The End Of Disney Markets

Today's masses are in a consensus of insanity. Be careful trying to fit in...

The pandemic marked the apex of central bank managed Disney markets, not only in terms of record asset over-valuation, but also in terms of record financial fraud and record gullibility. The final consensus is that the global pandemic CREATED wealth at the fastest rate in modern history. You have to be brain dead to believe it, therefore it's largely unquestioned...

There's no question the pandemic created wealth for the ultra-wealthy - at the expense of everyone else, which is how all Ponzi schemes work. There is a period of time during which asset flows provide the illusion of wealth for everyone. Which keeps them drawing in new cash. For the all time record, 2021 drew over two decades' worth of new cash into the casino:

In this post-pandemic "new cycle", we are also to believe that the shortest bear market in history capped off the longest bull market in history. Looking back to WWII, if we measure the duration of every bull market relative to the duration of the bear market to follow, we would get this ratio for 2020:

The bull market was 132 times longer than the bear market:

In other words, this perpetual Disney cycle is the new Eldorado. The myth of an entirely new cycle WITHOUT the pain of corporate de-leveraging. 

Unfortunately, that is where the myth has now run into inconvenient reality in 2022. Because unlike in 2008 when the Fed used its emergency powers to resuscitate a de-leveraged economy, in this pandemic, the Fed used its emergency powers to inflate a MUCH larger asset bubble than what previously obtained prior to the pandemic. In addition, they used interest rate policy to run the economy hot when the goods producing sector was already running hot due to the pandemic lockdown which shifted demand from services to goods. 

The Fed's policy error was to believe that the pandemic was a 2008 scale financial emergency before it had manifested into one. They bailed out markets BEFORE they were in crisis instead of after. Which is why now, they are boxed in by the bond market which has been raising rates far ahead of Fed policy, putting the super asset bubble at extreme risk. History will say that over-stimulus in the absence of de-leveraging was the proximate policy-error. Markets became over-lubricated and when they exploded the Fed had no dry powder left for the REAL economic crisis. 

In the meantime, unfortunately the apex of post-2008 bailed out criminality is now FULLY arrayed against the public. What I call the de facto policy of buyer be unaware. 

Since 2008, today's market pundits have been fully captured by Wall Street and central bank Disney markets. Despite global central banks actively coordinating a global asset collapse, today's pundits are more than happy to monetize useful idiots. They've learned the hard way that an aging populace has no stomach for the truth. 

As we see below it took four years in the two prior bear markets for margin debt to reach a new all time high. In 2020, it took a mere eight months.

This is not a new cycle at all. This is merely the blow-off top from the post-2008 bailout rally. Capped off with a similar magnitude bailout at the end of the longest cycle in U.S. history. The depletion of all stimulus at the end of the cycle. How this Disneyfication of markets was always going to end.

i.e. WORST CASE SCENARIO

This past week Cathie Wood said that we are witnessing the largest misallocation of capital in history. She of all people should know, because she is the sum total of everything that's wrong with this era. She is a Wall Street insider who is pretending to be "democratizing" markets. Her funds are the largest bagholders of the 2021 record Wall Street IPO pump and dump. Twice as many profitless junk IPOs were dumped in 2021 than were dumped in Y2K. 

All of which widely ignored chicanery is why RISK OFF is no longer an option. 

The "black swan event" that awaits this end of cycle Disney market is ANY reason to sell.

Don't Look Down

The Netflix movie, "Don't Look Up", is a timely analog for the  monetary euthanasia that has a death grip on society. Fortunately, this impending reset won't be a world ending event. But for consumption addicts forced to go cold turkey, it will feel like it anyways...

I finally got around to watching "Don't Look Up", which is essentially a slightly more intelligent version of "Idiocracy" i.e. a society of idiots hellbent on self-destruction. A very timely movie clearly targeted at climate change, but equally relevant to all other aspects of society that are currently imploding in broad daylight amid mandatory denial. Since the pandemic collapsed the carbon level down to decade lows, I've started worrying more about this society's latent mental breakdown than the environment. Why? Because once this monetary illusion implodes, the overall carbon level will collapse like a cheap tent. 

Case in point, in the same week we learned that consumer confidence has collapsed, we learned that retail sales are skyrocketing. This only makes sense in a society of hoarders fretting about inflation while their overall sense of economic confidence implodes. These people are hoarding merchandise going into a deflationary depression. Something we never saw in 2008. It goes without saying that the hangover will be brutal.

But really, who could warn them?

This hoarding/asset bubble scenario has created the perfect set-up for a bidless market and the fastest demand collapse in modern history. There is no way this could be more cataclysmic than this unique combination of idiotic events.

As we see below, the inflation hypothesis is now universal consensus. Even though at this latent juncture neither gold, nor oil, nor Treasury bonds are confirming it.

On the subject of timing, we have now entered the ninth consecutive week of short-term treasury bond yield rise. The last time we saw that was back in February of 2000. Which made me realize that the set-up now is eerily reminiscent to that one. Back then, the Fed kept the spigots open through the Y2K date change because they were worried the world was going to end, computers offline, planes falling out of the sky etc. When all of that turned out to be a non-event, the stock market bolted higher. At that point, the Fed realized they were way behind the curve on tightening policy. So what did they do, they started hiking rates as fast as possible. And then by March 2000 the Tech bubble exploded. Which when you think about it is very similar to the current scenario. The Fed has been preoccupied with the pandemic and the various mutations. Which left them way behind the curve as supply bottlenecks grew and pent-up demand exploded. So now, in this new year they're making up for lost time.

The main difference is of course that now yields are far lower than in 2000 because that was the strongest economy in decades. Whereas this is the weakest economy in U.S. history. In Y2K, GDP growth was at 7% and the U.S. budget was in surplus. Now, GDP growth is at 2% and the deficit is 6%. In any other era that would have been considered a 4% recession. 

Putting it altogether and we now have end of cycle inflation hysteria worse than 2000 and 2008, attending a 100 year asset bubble. Which means double policy error. However, the populace is far more concerned about the price of eggs than sky high asset prices. One is expensive short-term. The other costs everything long-term.

Once the global margin call reaches its crescendo, there will be no possibility for central banks to stop it. The Fed is now boxed in by the lethal inflation narrative. In 2008, it took four months and -40% for the Fed to arrest the decline of the stock market. Albeit there were some massive short-term rallies along the way.

Today’s pundits are 100% convinced the Fed can save every market despite the fact that the collapse is already well underway.

In summary, the consumption-addicted masses are now hoarding insolvency heading into a depressionary asset collapse. On the other side of which there will be a glut of EVERYTHING. Which is apropos for a society that trusts opinion over fact every single time without the slightest question. A society of dedicated denialists placing ALL faith in their overwhelming strength of numbers. 

On the topic of the casino, this week the Nasdaq has round-tripped back to the high of last February, while breadth has collapsed for a YEAR straight:

Since the top on January 5th (yes my birthday), the Dow is declining faster than it did in 1987. Today's Dow has already tested the 200 dma three times. Back then, a solid break of the 200 dma is when the crash got out of control.

Rally volume as we see has been abysmal:

The broad based Wilshire has the clearest wave form. It peaked back in November and it's now exhibiting nested "1s" and "2s". This is my interpretation and it implies the most bearish of outcomes.

Suffice to say, bulls can't afford for this to be accurate, because it implies the end of mass delusion.

Don't look down.

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.