Goodbye To All That

The pandemic marked the end of the consumption oriented lifestyle. So what did the masses do? They doubled down on collapse...

Here is something you won't hear any prognosticators predict - which is that the consumption lifestyle is about to explode along with markets. The magnitude of this three sigma asset bubble is of a scale and duration that precludes bailout. Whereas in 2008, the Fed and Congress found a way to bail out Wall Street from the impacts of their subprime financial WMD, this time their bailout efforts will fall far short. Which means that the "system" is now at risk. 

Am I predicting the end of the world? No. I am predicting the end of a failed way of life that has become toxic and lethal to those who embrace it. This is the side of the story that market pundits don't want to tell. That the modern lifestyle is lethal both physically, mentally, and financially to those who embrace it. And of course to the planet itself. Somehow we are dealing with an obesity crisis, a mental health crisis, and a retirement crisis yet no one makes any connection back to the corporate system that makes record profit from Frankenfood, Narcopharma, and rampant financial fraud. 

Very few people we know question the system. In their minds, it's always been this way. They see zero differentiation from a past when farm to table was the standard way of life, to now where it's the rarified privilege of yuppies while everyone else consumes GMO-manufactured factory food on an industrial scale. Most people are too busy self-medicating themselves into oblivion to question the system itself. 

Of course, when any bubble explodes, people say there was no warning. Last week, Jeff Bezos couldn't get his mega yacht out of dry dock because it didn't fit under a bridge. Looking back, history will say this was a seminal moment that captured the  peak zeitgeist of the supernova asset bubble driven by ULTIMATE greed.

"According to a study released last March by Americans for Tax Fairness and the Institute for Policy Studies, the collective wealth of 657 billionaires in the US grew by 44.6% — that's $1.3 trillion — during the pandemic"

Social mood is now coming down off of the pandemic-induced monetary crack high. We see it in growth stocks, the collapsed IPO market, China's real estate implosion, the Crypto market, and of course in consumer sentiment.

ALL of today's pundits are blaming "inflation" as the cause for collapsed consumer sentiment, because they have no clue that their own social mood is what drives markets and the economy.  They themselves are caught up in the bubble zeitgeist and are therefore completely unaware of their latent crack high. By the time they figure it out it will be WAY too late. 

When inflation morphs to extreme deflation amid record asset collapse, the universal desire to "bring down prices" will be filed under careful what you wish for.

Late last week, Goldman Sachs put out a note saying that after the CPI release they now expect seven rate hikes in 2022 - one at every remaining Fed meeting:

However, on Saturday they put out a note saying they now predict recession:

Got that? Seven consecutive rate hikes or recession. Whichever comes first.

What a recession would do first and foremost, is cause a stampede out of cyclicals stocks which have been leading the 2022 rally. In addition, it would cause a commodity collapse deja vu of 2008. And yet the same people who say that recession is now a major risk ALSO say that the case for commodities has never been stronger. 

The case for commodities was only stronger in 2011 and 2008, right before they collapsed:

In other words, going into a recession believing that inflation is the biggest problem, is by far the worst case scenario for investors. 

Why? 

Because it means they are holding record LOW cash. FAR lower than in 2008:

In a happy turn of events our middle son has also come to realize that the modern lifestyle is fraught with existential "risk". He  recently introduced my wife and I to Taoism which is a philosophy uniquely suited to helping people navigate troubled times such as these. For that, we are very grateful. While he and I still disagree on some topics, there is starting to be much more Zen overlap.

Therefore, he wrote a poetic essay which he hopes will help his generation navigate this continuing crisis. 

These are his words:

"I wonder about the silent screams

Those who while awake have terrible dreams

I wonder why I can’t bring myself to speak

When I open my mouth no one hears a creak

It seems that this world has gone mad

Chain reactions all around us, yet caring is a mere fad

As time went on we lost our villages

Seeking solitary confinement while we allow them to pillage us

We see the division as red versus blue

But in reality we know that isn’t true

Fear has run amok and we have become hasty

Sliding down a slippery slope cleverly guised as safety

Looking to the people you see a mass of the feeble

I am no different, in actions I am equal

We must not despair at the beliefs of our neighbor

All of us want the same just wishing for the stable

The path ahead appears to many as dim

And I assure you this is not on a whim

But a deliberate act of the few against the many

They’ve succeeded in making us believe our neighbor is the enemy

The path ahead with danger is fraught

A path few of us would have actively sought

While the time will surely come for action

All I want to do now is inspire passion

Led astray bruised and battered

Our communities have become tattered

But if we can see past our illusory divisions

We can forge a bright future ending this cultural fission"

Global Coordinated Meltdown

"our wisdom, too, is a cheerful and a homely, not a noble and kingly wisdom; and this, observing the numerous misfortunes that attend all conditions, forbids us to grow insolent upon our present enjoyments"

Inflation hysteria has gone global. Having inflated a 3 sigma super bubble, global central banks are determined to "shock and awe" markets with liquidity tightening. Is this human history's dumbest gambit? Without question...

Denial is now the universal religion

A great interview this week with "perma-bear" Jeremy Grantham. He calmly and eloquently sums up this era's risks. The adjective "perma-bear" is intentionally used to ensure everyone knows ahead of time that his opinions should be ignored. Far better to trust financial industry psychopaths than someone who would tell us this fairy tale has no happy ending:

"About 25 years ago, we felt in order to talk about bubbles, we should define them statistically...A two-sigma event is the kind that should occur every 44 years in a perfectly random world...three-sigma, is the kind that you would expect every 100 years"

The S&P 500 trendline is about 2,500; two-sigma is about 3,500; and three-sigma is 4,500, 4,600. We got to 4,800 in December 2021"

"History has been pretty straightforward. Whatever you do, don't have gloriously overpriced housing markets at the same time as you have a stock market bubble. Japan tried it...the stock market isn't back to '89, but the land market isn't back to '89, either"

By the time the pandemic hit, the market was already above Y2K bubble valuation when measured by market cap to GDP. Fed tightening has ended every market bubble in the past 100 years. Now we are to believe that this 3 sigma super bubble will be the exception when the Fed is adamant they are going to stop inflation.

Sure.

  

The importance of market cap to GDP as a valuation measurement is that it's a far more objective metric than the  standard price/earnings ratio. Today's earnings per share have been massively inflated by record profit margins and record stock buybacks. In other words factors that are leveraged to the cycle itself. When the cycle ends, these inflated factors will revert to trend and then earnings will collapse. Nevertheless, almost all of today's pundits use P/E ratios to justify today's record valuations. History will not be kind to an industry using artificially inflated metrics to justify buying a three sigma asset bubble. Soon, only the lawyers will be making money on the long side. 

On the monetary policy side, there are many lethal mistakes today's policy-makers are making at this juncture, and they've been aided and abetted by mainstream inflation hysteria. The first mistake is measuring inflation on a year over year % basis coming out of a lockdown pandemic. Not one of today's inflationary factors will survive this market crash. The second mistake is ignoring credit risk late in the cycle. Ironically, China is the only country NOT tightening monetary policy because their stock market and real estate markets are already in meltdown. They will be at the epicenter of this global meltdown. The third factor central banks are ignoring is the amount of tightening that has already taken place in markets. And most importantly of course they are ignoring the three sigma asset bubble they inflated and the fact that breadth has been imploding for a year already.

Put it all together and they're driving off a cliff by looking in the rear view mirror. And there is NO ONE to stop them. Inflation hysteria has gone global and "Shock and awe" is the order of the day:

"A dramatic week of central-bank meetings and economic data has changed the game for global rate-hike bets"

"Not only are money-market traders boosting wagers on the number of increases by major central banks, but also the size of each potential move, reflecting the prospect that policy makers will front-load tightening cycles to combat inflation"

The last time of course we saw this movie was September 2008 when the two year was similarly priced ahead of spot rates AND  market breadth had collapsed (lower pane).

For the past three weeks since the January low we've been seeing a massive short-covering rally ahead of central bank meetings, the jobs report, and now the monthly CPI report which came in today.

Now, almost all asset markets have the same corrective wave form. 

Small caps:

Consumer Discretionary

Semiconductors

Cyclicals

Meanwhile, despite all of this inflation concern and central bank promise of shock and awe, there is no hedging taking place compared to 2018 and 2020.

Ironically, this is the first time a Fed put doesn't exist, and an option put doesn't exist either. 

In summary, I predict there won't be even ONE rate hike in this cycle. And the ten year yield is heading to...

ZERO %. You know, like Japan.

There's No Bailout From Idiocracy

This society has a lethal addiction to cheap money. One that comes with an exorbitant price tag: Super asset crash at the zero bound, sans bailout. The Fed is following the exact course of action that will ensure they have neither interest rates to cut to save the economy, NOR QE to deploy to save the imploded asset bubble. History will say that the Fed and Congress were too busy front-running retail bagholders in the stock market to notice the bubble was out of control...

Many people don't like my writing style, because I am biased towards the bearish point of view. I leave nothing to the imagination. More importantly, I don't pander to idiots. The predominant writing style on the other hand, spews multiple opinions across the full spectrum of IQ and leaves the reader to get buried by the ball of confusion. Monetizing useful idiots is by no means limited to Wall Street in this era.

More importantly, I personally would never pass up this once in a lifetime opportunity to point out how fucking stupid this species has become. Looking back from an historical standpoint, this era will be the new 1929 - whereas that era stood for almost 100 years as the apex of insanity, per legendary investor Jeremy Grantham, the insanity of this bubble far exceeds that one. Did anyone alive twenty years ago believe they would see a Dotcom bubble bigger than the original one? Or a housing bubble bigger than 2007? Of course not, but here we are with both at the same time. The pandemic arrived at an unfortunate time because the cycle was already in its late stages. Many companies that had borrowed excessive amounts of cheap money were already starting to implode. However, the pandemic and its "special lending programs" threw them a lifeline to double down on balance sheet impairment. 

On the topic of the Tech bubble, the delusion that abides this bubble is that overvaluation is limited to the Ark ETFs and the profitless junk issued by Wall Street at double the rate of Y2K. That junk bubble has been collapsing since LAST February. Since that time there has been a massive rotation to "quality Tech". A rotation that has only amplified the overvaluation of this era's Tech behemoths, which as of December reached the same extreme as Y2K:

"The dramatic fall in some of the "flaky" parts of the stock market so far this year has followed the paths of previous implosions, including the bursting of the dotcom bubble in 2000"

These mega caps: Apple, Microsoft, Google, Amazon, Facebook are also at the happy intersection of the LARGEST stock market bubble, which is the passive indexing bubble. What some of us call the "Dumb money bubble". Michael Burry warned that passive indexing was creating a bubble of monumental magnitude which would lead to MOAC: Mother Of All Crashes. But then he capitulated, because this madness went on too long. The very protagonist of The Big Short couldn't fight the Fed any longer. 2008 was a mere micro-subset of this current bubble.

It's no secret that the Tech sector has driven the majority of gains since the 2009 low. When the pandemic hit, investors rotated out of cyclical reflation trades into Tech stocks which were deemed "safe havens" from lockdown. That set off a decade high blowoff top in the spirit of the Y2K date change melt-up which capped off the 1990s internet bubble. 

We can surmise that we've seen peak Amazon as the pandemic drove massive online sales at the expense of small service businesses. However, now sentiment towards durable goods is at a record low:

I don't know much about NFTs, I just know they're worthless. I was in the IT industry long enough to remember the "hype cycle" which was the cycle of hype that every new technology went through - the highs and the lows. Right now the Crypto space is coming off its all time crack high. This bubble will explode and then from the ashes we will find out if Crypto has any value beyond paying porn stars and child traffickers, off the books. Because right now that's it's only "utility" aside from bankrupting latecomer speculators.

Which gets us to this era's housing bubble. For the past decade HGTV has been on in the background in our household, as every home in the U.S. seemingly got remodeled to all white interiors and stainless steel appliances. The modern style being a replica of an institutional insane asylum. 

To say that we've mass overbuilt and commodified the housing stock is a ludicrous understatement. We've basically created a formula for mass bankruptcy on an industrial scale.

Last year, Zillow made news because they were EXITING the home buying business. That news should have been a massive warning as to what is wrong with this current housing market: Robo buying. Flipping houses on an industrial scale. 

"Wall Street and Silicon Valley have already transformed U.S. housing markets since the 2008 financial crisis, which had its roots in real estate"

The millions of foreclosures in the housing collapse created new opportunities for global investment firms to buy homes at scale, becoming corporate landlords controlling tens of thousands of homes"

The sheer irony is unbelievable. Wall Street creates a financial crisis that explodes the housing market at all time highs. Then, they come in at the bottom and buy up all the houses using cheap money leveraged 100x. All of which is leading to an even BIGGER housing crisis this time. In 2008, most of the leverage was in subprime, now the entire market is over-leveraged.

Which makes today's headline that much more dire:

Contrary to popular belief, there will be no bailout from Idiocracy this time.

The Hotel California Of Denial

One could not possibly invent a market scenario more lethal than this one. Today's investors now believe that the Fed has expanded their mandate to include inflating asset bubbles and bailing out investors when they explode. A lethal fantasy that is now boxed in by their primary mandate to keep inflation under control. Add in cycle denial, and it's the perfect recipe for a Hotel California market...

“Reading through various research papers from the Street, I couldn’t find anyone who disagrees with each other. But if we all agree and put on the same positions, who’s going to take us out” of the trade?"

No one. Everyone "knows" cash is trash. Why would you own cash if interest rates can only go higher.

After the jobs report on Friday, now traders are beginning to price in a 50 basis point rate increase for March. Which would be the first 50 bps increase since May 2000, which happens to be the last time a Tech bubble was bursting. Except this time, the everything bubble is bursting.

It all comes down to cycle denial which happens to be a very lucrative business model adopted by the vast majority of today's financial commentators. As long as today's pundits are unwilling to admit this is the end of the cycle then they will continue to push the higher rate scenario. Until such time as investors realize they are ALL on the same side of the boat and it's about to u-turn to recession. 

Another thing today's pundits don't admit is that the Fed can now basically manage the economy SOLELY using their balance sheet. As interest rates have sunk lower and lower over past decades, the efficacy of conventional interest rate policy has likewise collapsed. The Fed hasn't even raised rates yet, but already the two year yield has round-tripped to the pre-pandemic level. The market is tightening for them. 

Also late this week, the ECB shocked markets as well:

"Central banks are actively trying to tighten financial conditions ... they are moving faster than expected"

Morgan Stanley said markets were now facing "the largest quantitative tightening in history"

All of which means that imploding global markets which are used to receiving a bailout at about this time, are further from a bailout than they've ever been. Which means that liquidity is about to collapse at the same time as margin calls arrive for FOMO traders front-running imaginary bailouts.

Another critical delusion is the belief that only small growth stocks are overvalued. That delusion has driven money out of small caps into mega caps, driving their over-valuation higher. The same thing happened in Y2K, before Cisco lost -80% of its value.

This past week, new Nasdaq lows eclipsed the 2008 level. However, there are far more junk stocks in the market now than there were back then, so I'm sure someone can turn that into a positive argument. Even at this late juncture, the burden of truth remains on the truth. 

As we see above and below, this end of cycle denial is deja vu of 2008. Except, unlike back then, markets remain much closer to their all time highs, as investors buy every dip per the Fed's imaginary mandate to keep the asset bubble inflated at the new permanent plateau of over-valuation, while they vanquish inflation.

A ludicrous delusion that goes unquestioned. 

Sadly, there is no easy way out of this Hotel California of mandatory denial. This multi-decade failed Supply Side gambit was always going to fail at the zero bound at the hands of denialists recycling the same playbook that abided when the middle class was still strong and healthy.

Today's Idiocracy of pundits don't see this coming, because they all expect the middle class to come floating back from China any day now.

After all, no one would want to admit that they've been party to four decades of failure.

ALL ABOARD COLLAPSE

"What a fool believes he sees, no wise man has the power to reason away. What seems to be, is always better than nothing at all" 

It's not my goal to "rain on the parade". I am merely pointing out that this parade is taking place in a torrential downpour on the way to biblical flood...

Unfortunately, facts and logic can't compete with a society in love with denial. Nevertheless, the slow arc of reality is coming in for the kill. We are witnessing the PEAK of everything in this cycle from profits, to speculation, to consumption. 

Two cycles in a row (2000/2008) I changed jobs right at the end of the cycle. Why? Because my job satisfaction tank was empty and wages were rising. Also, because no one told me it was the end of the cycle. Like now.

We are currently seeing a level of turnover unprecedented in U.S. history. For a variety of factors - most significantly, the pandemic put the supply/demand equation in favor of employees for the first time in decades. Ironically, due to 20 million knee jerk mass layoffs at the beginning of the pandemic. Yes, you read that right. A DECADE worth of jobs got wiped out, even though the government promised to PAY employee wages during the shutdown. Now, employers are scrambling to fill empty positions, because THREE MILLION baby boomers chose early retirement, which just so happens to be the gap between pre-pandemic and post-pandemic payrolls. All of which means that higher wages are cutting into profit margins leading to PEAK profits for the cycle. The irony is quite ironic. 

Number of Americans quitting their job, monthly (thousands):

Still, no one need be convinced this will continue indefinitely, since that's what they must believe anyways.

Yesterday the monthly ADP private jobs report was a total fiasco. -300k job LOSSES versus 200k expected job gains. This was a massive miss even by EconoDunce standards. It was off by more than a minus sign. It's hard to be that incompetent and still keep your job, but economists excel at it. If it's one thing their continuing employment proves is that none of their theories are credible. 

I personally have long stopped guessing the monthly BLS jobs report which comes out tomorrow. There have been many pundits making excuses for why the January jobs number could be a disaster similar to ADP. However, we must bear in mind that this post-pandemic macro environment is a con man's paradise. All of these "unique" factors make it very easy to bury the end of the cycle in broad daylight.

Make no mistake, none of these "experts" want anyone to believe this is the end of the cycle. Does anyone on Wall Street want to tell people that recession is looming? No. So they don't. 

This week, we are very likely witnessing peak earnings, although most analysts won't admit it. The key is not what happened in Q4 of last year, but what will happen THIS YEAR:

"The first quarter estimates declining reflects the reality of supply chain and inflationary problems, the second and third quarter numbers rising are wishful thinking”

 there is increasing doubt that corporations will be able to keep raising prices to offset higher costs, particularly labor costs"

Got that? Up until now, profits have been rising faster than wages, but we've reached a point at which "consumers" will no longer accept higher prices, hence profit margins must come DOWN. 

And along with all of this peak wishful thinking, we are also witnessing peak corruption.

"Movement on the issue comes after an Insider investigation found dozens of lawmakers violated laws around stock trading while in office"

We live in an era wherein the Fed is trading stocks AND Congress is trading stocks, far more freely than at any time in modern history. And we wonder why there is no financial regulation. 

That will change. When it's way too late. 

Social mood is turning down. We see it in consumer sentiment. We see it in Biden's tanking poll ratings. We see it in the market itself. People who don't understand the role of greed and fear in markets are the ones who are constantly surprised when they explode. Currently we are seeing less fear in these end of cycle markets than we've seen in any other cycle in history. Why? Because the Fed has convinced everyone they are expert stock pickers. Therefore even as the Fed removes stimulus, these morons remain over-confident as to their prospects for future gains due to their unique "skill". Little do they know that their only skill in life is getting serial conned by Wall Street. 

Which gets us to the casino.

Today Facebook is imploding on 10x average volume due to "inflation" impacting advertising spend for their customers. That sounds a lot like a decline in overall economic activity to me. After the close today, we will hear from Amazon which is already expected to see a year over year -60% decline in profit. The stock is not waiting around to see what happens, as it's trading down in tandem with Facebook. What we notice below is that Amazon rocketed through the pandemic, but has been carving out a top for over a year and a half now. In other words, the pandemic brought about peak Amazon. The virtualization of the economy, which is inherently structurally deflationary. 

Now, they are seeing slowing growth AND higher costs at the same time. Their business model, consisting of predatory competition the likes of which would have been broken up in any other era, is coming to an end. 

In summary, algo-driven Tech moonshots by Apple, Microsoft, and Google drove the Nasdaq to backtest the 200 day moving average. However, now Facebook and Amazon threaten the next leg lower.

Finally, Trump's election rally exploded in the February after his first year in office. Right after the January jobs report. 

I'm sure everyone believes this time will be different.

The Eye Of The Hurricane

The front wall of the hurricane weakens the structure, the back wall blows it away...

We are in the midst of a Lehman style collapse in real-time, but there's no way of knowing because today's pundits are broadcasting sugar coated bullshit across every media channel. The sheeple wouldn't have it any other way. No one would pay for what I have to say, nevertheless it will turn out to be exorbitantly unaffordable.

We live in a society of useful idiots, who are convinced there's strength in numbers.

Last Friday I posted this chart on Twitter showing that to-date the volatility at the 200 day moving average was the highest since March 2020. The third highest was March 2000.

In other words we are in the midst of a bear market rally. The path of this bear decline is so far following the Y2k sequence: First junk Tech stocks got obliterated, which began a year ago. After that mega cap Tech took the lead, which continued until  November. Then, cyclicals led in December. Finally everything imploded in January. Except Energy stocks which I will discuss further below. 

Now investors are getting worried as January was the S&P's worst month since March 2020. For the Nasdaq, it was the worst month since December 2018, tied for the worst month since 2008. Had January ended last Friday it would have been the worst month for the Nasdaq since 2008.

Therefore, to placate their investors, every advisor and pundit is working overtime to keep the sheeple from bolting out of the casino. At the prime broker level, Marko Kolanovic is "pounding the table" for everyone to buy stocks. 

Many market metrics such as recent performance of high vs. low beta stocks and valuations of small-caps are already fully pricing in a recession — something we do not see materializing,”

The flip side of this argument comes from Alfonso Peccatiello, author of The Macro Compass blog, who notes the spread on overnight index swaps is dangerously close to inverting"

As I've said many times, buying cyclicals going into a recession, is a very bad idea. They get demolished. Unfortunately, the imploding Tech bubble gives investors fewer and fewer places to hide. So what to do, push investors into cyclicals and tell them recession is off the table. 

Unfortunately, every spike in inflation for the past 70 years has preceded recession.

Another asinine assumption Kolanovic makes is regarding the bullish aspect of collapsed small caps. Below we see that January had the worst Nasdaq breadth in HISTORY. And comparing to 2008, the maximum breadth collapse occurred in October 2008 which was four months before the market bottomed. In other words, margin clerks won't be selling the small caps anymore, now they will dump the big caps that have been holding up the market.

This chart is also testament to the RECORD amount of junk stocks that got dumped into the market in 2021.

Another dumbfuck assumption getting bought with both hands is that we are "early" in the rate hiking cycle. You have to have amnesia or dementia to believe this argument. First off, as we see below, interest rates have been in a downtrend for four decades. Secondly, as we see also see, this relative move in rates is unprecedented. Somehow we are to believe that post-pandemic price increases in the order of 8% justify increasing interest rates 400%. Because we all know that the price of money is not a "cost" to the consumer in the most leveraged society in history.

Sure. 

Which gets us to the massive Energy sector outperformance in January. Here we see that Energy outperformance has attended EVERY end of cycle/bear market in the past thirty years. And January's monthly outperformance is the largest in the life of the data.

Similarly, the monthly VIX is warning that we are heading into recession AND bear market.

But among the most dangerous assumptions being made right now, including by Kolanovic, is that cyclicals are NOT overvalued. This is how all of today's pundits are able to ignore the meltdown in Tech stocks, because they tell themselves that Cyclicals are "value" stocks. 

Unfortunately, nothing could be further from the inconvenient truth. 

But what better sector to prove it than the Wall Street brokers now pushing out all of this end of cycle bullshit in 2022 after having dumped RECORD amounts of junk stocks into the market in 2021. 

Rule #1 of survival: Never trust proven liars just trying to make the quarter.

"Many investors are grappling with their portfolios turning negative and the rotation into value is depressing appetite for the growth stocks"

In New York, the market turmoil has made at least nine firms call off IPOs"