Monday, May 23, 2022
THE GOLDEN AGE OF DELUSION
Sunday, May 22, 2022
THE SUM OF ALL RISKS
Today's bullish investors have only one investment strategy right now, which is waiting for bailouts. Therefore they must pray that their bailout karma has not run out after a decade+ of continuous bailouts and ever increasing moral hazard...
mor·al haz·ard
"Lack of incentive to guard against risk where one is protected from its consequences"
Today's investors have ZERO hedge.
The site Zerohedge rose from the ashes of the Great Financial Crisis. The name itself impugns the sheer fantasy of perpetual bailout. But something odd happened over the many years since 2008. That platform morphed from criticizing market delusion INTO monetizing market delusion. They adapted to the "new normal" of what they had originally decried as "Keynesian bailout" culture. What began as a critique of the decadent culture of bailout, ultimately morphed into a 24x7 purveyor of non-stop delusion. So it is that we find ourselves knocking on Heaven's Door of the longest cycle in U.S. history, as retail bagholders FINALLY pile back into "this time is different". While being sold down the same old river by Wall Street. And ironically once again there is NO ONE to warn them. All pundits having surrendered to the siren song of perpetual cheap money bailouts.
Let's see what we have THIS time:
Imploding Tech bubble. Largest Nasdaq losses since 2008.
Collapsing Crypto bubble on a scale larger than subprime circa. 2007
Largest housing bubble in history.
Largest inflation shock since 1980.
Largest oil shock since 1973.
Largest bond collapse in history.
Largest EM currency collapse since 1998.
In other words, the Fed will now successfully navigate all of the risks that caused recession and deep bear market in the past 50 years, without causing a recession or deep bear market. Despite having the least amount of interest rate buffer in history.
This is the current investment delusion:
History will say it took a pandemic to create the worst case scenario of a Fed way behind the curve of monetary tightening at a point when supply side pressures were at cycle high. The first rule of Japanfication is NEVER allow the economy to run too hot. Why? Because when there is too much debt, a hot economy will spike interest rates and bring down the entire house of cards. The pandemic made the perpetual Goldilocks scenario impossible. And yet few of today's pundits see it ending.
Last December, Mohamed El-Erian was one of the first pundits to warn that the Fed was making a huge mistake by keeping policy loose for too long:
December 2021:
"El-Erian has repeatedly said the Fed is underestimating inflation risks as the U.S. economic recovery from last year’s pandemic shock accelerates price increases for everything from energy and food to consumer items"
Failure to do so could result in needing to “hit the brake hard” in a few months, which would risk sending the economy into recession, El-Erian said"
Here we are a "few months" later, and El-Erian's worst case scenario is taking place in real time. The Fed IS hitting the brakes too hard. But what does he say now? He says there is low risk of recession:
STAGFLATION IS COMING. RECESSION UNLIKELY.
"The US economy can potentially dodge a recession, but stagflation is coming"
El-Erian and all of the other inflationists went from seeing the problem, to being the problem. They are now of the same mind as the Fed - that inflation is the biggest worry, NOT recession.
This week's abysmal retail earnings sent retail stocks to their worst performance since 2008. Tech stocks are having their worst two quarters since 2008. Consumer Staples are outperforming the S&P the most since 2008. And Energy stocks are leading the market the most since 2008.
How much warning do these people need?
Back in 2008, economists were still debating whether or not the economy was in recession, NINE MONTHS after it started. There are no economic leading indicators of recession EXCEPT markets themselves. The allocation of risk capital to LATE CYCLE trades is the clearest indication of late cycle risk.
"Stagflation is coming"
We may or may not be in recession at this moment, but it doesn't matter. Because the Fed is going to keep tightening policy until they are CONVINCED that we are in recession. Which means DEEP in recession.
And then they will realize they don't have enough dry powder to get us out again. It will be at THAT point when today's pundits realize pounding the table on inflation for too long facilitated THE LARGEST policy error in Fed history.
Today's older investors have NO EXCUSE not to see it coming. Aside from early onset dementia brought about by 14 years of brain dead investing. They've become fat and lazy. Accustomed to embracing all risk.
Today's young investors believe they are a new hardy breed of investor, unlike their parents who panicked and sold into the past two -50% market collapses. These young people have "diamond hands", meaning they never sell.
That is all well and good, but they have diamond hands in a crystal market. Meaning they won't sell until the Matrix melts down around them like a well cultivated illusion. At which point they will finally realize their entire life has been fed into a corporate hopper and sent to the Cayman Islands for efficient distribution to global Oligarchs.
Yes I feel bad for these young people facing EVERY type of major risk of the past FIVE decades at the same time. Layered on top with a collapsing crypto bubble, a student loan crisis, and a Fed with the least amount of dry powder at any end of cycle in U.S. history. All aided and abetted by the most corrupt and decadent financial commentary in U.S. history.
Recall that brokers lowered commissions to ZERO right before the pandemic, thereby luring an entirely new generation into the casino just before the end of cycle pandemic mega bubble took off. So no wonder they see themselves as the chosen ones of casino gambling.
Be that as it may, history will say they were the ultimate victims of moral hazard and late cycle criminality.
To believe anything else is IDIOTIC.
Could I be wrong that this fairy tale is NOT ending right now?
Sure, there could be ANOTHER chapter of Goldilocks and NO BEARS. Alternatively, this is just ending the worst way possible with the fewest number of people seeing it ending, as one would FULLY expect it would end after 14 years of central bank sponsored moral hazard.
Bet accordingly.
Friday, May 20, 2022
ALL ROADS LEAD TO HARD LANDING
"There is no means of avoiding the final collapse of a boom brought about by credit expansion"
- Ludwig Von Mises
If the Fed accelerates rate hikes they bring forward recession and asset meltdown. If they ease off rate hikes, they won't have dry powder for a recession and asset meltdown. Either way, investors are trapped at the END OF THE CYCLE...
Today's pundits who still believe in this "market", no longer believe in any element of TRUE financial analysis. They ignore eroding profit margins, they ignore collapsing P/E multiples due to high interest rates. They ignore cycle risk and recession indicators. They ignore consumer sentiment. They ignore Fed tightening policy. They ignore global risk factors. And of course they ignore ALL concept of over-valuation. All they believe in is the efficient Bailout Hypothesis, despite the fact that the Fed itself has repeatedly warned them that it's not happening this time.
Mostly what pundits ignore is the risk of being wrong when the Fed is tightening liquidity at the fastest pace in history NEAR the zero bound. There is no monetary safety net beneath this lethal gambit. This is the monetary equivalent of Russian Roulette.
The real policy error started 14 years ago when the Fed began conditioning investors to expect a bailout at the first sign of trouble. Prior to 2008, the Fed's mandate was price stability and full employment. The post-2008 mandate is full employment, price stability, and Dow making all time highs in perpetuity. Unfortunately, this untimely combination of end of cycle/supply chain bottlenecks now makes it impossible for the Fed to fight inflation AND save markets.
"Federal Reserve Bank of Kansas City President Esther George said the “rough week in the equity markets” was not surprising, and doesn’t alter her support for half-point interest-rate hikes to cool inflation"
Going into this year, financial advisors told their retail clients that stocks usually perform well during the first year of a new rate hiking cycle. Fast forward five months and the Nasdaq is deep in bear market territory and the S&P 500 is now just points off of a bear market.
What went wrong? Several widely unquestioned assumptions were invalid this time around. For one thing, the Nasdaq asset bubble started imploding a year ago. Secondly, the Fed tapered their balance sheet expansion in record time leading to further weakness in Tech. Thirdly, as I showed in my prior post, bond yields and mortgage rates sky-rocketed as the Fed continued to escalate their ever-more hawkish tone ahead of each FOMC meeting. In June, the Fed is planning to double tighten rates AND double tighten the balance sheet. Which would be the most extreme tightening measures in HISTORY.
All of this rising risk hasn't stopped today's pundits from continuing to propagate belief in the Fed put. This idea that the Fed is always ready to step in to save markets. Which is why investors are now counting on the Fed to bail them out of a nascent bear market.
"Bolstering his opinion is a conviction that US inflation has probably peaked, or is about to do so, paving the way for a pullback in price pressures that will eventually allow the Federal Reserve to moderate the pace of monetary tightening"
This is the Goldilocks and NO BEARS economic fairy tale - not too hot and not too cold. And they lived happily ever after. The fact that this outcome WON'T allow the Fed to normalize policy is of no concern. Nor is it explained how we go from 8% inflation down to 2% in a few months, which has never happened before EXCEPT in the 2008 market meltdown. The fact remains that the ONLY way to get inflation from 8% down to 2% quickly is via market crash. Anything less, and the Fed will continue tightening long after inflation has "peaked". They won't be satisfied with a 5% inflation rate.
Getting back to the topic of policy error, the Fed has systematically conditioned investors to misallocate capital throughout ALL points in the cycle. To actively embrace risk rather than protect capital. Which ironically is why the Fed sees no major market risk on the horizon. The Fed's own proprietary financial stress index is a mirror image of the stock market VIX - both are stuck at a relatively low level. No surprise, the VIX is one of the constituent data elements of the Fed's index.
Both the VIX and FSI are confirming MASS COMPLACENCY in financial markets. And therefore the Fed feels free to continue tightening.
In summary, the S&P 500 is at the precipice of a bear market, and yet complacency reigns supreme. End of cycle risk is coalescing in the background while the Fed is systematically taking liquidity out of the market. Investors are no longer hedging because it's too expensive and they assume the Fed will bail them out sooner than later.
Unfortunately, this time they can't afford to be wrong. Because a crash coming AFTER a -20% decline is WORST CASE SCENARIO and will stress test these Disney markets far beyond their breaking point.
So the only question now is "What could go wrong?"
And the answer is ANYTHING.
Tuesday, May 17, 2022
THE BAILOUT CYCLE IS OVER
Retail investor bagholders have a long tradition of going ALL IN at the top. Why stop now?
Today's pundits are largely of the groupthink mind that the Fed can thread the needle between normalizing monetary policy and recession.
Every oil shock in the past 50 years has preceded recession. Every inflation shock for the past 50 years has preceded recession. Every housing bubble in 75 years has preceded recession. 8 out of 10 rate hiking cycles has preceded recession, and the DotCom bubble in Y2K preceded recession.
This time we have ALL of those risk factors and a negative GDP print in Q1, but pundits are STILL not certain there will be a recession.
Here we see the University of Michigan index of current economic conditions is the lowest in 50 years, yet this time the housing bubble is STILL growing. What are we to believe will happen when it collapses?
Retail sales came in today near expectations, which has led pundits to believe "the consumer is strong". However, headline retail sales are NOT adjusted for inflation. On a quantity basis, we can see that retail sales are imploding:
Real consumption expenditures, QUANTITY:
Walmart warned today that they are no longer able to pass along all costs to the consumer hence profit margins are imploding:
Walmart stock peaked only three weeks ago, which is several months AFTER the overall market. The same pattern that took place in 2008.
What today's retail gamblers don't understand that institutions DO understand is that the Fed bailout cycle is OVER. The Fed is now intent on normalizing monetary policy as quickly as possible, because they know recession is coming. Which means they need as much dry powder as possible. So ironically, they are now in the process of accelerating recession in order to get rates to a level that will allow them to cut in the future. Investors are now trapped by this policy conundrum.
The rational strategy is to rebalance portfolios from stocks back to T-bonds and to raise CASH aka. t-bills, money markets. However, RETAIL investors have been led to believe that inflation is NOT transitory and therefore they must OWN the riskiest end of cycle assets. By this I mean commodities and commodity stocks. While holding minimal cash.
What is not priced into these markets is DEFAULT risk. The Fed's proprietary financial stress indicator has fallen since the stock market crash began. Why? Too much complacency in the stock market AND in the high yield bond market.
There is no cycle risk priced into these markets:
We got news this week that China is already in a recession.
Their market has collapsed back down to where it was in late 2015 right before the wheels came off the global bus. In addition, the Yuan is collapsing at the fastest rate in history (not shown).
The markets have ALREADY done the Fed's job for them. Consider that the Fed rate is currently at .75% but the 30 year mortgage is at the highest level since 2008. HIGHER than it was in 2018 when the Fed rate was at 2.5%!
That's insanity.
Homebuilder sentiment is collapsing. AND home buyer sentiment is collapsing as well.
Which means that the Nasdaq is imploding AND the Fed is tightening both at record pace.
BTFD: Buy The Fucking Depression...
In summary, this same market pattern played out in 1929. At first, individual investors bought the dip. But then the selloff accelerated and they ultimately panicked and the market crashed.
This chart shows the 1929 Dow inset against my predicted path for the U.S. market. Until the Fed panics, this market WILL NOT see a tradable bottom. Which means the initial crash will not be enough to stop stocks from going lower. I predict a neutral Fed will lead to a dead cat bounce followed by another leg lower. Which is what happened in 1929. The percentages are ESTIMATES. There is nothing magical about these price levels. If anything, they could be lower.
Friday, May 13, 2022
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.
Tuesday, May 10, 2022
SLOWLY AT FIRST, THEN EXPLOSION
"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"
Sunday, May 8, 2022
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"
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.
"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.
2008 sans bailout aka.
MONETARY POLICY FAILURE.