Thursday, June 26, 2014

Don't Expect Any Advance Warning of Economic Collapse

Because Wall Street hasn't figured out how to short it yet
There is a reason that the HUGE GDP drop yesterday was totally ignored by Wall Street (and hence the media). It's because the market is still rising and therefore Wall Street can't AFFORD to be correctly bearish. Unlike 2008, Wall Street hasn't found a profitable way to short a bad economy.
This is all just the biggest circle jerk in human history...

Momentum Feedback Loop: A Circle of Jerks
Back in 2008 prior to Lehman, (most of ) Wall Street was relatively well positioned for the ensuing collapse (see CPCI chart below). That's because the market topped 2 months prior to the first quarter GDP miss (see below). Subprime was well documented and heavily shorted via CDS/CDO derivatives. Therefore, it was profitable to be bearishly positioned on the economy and the market in that era. Whereas in this cycle the market is still rising a full 6 months AFTER the first quarter GDP miss. Therefore, Wall Street CAN'T AFFORD to be bearish in this cycle, because the market is still rising. The key point in all of this is we need not expect any "advance warning" of something bad happening prior to the collapse, this time around:

With correlation of 1 across all risk assets, it's impossible to be short any market:

Index Option Put/Call Ratio (50 Day Moving Average)
It's all about the (Mal)Incentives
No volatility and no pullbacks makes it impossible to hedge in this cycle

GDP may be tanking, but "the Fed is going to raise interest rates sooner than expected"
You don't say...on that news, long-term interest rates went down today
L.T. Treasuries are betting that the Fed's Potemkin Village will be obliterated when short-term interest rates rise...