this wide was in December 2007 at the beginning of recession. It's the greatest example as to how today's pundits are totally clueless as to the true condition of the underlying economy.

Too many people now believe the stock market IS the economy. 

2022: The Banquet Of Consequences

Everyone loves asset bubbles, right up until the time they explode with extreme dislocation. Anyone who speaks against them is as popular as a gambling counselor in Las Vegas. This society is now totally desensitized to fraud. Which is all fun and games until someone loses an everything. What this all sets up is the worst case scenario for an end of cycle obscured by rampant speculation and obligatory bullshit. But no one sees risk anymore because in 2022 all of America's organized crime syndicates are now corporate. To question "the system" is heretical...

Club Orlov: License To Kill:

"As the end-game approaches, it becomes a matter of imperial self-preservation to breed a special-purpose ruling class—one that is incapable of understanding that the end-game is approaching. Because, you see, if they had an inkling of what's going on, they wouldn't take their jobs seriously enough to keep the game going for as long as possible"

This society has survivor bias on cycle high steroids. History will say that global central banks created the largest asset bubble in history and morally challenged pundits just went along for the ride, because it was the path of least resistance. And more importantly, it was the MOST LUCRATIVE. In 2021, Zerohedge perfected the ad-sponsored circle jerk. Congratulations are in order. There is no market for pissing on a parade, so they too gravitated to the cheerleading model. Which is why today's financial pundits take absolutely zero responsibility for how many people get obliterated by all of today's financial scams. In the first quarter came the Gamestop pump and dump scheme which drew in hordes of newbie investors. What most people don't realize about Gamestop is that ultra-wealthy investors came in at the top and shorted it massively, obliterating latecomer newbies. Bill Gross made $10 million on the short side, but only  large investors with prime broker access could borrow the shares. Most of the retail suckers were on the long side of the bet getting wiped out. I never heard a thing about that in the press, it was all a triumph for the little guy. 

In the second quarter 2021, billionaires Elon Musk and Mark Cuban touted a joke crypto currency called Dogecoin. Once again, newbies piled in late and got decimated. Those two scams and the myriad copycats that followed all year padded broker revenues, especially Robinhood the Candy Crush front-end to Citadel. Of course late in the year they announced that revenues were collapsing as they were running out of fools to monetize.

Wall Street dumped record junk into the market all year long. That was met with a shrug.

Two decade high inflows to stocks. Who cares.

Cathie Wood CNBC celebrity, down -45% on the year. Big deal.

Today's pundits know full well the Fed created this asset bubble, and now they're unwinding stimulus at a double pace. How many are warning about that risk? None. 

The red hot housing market peaked a year ago in January as far as new homes sold. That same event heralded the peak in the 2007 housing bubble. Back then the Fed had 6% interest rate buffer to cut to offset the economic dislocation. This time they have 0% to cut. Yawn.

None of that can compete with the celebration of excess taking place right now. 

Unfortunately, it all lands in 2022, which is the worst case scenario. Why? Because when a bubble crosses a tax year then it locks in prior gains for tax purposes while still exposing capital to massive loss. 

This was the lesson NOT learned from Y2K which is that tax losses can be carried FORWARD, but not backward. There were thousands of DotCom paper millionaires back in that era. Most of them exercised their shares and then held onto them instead of selling them, because they wanted to pay the lower long-term capital gains rate. However, the exercise itself is considered a taxable event by the IRS and it's taxed at the difference between the current market price and the strike price. That sets up the liability. What happened back then is that employees exercised in 1999 and in 2000 they got wiped out when the bubble collapsed. Then the IRS handed them a bill for a few hundred thousand dollars. They went from being a paper millionaire one year to being bankrupt the next. It's happening all over again right now with 2021's stable of record unicorn IPOs. 

But who is warning about this? NO ONE. 

We have a generation now in the Millennials who are simultaneously exposed to Tech stock risk, housing market risk, $1.7 trillion student loan risk (which is 2x subprime), $2.5 trillion in crypto risk (which is 3x subprime), IRS sticker shock, the healthcare crime syndicate which is the #1 cause of bankruptcy and end of cycle job risk. All at the same time. 

And who is warning about this?

NO ONE.

Fucking pathetic.

We're putting an entire generation at risk because our society has the morality of a used car salesman. 

Half of young people ALREADY feel like they're drowning, and the other half are about to come along for the ride. 

Below we see how the casino finished up in 2021:

Here we see in the top pane that weekly Nasdaq new highs  peaked back in February, had a lower peak in November and ended last week (last year) at the lows of 2021 (vis-a-vis an S&P all time high). 

In the second pane we see that Interactive Brokers Daily active trades also peaked back in February, a lower peak in November and then ended December at the pre-2021 level. 

The Bitcoin trust, same idea. It already gave up MORE than its entire 2021 gain mid-year, does anyone believe it won't happen again?

It's ALL ONE MARKET now massively levered to a generation on the verge of explosion. And ALL of today's older paper millionaires are massively leveraged to a generation they threw under the bus. 

Denial Of Japanification

The U.S. has been in a Japanified environment for at least 13 years, more likely as far back as the DotCom bubble. And yet, policy-makers and the public at large remain in total denial. The current fear of "inflation" is exhibit A of rampant denial...

First off what do I mean by Japanification? I mean mired in a permanent state of structural deflation. Japan first entered this state 30 years ago and they've been stuck in it ever since. The "good news" is that they appear free to use monetary and fiscal policy to extremes previously considered impossible. The bad news is that their economy is totally stagnant.

The U.S. has been sliding down the deflationary slope since 1980. Free Trade and Supply Side economics solved the stagflation of the 1970s by exposing the economy to wide open global trade. Since that time the twin deficits consisting of the trade deficit (current account) and U.S. budget deficit have been growing faster than the domestic economy itself. The demolition of the middle class due to free trade and open immigration has been papered over with debt. The corporate sector has been the primary beneficiary of this easy way out from U.S. lack of  manufacturing competitiveness that began in the mid-1970s. Now the U.S. is totally dependent upon other countries (aka. China) for manufactured imports. 

All of which conventional economics would predict spells inevitable doom for the U.S. dollar. However, Japan has been doing this for decades and their currency is still considered the SAFEST on the planet. Even safer than the dollar. Why is that? It's because during boom times Emerging Markets borrow from the lowest yielding economies i.e. slowest growing, which is where they can find the lowest interest rates. That "carry trade" continues throughout the economic cycle until such time as the Minsky Moment occurs and EM currencies implode. At that point in time all of that borrowed money must be returned post haste to the lender. Which is why the Japanese Yen always catches a massive bid during global margin calls. It's not really due to implied solvency, it's more due to lack of concern over Japanese inflation. No one is worried it will ever get out of control, because it's structural. 

I first became disillusioned with U.S. economic policy in the aftermath of the Dotcom bubble when the Fed lowered interest rates to 1.5% and recommended that home buyers start using adjustable rate mortgages. They were clearly trying to offset the implosion of  the Tech bubble by stoking another one in real estate. And it "worked". For a time. 

Nevertheless, after 2008 and zero interest rate policy "ZIRP", the rules around "markets" changed dramatically. For one thing "valuations no longer matter". Meaning they are no longer useful as a timing mechanism with any precision measured within years. In addition, similar to Japan, the U.S. is now "free" to overuse fiscal and monetary stimulus on a level previously considered impossible. All as a proxy for a real economy. 

However similar to Japan this newfound profligacy does not necessarily portend the imminent demise of the U.S. dollar. In fact, the U.S. dollar is now a carry currency of choice similar to the Yen. During the March 2020 meltdown, the U.S. dollar skyrocketed. Anyone who IS worried that the U.S. dollar demise is imminent, should buy gold. However, don't be surprised if better prices lie ahead. 

What this monetary and fiscal monster now portends is larger and less stable asset bubbles over time. The largest of which to date we are witnessing right now. To believe the pundits of the day we too would have to ignore this latent fragility that I wrote about in detail this past week. The mega asset bubble and attendant continual monetary bailout has ensured that the next global RISK OFF event will implode the machines that create this carefully fabricated new permanent plateau of delusion.

Here we see S&P (eMini) futures open interest as a proxy for the current level of liquidity, is at the lowest point in this cycle. This is the consequence of automating markets to the point at which human market makers have been replaced by HFT algos front-running Robinhood gamblers. Someone on my Twitter feed said they don't think the Fed will go through with taper. It already started, and it will accelerate in January. The goal is to be wrapped up by the end of March - from $120 billion/month down to $0/month.  

This chart shows that the global reach for risk peaked way back in February and hit a second lower high aka. second wave retracement in November. Then the market tanked into early December which was the first (minor) wave of third wave down. The subsequent retracement in December was minor ii. I show the Bitcoin Trust because it has the clearest wave structure, and because all risk assets are now correlated to the downside, as we see via Nasdaq lows in the lower pane. For those not familiar with Elliott Wave Theory, at its most elemental level it's merely pattern recognition. Beyond that it's the belief that greed and fear ultimately control markets, NOT central banks as so many people today assume. 

If this wave count is accurate then indeed third wave system test is near at hand. 

We must acknowledge that this society has an overriding need to believe that NOTHING has changed over these decades and therefore they are free to extrapolate the past 70 years of stock market returns into the indefinite future. Which is what they are actively doing right now. To their minds, nothing dramatic has changed to the underlying economy which would indicate that "stocks" are outside of historical bounds. In other words, those who don't believe in any form of market timing, now rely solely upon extrapolation of a 70 year volatile trend by assiduously ignoring the experience of the past twenty years. Millennials at least have an excuse not to see this coming. No one else has an excuse other to claim they are functionally brain dead. 

In summary, going forward, the definition of "retirement" is going to change. In the past it meant reaching a fixed age and  heading out to the golf course. Going forward, it  will mean that people work longer but they will begin to trade off time and money earlier in life.

In a world in which future returns are highly uncertain, it's the rational choice. 

A lesson the Japanese learned a long time ago.

The New All Time Crack High

This is my last blog post of 2021 - a year that will forever be known for maximum smoke and mirrors. Recently, I realized why I don't read fiction anymore, it's because I get more than enough fiction during the day from business news. Beyond that I have no appetite for creative fantasy. Unfortunately, this society is now addicted to fiction. Fact and truth can in no way compete. Therefore, it's totally appropriate that 2021 embedded the largest breadth divergences since 2007. And more recently, holiday collapsed volume and volatility are hiding the largest divergences of 2021. Every Ponzi scheme has paper millionaires bidding up their own ephemeral wealth. Unfortunately, when this asset bubble explodes, this Idiocracy will realize that in Ponzi schemes there is no strength in numbers...

No fact or truth can penetrate the complacent malaise that permeates this society at their new permanent plateau of mass deception. Just as ever-widening wealth inequality has been ignored for decades, it's only fitting that cycle-wide market risks are assiduously ignored now. The masses seek consensus from like-minded fools, and they all take comfort from their strength in numbers. As I've pointed out recently, many bubbles have already burst in 2021. Just not the biggest one - the one that involves central bank coordinated market manipulation. Which is why we're seeing chasmic market divergences. It was the same way back in Y2K. First the junk stocks imploded. Then investors told ourselves that the mega cap Tech stocks were safe havens, because they had real revenues. The fact that they were record overvalued didn't matter. It turns out, it DID matter.

For example, Cisco made its all time high back in Y2K and STILL hasn't recovered. At the peak over twenty years ago it was the world's most valuable company at $550 billion. Today's market cap is HALF that amount.

Most of the money lost in that era was lost in the mega caps that were perceived safe havens. It's shocking how many people who lived through that debacle have already forgotten that fact. 

In a recent survey of which wealthy investors plan to dump stocks in the New Year to lock in gains (and avoid taxes 2021 taxes), Millennials are at the top at 90% and Boomers are at the bottom at 29%. Which is the exact opposite of what should happen. It appears that the older generations have completely forgotten the lessons of the past two bubbles. Call it amnesia or dementia, it will have the same outcome.

Another shocking fact is that no pundits are mentioning the chasmic divergences in market breadth attending this latest "all time high". As of yet, neither the NYSE composite NOR the Nasdaq composite have confirmed this latest S&P high. Which is the longest stretch of non-confirmation of 2021.

Here we see the last two times the divergence reached this duration, the S&P rolled over. In October 2018, it imploded -20% into the end of the year.

Far worse yet, is the latent leadership by recession stocks. Even mega cap Tech stocks are not confirming this latest high. And notice the number of daily Omicron cases which is spiking after Christmas. It will spike even more after New Year's. 

It's only a matter of time before the old age home shits a brick deja vu of March 2020.

Can you imagine if this crash starts off the exact same way as the last one? And yet they will say no one saw it coming. 

There are many historical analogs for today's bifurcated market. None of them however embed ALL of the risks of this all time crack high. However, going into the 2022, the 2015/2016 analog is now the closest. Back then as now the market was highly volatile during the late summer and Fall. In December the Fed tightened but markets kept it together until the new year arrived, and then they exploded. 

Yet again the rest of the world is just waiting for the U.S. crack high to wear off:

This chart shows the combined breadth of the Nasdaq and NYSE. This level of divergence has also not been seen since 2015, right before the August crash. Before that, there is no precedent for this amount of divergence from an S&P 500 all time high. 

The Rydex asset ratio has been extremely erratic throughout this year but always ending at a new all time high. RISK OFF is not even a consideration. So it's altogether fitting that it's ending the year at a new all time crack high.

Today's fat and happy bulls bidding up their own assets have to learn the hard way the difference between realized and unrealized gains.

And when they do, they will realize there is no strength in numbers. 

This song seems the most appropriate for 2021 even though it's not from this era. This is the first year of my entire life I don't recognize one song that's popular. Either I'm getting old or the music today is total dog shit.

Happy New Year!!!

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.