BTFD: Buy The Fucking Depression

This article from the Wall Street Journal confirms that retail investors are buying stocks with both hands while institutions are selling in massive quantities. Which is what happens at EVERY stock market top. Once again, retail investors waited until the end of the cycle to plow record amounts of money into stocks at record over-valuations this time with NO Fed safety net. It's financial suicide:

"This year’s stock market volatility has turbocharged a favorite strategy among individual investors: buying the dip"

Many individual investors who bought the stock-market dip are sitting on losses...This year, the S&P 500 has fallen 16%, its worst start to a year in nearly a century"

Vanda estimates the average individual investor portfolio peaked late last year and has since tumbled, giving the average individual a paper loss of about 28%"

In other words, individual investor losses roughly equal Nasdaq losses. So far. The lack of panic is highly evident in the subdued Nasdaq VIX:

Investors have been systematically conditioned by central banks to buy the dip despite ever-increasing risk. They no longer look at valuations or economic information, they just blindly buy stocks whenever they fall. On the assumption that this strategy will ALWAYS pay off. The last time this strategy REALLY failed of course was in the 1930s. After the market peaked and crashed in 1929, it eventually lost 90% of its value by the lows of 1932. The high of 1929 was only regained 25 years later. 

Ironically, Warren Buffett was born in 1930 so he began his investing career AFTER the worst bear market in history. Therefore he believes that stocks always go up as well. Of course Japan and China give us much more recent examples of what happens when monetary policy fails. In both those cases, stocks remain far off their all time highs. 

You don't have to be a genius to predict how this all ends:

The Fed pushes global markets over the cliff until the global asset bubble explodes - a process which is already well underway. Retail gamblers will be trapped with MASSIVE losses. The Fed is slow to react at first, but eventually reverses.  In the meantime markets continue to implode. Consumer confidence collapses. Global depression ensues. 

Here we see that consumer confidence has already collapsed to where it was at the bottom of the last housing bubble. This time, it has collapsed at the top of the housing bubble. Meanwhile, the Fed is tightening monetary policy at the fastest pace in history. 

A disaster in the making. 

Ultimately, investors will lose confidence in the Fed and in markets and they will bail at the bottom. I don't predict a 90% loss however because this time the Fed is going to Japanify the bond market which will ultimately put a bid under stocks. Something that was not attempted in the 1930s. Nevertheless, the degree of dislocation will ensure that investor confidence is fully shattered.

This is by far the most likely scenario given the information we already know. And yet, not even ONE mainstream pundit sees it coming. They all see Fed interest rate hikes for the rest of 2022 and into 2023. Zerohedge always has the bipolar "depressionary hyperinflation" angle covered. Which is an asinine theory of course. There will either be recession or inflation, not both. 2008 is the closest analog. Back then, inflation expectations collapsed along with the commodity markets. This week we learned that China is likely going to cut interest rates as soon as next week. And they may soon lockdown Beijing over COVID. In addition, Europe has backed off the idea of a Russian oil ban. So the argument keeping oil bid no longer exists.

We can see there is now a massive divergence between crude oil and the Canadian dollar, which is a proxy for global growth:

The markets are going to do the Fed's job for them, only FAR FASTER. They are going to take away the punch bowl and collapse inflation expectations. Which means that most of today's pundits will be catastrophically wrong as to how this all plays out. And most investors in risk assets will get wiped out.  

 

 

The dislocations we've already seen this week in Crypto currencies should have been a warning as to what is coming to other markets. Crypto is currently 95% correlated to the Nasdaq. The Crypto losses to date are $1.7 trillion which is more than subprime losses in 2007 ($1.3 trillion).

The next big shoe to drop will be in Emerging Markets which have been getting monkey hammered by the rising dollar.

And are now BIDLESS.

In summary, the losses are racking up in IPO junk, ARK ETFs, Emerging Markets, Cryptos, and Mega Cap Tech. However, complacency is rampant. 

Retail investors are just buying the dip lower and lower into the economic abyss. And sadly, there is no one who will tell them it's a bad idea. The amount of economic hardship this will cause is totally unthinkable. 

The age of easy money is OVER and now the age of democratized fraud is ending far worse than the majority expect.

Who knows if it was meant to be this way.

"In the broadening top formation five minor reversals are followed by a substantial decline."

In its formation, most of the selling is completed in the early stage by big players and the participation is from general public in the later stage"

Indeed.

SLOWLY AT FIRST, THEN EXPLOSION

The Fed is raising interest rates heading into recession. Investors want to know when they should double down on stocks. It's the power of imagined reality...

"What a fool believes he sees

No wise man has the power to reason away

What seems to be

Is always better than nothing"

Way back in late 2014 hedge fund manager Hugh Hendry penned an open letter to his investors telling them that he was "taking the blue pill now" - the Matrix metaphor for drinking the Kool-Aid. He had reached the conclusion that central banks would continue manipulating markets ad infinitum, thereby creating an ever greater divergence between fantasy and reality. He called QE, the "virtual simulation of prosperity". This divergence he claimed would go on indefinitely, but then end extremely badly. However he believed that no one could predict when it would end because by the time it ended everyone would believe in the invincibility of central banks. He called this new investment approach the power of "imagined realities". Looking forward to 2015 he predicted that amid GDP growth at 25 year lows the PBOC would create a Chinese stock bubble and he was going to buy into it. He was right - for a time - because in 2015 the PBOC did create a vertical stock market rally, but then it all came crashing down and they lost control of the market. What I call "Shanghai Surprise" i.e. when you find out central banks are NOT invincible. In the event, Hendry lost his hedge fund as large investors left in droves. Here we see Chinese stocks peaked back in 2008:

What we are witnessing right now in the U.S. is the EXTREME version of imagined realities i.e. investors buying a disintegrating market with NO explicit OR implicit central bank support.

TD Ameritrade Investor Movement Index for April:

"Demand for equities was light to start the month, but as the major indices continued their strong pullback below key support levels, we saw demand accelerate"

This shows the IMX relative to collapsed Nasdaq breadth in the bottom pane. In all of the prior times % Nasdaq above 200 dma reached this current level, the Fed DID bailout the market. As we will see in the next chart below, they are nowhere near doing so now. 

Worse yet, China's COVID zero policy is creating an extreme divergence in monetary policy between China and the U.S. By locking down large parts of the country, China is exacerbating global supply chain shortages, forcing central banks such as the Fed to tighten more. At the same time, the lockdowns are imploding China's economy causing them to ease more and weaken the Yuan. Emerging markets are caught in the middle, forced to devalue their currencies in line with China while inflation is rising. It's a recipe for mass exodus of capital WORSE than what happened back in 2015 when China's stock market imploded. Back then the Fed was only planning to raise rates and then they stopped. China's lockdowns are only short-term "inflationary" from a supply chain standpoint. Their collapsing currency and the sky-rocketing U.S. dollar are long-term DEFLATIONARY.

All of which is why I don't predict these markets will have a conventional crash. I predict we will see global asset EXPLOSION across every risk asset class, that is totally uncontrollable by central banks.

This graph of the Nasdaq shows that the Fed has stepped in to rescue the market EVERY time it fell meaningfully below the 200 day moving average (red line). Currently, the Nasdaq is down -27% but the Fed Funds futures still predict a 100% probability of rate hike in June. With an 85% probability of ANOTHER .5% rate hike. 

Tech is not the only problem. During the pandemic, cyclicals got bid up to ludicrous valuations. And now as the economy turns from inflation to recession, the reflation trades are about to go BIDLESS.

Millennials have never been through a bear market. Their primary investment experience took place during the 2018 and 2020 Fed bailouts. So they believe that markets ALWAYS magically v-bottom and sky-rocket higher. Hence they keep buying more as the market collapses. The thought that they could keep plunging lower never even enters their mind.

They will keep buying lower until they get margined out of existence.  

"Nursing losses in 2022 that are worse than the rest of the market’s, amateur investors who jumped in when the lockdown began have now given back all of their once-prodigious gains"

“A lot of these guys started trading right around Covid so their only investing experience was the wacked-out, Fed-fueled market”

In summary, we have now reached the terminal juncture that Hugh Hendry predicted "no one" would see coming. The point at which central banks lose control. As we see via today's totally useless financial media, investors desperately want any excuse to embrace risk. Which is why their current preoccupation is finding the "bottom" in this bidless market. Which is what happens in EVERY bear market. Investors slide down the slope of hope.  

The market is technically broken now. We are seeing a Y2K level of financial decimation. In 2021, Wall Street dumped RECORD amounts of junk stocks into the market which are now imploding the Nasdaq. The Nasdaq will be dead money for years if not decades. History will say that the Millennials were protesting Wall Street at the beginning of the cycle and got bilked by Wall Street at the end of the cycle.

And then they exploded and brought down the entire Casino.

Because it was all one JUNK MARKET inflated by the unquestioned belief that printed money is the secret to effortless wealth. 

THE MINSKY MELTDOWN

This week the Fed pulled the trigger on the first .5% rate hike in twenty-two years. In the process they very likely initiated global financial meltdown. The general consensus is that it was not enough. You can't make this shit up...

The Financial Instability Hypothesis

https://www.levyinstitute.org/pubs/wp74.pdf

"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. 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. This is likely to lead to a collapse of asset values"

Why is it that every time this society gets to the end of the cycle, they conveniently decide there is no cycle anymore? This society goes from youthful naivete to aged cynicism without stopping at reality in between.  

This week Larry Kudlow deemed the .5% rate hike as "dovish":

"The basic inflation rate is running around 8%. That would require a 9% or 10% Fed funds rate, or even higher in the days of Volcker shock and awe. Volcker also reined in money supply growth and here, Powell completely struck out"

The 30 year mortgage is currently at 5.25%, can you imagine a 30 year mortgage at 18% which was the 1980 level?

We are constantly reminded this is the highest level of "inflation" in 40 years (despite nominal oil prices still below 2008 levels). However, the rate of change in interest rates is the highest level EVER in the biggest housing bubble in HISTORY. 

To cap off FOMC week, Stanford University held a conference to discuss how far monetary policy is behind the curve. 

Two Fed members were on the hot seat, Waller and Bullard:

"It's going in the right direction ... hopefully we'll be able to get away from this behind-the-curve characterization soon," Bullard said.

Indeed. Much sooner than anyone can possibly imagine. 

All of the above means that the Fed's mandate is to cool the economy and bring down inflation. NOT to save asset markets from collapse.

This change in policy taking place after FOURTEEN straight years of bailing out markets, is NOT priced in to any asset market right now. Investors are still under the delusion that the Fed can slam on the brakes as hard as possible for price inflation AND yet keep asset markets inflated. It's the delusion of the CENTURY, and it has been assiduously cultivated by Wall Street and their media acolytes. 

Not everyone took the bait:

"Wall Street titan Jeremy Grantham has been warning of a “superbubble” in the U.S. since last year, arguing the S&P 500 is set to be cut in half as an era marked by exceedingly risky investor behavior begins to fade."

Now, with interest rates for a 30-year fixed-rate mortgage rising to 5.27% this week, their highest levels since 2009, he sees that point coming ever closer"

Of course, not everyone is convinced that the housing market is set for a dramatic drop"

Got that? We can't even agree on what is a "bubble" anymore. In my neighborhood prices went up 30% in the past year. Apparently that's NOT a bubble, but eggs going up 30 cents, that's existential inflation.

What a bunch of fucking morons. 

Clearly these people can't spot an asset bubble over and over again in their lifetimes, so how do they know what is inflation? In other words, what if all of these asset prices are temporary? That would mean they could all come crashing back down and leave the Fed "dick in hand", just like last time. Then you will see rampant morons rioting in mass protest. Wondering how they are going to pay for cheap eggs when they don't even have a job. Buried by another housing bubble. 

What economists never noticed is that consumer sentiment NEVER recovered after the pandemic. Corporate profits sky-rocketed and consumer sentiment went in the other direction.

We've never seen this much disconnect between consumer sentiment and corporate profits. One is inflated, and one is deflated. 

The Tech bubble is DOOMED. It's collapsing for the same reason it collapsed in Y2K - slowing growth AND a Fed eager to make up for lost time. Back in 2000, the Fed purposely held off on rate hikes until after the millennium date change, because they were worried computer systems would fail. When that didn't happen, the melt-up accelerated into March 2000. By May 2000 the Fed was doing everything possible to contain inflation. Sound familiar?

The Tech sector just got rejected at the 200 dma for the first time since 2008:

In summary, the Fed and its inflation acolytes have triggered global Minsky Meltdown. Which in today's Idiocracy means they didn't do ENOUGH.

Why? Because SO FAR, most of the pain has been in non-U.S. markets.

This time, the Fed is constrained from initiating a monetary bailout. Which ensures MAXIMUM dislocation at the zero bound. 

2008 sans bailout aka. 

MONETARY POLICY FAILURE. 

THE BIG LONG 2022

The mainstream financial media deserve the majority of credit for the masses NOT seeing this coming. Zerohedge deserves credit for excellence in generating mass confusion. No one does it better. In summary, end of cycle GREEDTHINK is driving the most expensive circle jerk in human history:

"Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that confirms or supports one's own views"

Reading the news THIS week one would never know that in April the Nasdaq had its worst month since 2008.

How soon they forget:

Two things are killing Tech right now, one is DECLINING growth as described in the article above, which is the death knell for momentum trades. The second factor is higher interest rates which are the death knell for high valuations. This week, the Fed raised interest rates .5% which is the most since May 2000 when the DotCom bubble imploded. The Nasdaq finished that year down -60%. This current Tech wreck started over a year ago and now it's spreading to the mega cap names as well. 

After Y2K, the Nasdaq didn't make a new high for 18 years. The 2008 crash required a maximum Fed bailout, but still the Nasdaq fell another -40% before hitting bottom AFTER October 2008:

In addition to the Nasdaq being down the most since October 2008, the S&P 500 was down in April the most since March 2020. This time of course, the Fed is tightening at the fastest rate in history whereas back then it was easing at a record pace.

Which means that this set-up is March 2020 deja vu EXCEPT this time sans bailout. Anyone can see that breadth during this period of time in no way resembles 2018 and 2020. 

Right now investors are piled into LATE cycle inflation trades because the stagflation hypothesis is unanimous. Here we see that commodities are the most overbought in four decades.

In addition, the stock/bond ratio is at the highest level in history, and yet today's pundits claim that investors are "too bearish" for a continued stock market decline.

Stagflation is a "RISK ON" trade. 

What today's pundits never admit is that "stagflation" is temporarily evident in EVERY late cycle just prior to recession. It just means slowing growth and high prices. Only in the late 1970s was stagflation NOT transitory. So therefore this must be the late 1970s. 

It couldn't be for example 2008 deja vu:

What these stagflation pundits forget is that Powell is doing his best imitation of Paul Volcker who KILLED stagflation in 1980.

What makes THIS situation uniquely lethal is the fact that the housing market has yet to implode. Whereas during the prior two housing bubbles (1980/2008) the housing bubble had already imploded BEFORE consumer sentiment collapsed. 

Which means THIS Fed is raising rates into an impending housing collapse at the ZERO bound which will make this recession far worse than 2008 and 1980.

When the Fed's first rate hike didn't collapse global markets (ALMOST), they decided to double down on collapse:

In summary: A Tech wreck in progress, record overbought inflation trades, collapsing Emerging Markets, and a housing  super bubble with a Fed hellbent on maximum tightening.

All of which means that the biggest policy error in market history is attended by the WORST positioning by investors at any end of cycle in history. Why? Because today's pundits are groupthink idiots and the masses wouldn't have it any other way. 

Which portends MAXIMUM DISLOCATION @ 

MINIMUM BAILOUT.

BLACK SWAN DIVING INTO PAVEMENT

The plans are now set for a hard landing at the zero bound. 

Everything EXCEPT, seeing it coming...

With each FOMC meeting, the Fed keeps upping the ante. Now, the stakes have NEVER been higher, but you would never know it by today's circus quality financial commentary - by far the dumbest we've seen in our lifetimes. The longest bull market in history has succeeded in making everyone forget what a bear market looks like. The crash in March 2020 was of such short duration that it doesn't even show up on a monthly chart. All it was is a corrective pullback on the way to a pandemic-driven Tech bubble blow-off top.

Deja vu of Y2K:

Contrary to popular belief, the Fed's REAL mistake was keeping their balance sheet inflated for far too long while investors gambled with impunity. Investors only finally took notice when inflation seeped into the actual economy. Prior to that there was no complaining as profits and stocks sky-rocketed to RECORD highs.

NOW, EVERYONE knows the Fed made a big mistake. So to make up for it the Fed is making a much bigger mistake. And the same people who ignored the first mistake, are ignoring this one as well.

NONE TOO BRIGHT.

Unbeknownst to all of today's pundits, in the period while the Fed was asleep at the wheel, the bond market did their job for them. The two year sky-rocketed at the fastest rate in history.

Here we see the two year yield is above the Fed rate by the most since the last two recessions.

Which is where this all gets interesting. In the sense that watching an Idiocracy self-destruct is fascinating. 

The Treasury market has collapsed. Therefore the spread between junk bonds and Treasuries has narrowed. Which gives the Fed the illusion of LOW credit risk. Usually spreads compress when the junk bond market rallies. This time, spreads are compressed because Treasuries have collapsed. 

Which is why the Fed's proprietary financial risk index is at RECORD lows despite the largest bond market collapse in HISTORY.

Giving a totally erroneous signal of "low risk". When nothing could be further from the inconvenient TRUTH:

The stock bulls' case is that despite the obvious risks, there is too much pessimism in the market to allow a meaningful break lower. So far in 2022 that has been the case. The market has pounded the FOMC support level multiple times this year only to bounce higher. Which has kept everyone guessing: is this a correction in a bull market, or a top in a bear market? Most of today's investors are in the former camp - short term bearish and long-term bullish. They see this FOMC rate spurt as a mere speed bump to the next bull market. 

IF the bulls are right, there is currently TOO much bearishness. for a bull market. However, in the context of a bear market, there is not nearly enough bearishness to keep this market from breaking lower.

LONG-TERM active manager risk exposure has been above 50% for seven years straight:

The abiding delusion is that in the event of major selloff the Fed can pivot from max hawkish to max dovish quickly enough to keep markets from exploding. 

Which is why we find ourselves camped at a similar breadth level as 2018. EXCEPT, back then, the Fed rate was ALREADY at 2.5%, the balance sheet had been reduced considerably, inflation was muted, and of course Trump demanded the Fed reverse policy. 

This time NONE of those factors apply. And yet, today's investors are even MORE sanguine than they were back then, now facing DOUBLE the level of tightening. 

It's MORAL HAZARD on steroids. Investors have been bailed out so many times that they no longer manage risk. So much for the "too bearish" theory.  

 

In summary, despite the Fed's KNOWN prior error in keeping policy too loose, and their latest error in tightening TOO fast, today's investors maintain their belief that central banks are INVINCIBLE. And can bail them out of every situation, even when they themselves are no longer hedging. It's the imaginary Fed put. 

The Fed on the other hand is hellbent on restoring their LOST credibility. Therefore, they are not focused on the implosion of global markets and the Nasdaq.

So it is that we are pile driving straight into the zero bound at MAXIMUM VELOCITY.

And so it is that no greater fool wants to see it coming.

PAINTED INTO EXPLOSION

When I tell people that market explosion is inevitable, they always ask me "when is that?". The fact that most people will get wiped out by it is apparently of no concern...

Most people these days assume the past is the future. They are set in their ways and have no intention of changing. Therefore, they happily extrapolate mass insanity into the indefinite future and sacrifice their mental health on the altar of mass consumption. A lifetime of bad habits doesn't change at the end. The idea of adapting to a new reality of less is more or quality over quantity, is never under consideration. This society has been brainwashed from birth to consume at any cost. 

We see this all around us at the personal level, people consumed by their addictions. But we see it at the societal level as well. No politician or pundit on either side can tell the public what they don't want to hear. There is no market for the truth these days.

Meanwhile, the average IQ has been collapsing, thereby front-running the next level of widely ignored corruption. Which has left us skeptics of rampant fraud constantly playing catch-up to the next level of delusion.  Our many critics claim we have been "wrong" timed in our prediction of the inevitable. Their ONLY concern is "when" NOT "if". The fact that this will all explode one day with extreme dislocation can wait another trading day. In the meantime, THEIR beloved financial weapon of mass destruction grows from one magnitude of destruction to the next.  

Granted, no one can predict the future with 100% accuracy. The best we can do is measure the amount of buffoonery that precedes collapse. Which in the current case is on the scale of biblical. Through necessity, the level of buffoonery has had to increase from one larger bubble to the next, according to the law of magical thinking. Central banks in their infinite hubris have constantly bailed out the masses from impending reality. And in  doing so they have painted this society into a corner. At this latent juncture, rampant corporate profiteering has forced the Fed into record tightening. They are now hellbent on creating a global depression. At the same time, home gamers are widely told to expect a "soft landing". 

Today we got news that Q1 GDP was NEGATIVE. The first quarter of incipient recession. The Dow gained 700 points on the news. 

THIS will be the epitaph for this era:

A Fed worried about inflation expectations becoming embedded in a COLLAPSING economy, oblivious to the fact that inflation expectations are ALREADY embedded in inflated stock market valuations:

"The analysis of SEC filings for 100 US corporations found net profits up by a median of 49%, and in one case by as much as 111,000%. Those increases came as companies saddled customers with higher prices and all but ten executed massive stock buyback programs or bumped dividends to enrich investors"

The level of denial is very similar to 2008. 

We are constantly told "The consumer is strong", but it's a massive lie as anyone can see:

The Nasdaq is at critical support:

Globally things are far more dire, as the relentless dollar rally collapses the various dominoes which are heading inexorably towards U.S. markets:

Beneath this market is a wall of put options. Bearishness is the highest since October 2008. For a time, a high level of hedging can keep the market from imploding, especially around a major event such as this impending FOMC meeting, which is what happened during the TARP bailout of October 2008. Back then, many investors hedged that meeting so the market rallied into the news. Soon after, the puts expired and the market collapsed.

The next major financial event is what I call "Millennial Margin Call" or MMC. It started last year with the Gamestop debacle and so-called "democratization of markets". Which was merely a euphemism for the ensuing RECORD Wall Street pump and dump.

2022 has the dubious distinction of having the WORST Nasdaq breadth (highs - lows) in market history:

So far miraculously across Cryptos, Biotechs, junk IPOs, SPACs, Chinese stocks, and Ark ETFs there has been NO capitulation. These newbie investors have been taught to "HODL" which means hold on and never sell. Because as long as you never sell, you never have a loss. Of course, this theory means nothing to margin clerks: 

"The number of active users fell 8% as compared with December 2021, mostly thanks to users with lower balances engaging “less in the current market environment”

What I see happening next is MMC (Millennial Margin Call) coinciding with FOMC DOUBLE tightening. Which when it occurs will lead to a final reach for protection into a ZERO liquidity market. 

What I call IGNITION.