THE END OF THE PONZI CYCLE

In this market, when one fraud ends, another begins. Bulls have an insurmountable advantage in the war of words - not only do they have the full weight of deception on their side, but they have an audience of eager accomplices. Meanwhile, us critics of criminality are the enemies of all that's fun in manipulated markets, and hence perma-boring...

Sadly, as they will all learn the hard way, having your head up your own ass is not a Black Swan event. 

There's a scene in the movie Sling Blade where the father (Robert Duvall) excoriates his son (Billy Bob Thornton) for killing the wife/mother for cheating on him. So the son kills the father too.

Here we are - there are no innocents left in these markets. There can be no defense from the supposed unpredictability of a "Black Swan" event as so many have done in previous selloffs. 

This is Q1 in a nutshell:

Highest CPI in 40 years (which led to recession in 1980)

Largest oil shock in 50 years (which caused recession in 1973)

Largest global bond collapse on record

Fastest Fed tightening on record (which preceded EVERY recession)

War in Ukraine

And yet all bought with both hands. The ultimate example of moral hazard. Far too many bailouts have led the masses to run towards risk. 

Which is why markets just made a round-trip of record deception. Institutions sold, while retail investors bought the dip with both hands: 

"Institutional selling has been a feature of U.S. stocks since the start of the year. Macro systemic strategists, including volatility-targeting funds and trend-following commodity-trading advisers, dumped $200 billion of global equities in the first two months of 2022"

Individual investors have purchased a net $39 billion of stocks since January, the largest at this point in at least five years"

Institutional selling at market tops has been a "feature" of every end of cycle bull market in history. And late stage retail bagholding has also been a "feature". It's called distribution - and it means large investors selling stocks to the masses. 

If at the beginning of the year anyone told you those above risks would abide in three months, would anyone believe the "market" would still be near all time highs? Of course not. This is now entirely about misallocation of capital.

Deja vu of last year when the growth stock led deflation trade melted up and imploded spectacularly in Q1 - we just saw the exact same melt-up in the reflation trade, led of course by commodities. The war was the catalyst for the manic blow-off top, however the reflation rally had been gaining steam since the election, vaccine rollout, and global re-opening in late 2020. 

Which is why for the first time in this entire rally since the March 2020 lows, BOTH the NYSE and Nasdaq are now overbought at the same time.

You will note that S&P breadth (top pane) made a large leap up in June 2020 which was accompanied by a record breadth thrust in the NYSE (mid pane). Now we see another surge. Also last year saw the manic melt-up in growth stocks, followed by this echo surge. Anyone can see however, that overall S&P breadth has basically collapsed. 

So what we are witnessing is an end of cycle melt-up in ALL risk assets at the same time, amid daily increasing odds of recession. All accompanied by mass denial that it's the end of the cycle. 

Many pundits have been saying recently that as long as the twos/tens didn't invert that the rest of the yield curve inverting did not mean recession. Well, now they are wrong, because twos and tens just inverted:

"Some analysts say that the Treasury yield curve has been distorted by the Fed's massive bond purchases, which are holding down long-dated yields relative to shorter-dated ones"

[There is only one problem with that hypothesis which is that the Fed is no longer buying bonds]

"Analysts say that the U.S. central bank could use roll-offs from its massive $8.9 trillion bond holdings to help re-steepen the yield curve if it is concerned about the slope and its implications"

This last part is the dumbest thing I've read in a while. The Fed's asset purchases aka. QE inflate markets and increase reflation expectations. The Fed's asset unwind aka. QT does the opposite - it tanks asset markets and it increases deflation expectations. So how could it possibly steepen the yield curve? 

But here is the key takeaway all bulls were waiting for:

"The time delay between an inversion and a recession tends to be, call it anywhere between 12 and 24 months"

Still plenty of time for gambling, so says Wall Street.

Which gets us to the casino:

At today's close, the NDX (not shown) was RECORD overbought going back to 1998. 

Here is the Nasdaq Composite with the Nasdaq breadth oscillator:

As I said above, NYSE breadth is the most overbought since June 2020. Which is the last time bond yields spiked this amount. After that reflation trades (Energy, Financials, Industrials, Transports) imploded. 

Crude has tested the 50 dma twice. If it breaks, next support is -25% lower at the 200 dma. With far greater potential downside if that breaks.

Recession stocks are leading the end of cycle rally.

Go figure.

In summary:

Here we are back at multi-year overbought. The epic risks of the last three months were sold by the smart money institutions who raised cash. Therefore knowing what we know now. Buy or sell?

If you had been bearish and you wish you had been bullish, here's your chance. And if you had been bullish, and wish you were bearish, you can now flip.

BUT, this time EVERYONE knows the risks. 

THE GLOBAL MINSKY MOMENT

Today's policy-makers are racing full speed towards the Minsky meltdown:

"Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate"

The pandemic and its *special* bailout programs allowed companies that were essentially insolvent to rollover their debts. 

One, more, time. 

The Fed missed their window to raise rates, and now they are tightening into a deleveraging phase:

Amnesia or dementia? Of course it will make no difference in the end. Except with respect to the treatment for the impending mass mental health breakdown. 

This society specializes in doubling down on failure. Not only are the Dotcom Tech bubble and 2008 Housing bubbles long forgotten, but every policy mistake in between as well. To believe in this fraud one must forget the 2018 Fed implosion. The 2015 China meltdown. The 2014 oil collapse. And the 1998 Russian default. 

This monster is the SUM TOTAL of all of that, now accelerated by a Fed hellbent on implosion. This tsunami of risk is so large that its gargantuan magnitude is imperceptible in open water and will only be visible when it breaks on shore and obliterates everything in its path. 

The Fed is flooring their rate hike plans while keeping their eyes firmly locked on the rear view mirror of stale and irrelevant data. They are in Thelma & Louise end of cycle policy disaster mode. What hubris they had keeping QE and rates at full throttle for FAR too long, they are now repeating by cutting liquidity FAR too fast. 

Unfortunately, today's pundits squandered their credibility telling everyone for months that the Fed is behind the curve. So now they are trapped by their own consensus of idiots. 

For their part, the sheeple are just massively confused. They are being constantly told to ignore all mounting risk. Which is why social mood is collapsing. Never before have we seen such a large collapse in consumer sentiment BEFORE an asset crash and before Fed rate hikes. One can only imagine what depth of despair awaits this crime scene when asset collapse stirs the profoundly stoned masses from their narcoleptic coma.

"Home prices soared 18.8% through 2021, marking the largest annual gain since at least 1988

Still, for all the wild price gains in the housing market, the landscape doesn't share the risks that emerged during the late-2000s bubble, the Fed governor added"

Below we see the University of Michigan current economic conditions. This is the mid-month (interim) reading, which is the lowest since 2008. In the bottom pane I show the 30 week % change in the 30 year mortgage. Combined we see these are the worst correlated readings since Paul Volcker pulled the plug on inflation in 1980.

Thelma and Louise are about to go through the windshield:

Even before the Russian war in Ukraine, global risks were mounting inexorably. In the meantime, China Evergrande and its derivative dominoes have been spreading throughout the Chinese economy. This week, China is experiencing its biggest COVID lockdown in TWO YEARs. For those who still think they invented this virus, you have mistaken idiocy for a conspiracy.

Russian default is coming around again in early April:

"The last payment was a small investment in credibility, but when Russia has to start writing billion dollar checks it’s a different calculation”

The Fed's implosion of the global bond market is a Black Swan event in broad daylight. It's not only Russia and China that are caught up in this meltdown.

This is the worst quarter for EM dollar bonds since the Russian debt default in 1998:

What does this all have to do with the Casino?

Right now bulls believe there is too much bearish sentiment for stocks to go down. Unfortunately, as we see via the AAII survey, bearish sentiment does not prevent the market from sliding down the slope of hope:

Anyways, sentiment is just opinion polls. Only positioning matters, and positioning of course is FAR too bullish to mark any sort of tradable bottom yet. 

The equity call/put ratio remains near pre-pandemic highs:

In summary, the full force of Wall Street criminality is arrayed against the public right now. They are intentionally being kept in the dark and fed bullshit. As far as the masses are concerned, they wouldn't have it any other way.

No one wants inconvenient facts and data to get in the way of their cherished opinions, or to interfere with their daily subscription bullshit enema. 

The New Permanent Plateau Of Delusion

What's about to happen is totally unthinkable and therefore it's not even being contemplated - A liquidity collapse across all risk asset classes at the same time. The perfect recipe for a totally bidless market...

What we are witnessing is a commodity driven liquidity collapse. Higher oil and commodity prices are forcing the Fed to accelerate their tightening plans. Of course they are using the wrong tool for the wrong problem. Rate hikes are a demand side solution, whereas the sanctions-driven commodity shortage is a supply side problem. The end result of this failed gambit will be a demand collapse in conjunction with a global supply glut. This is total economic mismanagement driven by the ubiquitous assumption that markets won't rationally respond to inflated prices. The overwhelming consensus at this latent juncture is that prices of everything, especially risk assets will keep climbing while the Fed tightens liquidity at the fastest pace in decades. Where this is all headed is inevitable deflationary asset collapse as illustrated below:

"Whipsawing commodity prices and eye-watering margin calls are forcing traders to reduce their activity, driving liquidity out of markets and exacerbating price swings, according to some of the world's biggest trading houses."

 

Consumers are now getting squeezed from every direction: Durable goods, home prices, interest rates, food prices, car prices, commodity prices. Today's pundits should know better than to believe in this mass delusion. Sustained inflation is always and everywhere a monetary phenomenon and yet the Fed is now tightening as fast as possible. Supply side "inflation" in a rate hiking cycle is not sustainable.

Unfortunately, there is no one to warn the sheeple because the prospect of a global deflationary asset crash is not an option. It's not something that today's pundits could even mention since they would have an exodus of subscribers. What we have instead is mass groupthink on a record scale. 

Exhibit A of impending disaster is today's over-heated housing market. Home prices in my neighborhood have gone up 30% in just the past year alone. These sky-rocketing home prices are causing massive distortions in supply and demand. Buyers have been told that home prices and mortgage rates can only go higher, so they are panic buying homes. Demand has been further accelerated by so-called robo buyers. These are hedge funds that are buying up homes across the country and packaging them into collateralized debt obligations (CDOs) in a repeat of the 2008 housing crisis. Except instead of packaging the mortgages, they are packaging rental properties. 

For their part home builders are responding rationally by building as many homes as possible to meet "demand". All of which is creating the perfect conditions for a massive end-of-cycle supply/demand mismatch.

In summary, the conditions are now in place to create human history's biggest supply glut. Industry desperately wants us to keep buying and pretend it can't happen. The purpose of the stagflationary hypothesis is to convince as many people as possible that these prices will continue rising forever. Unfortunately, an inflationary consumption binge followed by a deflationary asset collapse is the worst case scenario for the economy. 

It should come as no surprise that the "stagflationary" 1970s was followed by the biggest recession in post-WWII history in 1980. When newly appointed Fed Chairman Paul Volcker pulled the plug on inflation, it was called the "Saturday Night Massacre". Ironically, today's amnesiacs who believe this is the 1970s all over again, are creating the same deep recessionary conditions - this time in a liquidity trapped environment where interest rates can't go lower. How do you incentivize people to buy homes and big ticket items if the cost of debt in real yield terms is sky-rocketing?

You don't. Which means last ones out, don't get out. 

Front-Running Collapse

History will say the Ukraine war hid the collapse of the global economy behind an end-of-cycle commodity shock. Wall Street now has their excuse to run the herd over the cliff with the Fed now tightening into depression. With their only question being...

"What stocks should I buy in a nuclear depression?"

"WASHINGTON — Senators reacted with alarm to a new report that suggested Russian President Vladimir Putin could deploy a small, targeted nuclear bomb as his troops get bogged down in a costly, drawn-out battle against defiant Ukrainian fighters"

Where to begin...

First off, I will discuss the "nuclear" economic option of a Russian oil embargo:

A commodity spike at the end of the cycle is ultimately deflationary, because it's yet another shock to an already tapped out consumer. First consumers endured all of the pandemic-related supply chain shocks for the past two years, next they endured interest rate shock for the past six months, now we're having commodity shock. There is only so much  pain consumers can take, which is why recession odds are sky-rocketing. When people see high prices they view it as inflationary, because they assume these prices will stay high forever. However, the definition of "inflation" is not prices that spike and collapse. When oil spikes, it means less purchasing power for other parts of the economy. 

The West's Russian oil embargo drove oil prices to a manic peak two weeks ago. However, that "embargo" turned out to be a soft embargo, because most of Russia's oil is still expected to reach the market whether through Europe, India, or China. Which is why many speculators got dumped when commodities crashed -27% into bear market. Now commodities are making a second lower high.

In addition, we can see that crude oil demand in the U.S. is beginning to roll over in line with collapsing consumer sentiment. The hyperinflationary depression fantasy propagated by Putin and Zerohedge, is running on glue fumes.

aka. "Pravda"

Nevertheless, all of today's pundits are ignoring the bond market and yield curve inversion. The stagflation hypothesis is consensus. Even the Fed believes it now.

Which is why a hard landing is becoming far more likely:

The Fed is collapsing the global bond market, but they are not concerned because investors are still in RISK ON mode and hence collapsing risk premiums. Which is why market duress is not showing up in any of the Fed's key indicators. That lack of market stress ironically makes further rate hikes and further market collapse likely. Investors are in what I call a "Moral Hazard" death spiral. They are front-running the Fed into collapsing markets on the basis that the Fed will bail them out. 

Meanwhile, the Fed is using their positioning as a rationale for tightening liquidity:

March 23rd, 2022:

If the Fed raises rates .5% in May this year, it would be the first  double rate hike since May 2000. Back then the Fed kept raising rates until the DotCom era Nasdaq was collapsed -80% and the economy was in recession. 

Looking at the chart above, it's hard to believe the Fed will get that opportunity, this time around. The market is way ahead of them on rate hikes as we see below with the two year now above the Lehman level of 2 year minus Fed rate:

Which gets us to the casino:

Three waves are now becoming visible on the S&P 500. Confirmation is provided by NYSE new lows and the breadth oscillator. 

This is a very weak retracement, but it's also a long retracement in terms of duration. When it started the S&P was two years oversold. And now it's two years overbought:

As one would expect, the Nasdaq is in far more dire condition. This wave count which is similar to the S&P's is extremely weak. And yet it's confirmed by the volume oscillator as a three wave correction. Normally wave 'b' above wave '1' and wave 'c' is above wave 'a'. 

In summary, this decline and correction has been more about time than price. However, the next leg down should be more about price than time.

Gamblers who wait too long, are going to find out it's their bailout that gets delayed this time around.

THE BIG LONG

In the age of scams, the burden of truth is on the truth. The bull case at this latent juncture is 100% fairy tale...

"We are living in the age of the scammer. If you weren’t aware of it, just turn on your TV: there’s a rash of real-life dramas about master con artists"

It’s no wonder that the New Yorker’s Rachel Syme has declared a “Scam Spring”

Indeed. What's consistent about the infotainment media is that they excel at capturing the pissant minor scams while totally ignoring the master con taking place in broad daylight. Back in the Fall of 2008, all eyes were on Bernie Madoff being arrested for his Ponzi Scheme, while at the exact same time Wall Street was getting bailed out 100 cents on the dollar for collapsing the Global Financial system.

The same thing is happening now. Last year was the biggest IPO/SPAC pump and dump scheme in market history. But the only thing on Netflix is some pissant German con artist who rips off a few New York dilettantes. All the while downtown Manhattan was pumping out SPACs like there was no tomorrow.

Cycle criminality has now reached a new all time lie:

We had dinner with some old friends tonight and I was reminded why I miss the pandemic already. For two years I was spared inundation from lamestream bullshit. Not tonight.

The only good news is that I can confirm for you that this lamestream Cirque Du Jerk is in no way prepared for what is coming.

What we witnessed this week will soon be known as the biggest policy error in human history. And who can we thank for that but all of today's bulltards who are convinced that inflation is as bad as 1979. For some reason these people can remember 40 years ago better than they can remember 14 years ago. Why? Because they've assiduously blocked that event from their minds. They forget that commodities were hyper bid in the early Fall of 2008 when Lehman was the last banking domino to implode. They forget that the Fed was preoccupied by inflation.

And they forget that by the time the Fed got around to a full and proper bailout it was too late.

This time last year featured a Tech stock melt-up coming out of the pandemic. It was the deflation trade driven to record extremes by the belief that work-from-home cloud technologies were in the early part of the growth cycle. Deja vu of Y2K when the millennial date change accelerated the expenditure on new technology, the same thing happened during the pandemic. Pull forward of Technology expenditure, featuring the biggest IPO/SPAC pump and dump in world history. By all rights Cathie Wood should have her own miniseries on fraud by now. But instead she is a regular feature on CNBC, the longest running documentary on excess greed in world history. 

It was a year ago that the Gamestop pump and dump scheme democratized fraud:

Fast forward one year and instead of the deflation trade scam, we now have the reflation trade scam. Deja vu of 2008, the Fed has now been convinced via commodity Ponzi reflation that inflation is the greatest threat to the economy. What I call the "Stimulus Ponzi cycle": The Fed is chasing their own tail. They inflate markets, they create inflation, and then they pop their own bubble and create deflation. Today's so-called "experts" trust the Fed's ability to create inflation, but they totally ignore the deflationary policy taking place RIGHT NOW.

Coincidence or conflict of interest? You be the judge.    

Of course today's investors are 100% complicit in this scam. Here we see monthly commodity ETF volumes exceed any other month in the ETF history.

And that is halfway through the month. 

Clearly we will see volumes that far exceed today's record level and I predict there will be a long red wick on that nascent reversal of fortune. 

This week Tech stocks had their best week since the March 2020 lows. What happened is that hedge funds were force delevered when their record long commodity position exploded into bear market. In the event they were forced to "degross" and therefore buy back their consensus Tech stock short position. Which was widely conflated as a new Tech bull market. 

Suffice to say, this is the most deflationary set of circumstances we've seen in two years. Last year was the best shot at inflation due to maximum stimulus combined with the vaccine rollout and global economic re-opening. And yet even then we see that the 30 year peaked in March and imploded lower. This current set-up by comparison will see a MUCH faster collapse in bond yields and return to uncontrolled deflation. 

In summary, the bond market is signaling recession.

However the scam-riddled stock market is getting bought with both hands under the ubiquitous belief that the pandemic strengthened the global economy. 

But really, who to believe? The bond market, or every dunce you know?

The SEC:

All Signs Point To Crash

Back in 2008 the Fed made the exact same mistake they are making right now - believing that inflation is a higher risk than incipient global meltdown. In that event, the bailout worked. This time will be the hardest landing...

Over on Zerohedge, they have successfully "pivoted" from hyper-inflation last Fall, to stagflation last week, to recession now. Ironically, these are the same people who were mocking the Fed last Fall for saying inflation is transitory. And now the Fed is more hawkish than they are. It's this cabal of Peter Schiff acolytes who have assured this gong show will end as painfully as possible. The ubiquitous delusion is that the Fed can easily pivot back to cutting rates again. 

There's only one problem with that fantasy: the Fed funds rate is at .25%, whereas in 2008 it was at 5.25%. There is nowhere to go on the downside. Therein lies the difference between this blog and all others - I don't assume there will be another happy ending when this end of cycle con job explodes. For that assumption you can go anywhere else where the sole objective is expanding the subscriber base and/or assets under management. 

 

In 2008, in addition to a U.S. 5.25% interest rate reduction (i.e. 21 serial rate cuts), China's economy was still booming. It was China that dragged the world out of recession. This time they are leading the world into recession.

What you notice about this chart is that commodities follow China GDP, not the other way around. There is a staggering difference between China GDP in 2008 versus now. That was their highest growth rate in modern history. 

All of which means that QE alone will not be enough to revive the global economy. What will be required is a combined fiscal + monetary super stimulus similar to what took place during the pandemic. Which will be challenging with a gridlocked Congress in a mid-term election year. When all else fails, I assume they will get it done, however, it won't be nearly as easy as during the pandemic. 

And then there will be the protests and rioting. Why? Because a generation of Millennials is about to get financially wiped off the map. When that happens, one can assume that a TARP style bank bailout will be off the table. Which means that financials will be bidless. All of which means that the "just in time" bailout hypothesis which is propagated by all of Wall Street and most financial pundits, is lethal bullshit. 

Go figure that Wall Street would not predict the wholesale collapse of their own industry.

Those who are not positioned ahead of time for what is coming will suffer TERMINAL losses. Why? Because there will be systemic meltdown of financial markets. Featuring extreme volatility. record volumes, and total lack of liquidity. Culminating in mass panic. 

Unfortunately, the ubiquitous "hyper-inflation" hysteria has caused most investors to be very badly positioned for this impending event. Instead of respecting cash balances, they've been told that "cash is trash". What happened to hedge funds  in commodities this past week is a warning for what's coming to the rest of the market. Going into last week, hedge funds were record LONG commodities. Then came the melt-up in crude oil last week followed by a straight line -30% crash into bear market. RECORD volatility, exceeding 2020. In addition, the nickel market has been shut down for over a week due to volatility. 

These commodity trades are MASSIVELY crowded death traps at this phase of the cycle. Anyone can easily see that the commodity cycle peaked in 2008 along with China GDP above, and is now three wave corrective to a lower high. The pandemic commodity rally was an echo bubble.

But really who knew that a global pandemic and two year lockdown wouldn't lead to stronger global growth?

Not this Idiocracy.

Which gets us to the casino.

Bulls have mistaken post-FOMC volatility unwind for a positive response to Powell's rate hike. When these weekly puts expire or move further out of the money, options market makers buy back stock to unwind their option hedge. For the true direction we must wait until post-OPEX next week.

This market is now eerily similar to the last Fed policy error back in December 2018. Coming off the all time high, the market imploded -12% and then bounced up into the 50 dma. Then it re-tested and bounced up into a death cross. Which is where we are now. As we see, the % bullish is identical: This is the % of stocks that are deemed to be in a technical bull market. When the wheels came off the bus in late 2018 however, it was Trump who commanded Powell to pivot on rate hikes. Whereas this time, there is no chance Biden will interfere in monetary policy on behalf of stock gamblers. And Powell has already shown via the Nasdaq that he doesn't care if stocks implode. The Nasdaq is ALREADY down as much as it was when he pivoted in 2018 (not shown).    

Here we see the extreme moral hazard that is now baked into this "market". In each of the past major market events, gamblers were reaching for hedges. However, in this event with global markets ALREADY in meltdown, there is no reach to hedge. In addition, this is the least likely time to get bailed out due to the Fed's hawkish stance.

This is beyond any level of risky risk-seeking we've ever seen:

In summary, I just nuked a bunch of trolls over on my Twitter feed. Bulls have command over the entire internet and yet they still feel the need to camp out on my site. My number of followers has increased dramatically recently, but I only care about quality not quantity. Today's bulls believe they have strength in numbers. Sadly, in an Idiocracy there is no such thing. Which is why the public is in no way prepared for this inevitable meltdown. 

Lastly, for all you bulls who keep telling me how much money you've made in this bull market, I can't help but thinking you must be related to Cathie Wood.