Saturday, May 27, 2017

Manias, Panics, Crashes And The Madness Of Crowds

Unfortunately, the speculative cycle is extremely abrupt, and therefore the economic cycle is very abrupt as well. This is going to be an education they never forget...

For some totally unknown reason, the Economics profession remains wilfully ignorant about the downside effects of cheap debt - not only on speculative portfolios, but on the economy itself. To be sure, they are well aware of the (fake) "wealth effect" thrown off by monetary policy:

The Wealth Effect:
"The wealth effect refers to the psychological effect of asset value increases, such as those experienced during a bull market, on spending patterns. The concept focuses on how the feelings of security, referred to as consumer confidence, bolstered by the rising value of assets, such as investment portfolios and real estate"

What about falling values? No effect?

The problem with this willful ignorance is that it leads to widely ingrained behaviours such as extrapolating the business cycle out to infinity. The problem in turn with extrapolation is that the business cycle bears no correlation whatsoever to the latest stale bread crumbs of backwards-looking economic data. And yet that doesn't stop economists from making serially-wrong predictions. After all, the trend is their friend until the very day it's not. 

In the bubble economy in which we find ourselves, the primary determinant as to the health of the credit cycle and by extension the "economy" is the speculative asset cycle, which I have modeled above.

This is well-documented by Minsky, but I wanted to add some additional relevant detail, because the bubble cycle is not just about credit accumulation it's about the interdependence between asset values and credit - after all, available leverage is a function of both income AND asset values

As we see above, speculative asset values are initially supported by income, but eventually supported by debt/leverage as the cycle progresses. Asset values and leverage spiral higher since one feeds off the other via the speculative equity effect. As in, look my house value went up and so did my equity. This can go on for quite some time, until such time as asset values rise too quickly and exceed available buying power. This is the Wile E. Coyote moment. Why? because the model does not go in reverse. Marginal asset values can fall very quickly, but unfortunately, fixed debt obligations do not. This results in forced selling, and ultimately panic. 

The $Trillion dollar question is knowing when it's the end of the cycle, because one must jump in the time machine and be a seller ahead of that point in time. And by my humble estimation, the only way to know it's the end of the cycle is when price accelerates after a "prolonged" period of slow and steady increase.

I would suggest that this is not a good time to be fucking around with speculative asset values...

Recession stocks:

Dow Transports

Recession sector rotation versus IPOs

Friday, May 26, 2017

Global Moron Bubble aka. "Globalization"

What it all comes down to is that no one wanted to leave the Ponzi party early, because then they might look stupid to every other moron. When it comes to being a dunce, there's strength in numbers...

What we witnessed this week was a blow-off top in global Social Mood.

Any questions?

Bitcoin (Bitstamp, $USD), weekly:

We know that nuclear war with North Korea is likely not "bullish", but that hasn't stopped South Korea's stock market from going vertical...

We know that Brexit is likely not bullish for the UK economy and financial sector, yet that hasn't stopped the London FTSE from going vertical:

Macron is the saviour of France and Europe? Or a Hollande clone?

Trump: I'm in Europe, so what can I say about Germany to rile up my base of Twitter dunces. I know...

Germany is selling too many fancy cars. We need to make everyone buy a Pontiac, the likes of which I wouldn't be caught dead in

China's imploding anew, so Hong Kong stocks are going the other direction...

And not to leave out India:

"Just buy all of it..."

The Moron Bubble: 2008 x Y2K

An IQ test for who could be conned three times in a row by the exact same psychopaths, while worshipping the false idol of competitive consumption...

The DotCom bubble was based upon the monetization of the internet. The Housing Bubble was as an experiment in using homes as ATM machines. This is the moron bubble, based upon the ubiquitous belief that printing money is the secret to effortless wealth...

Post-2008, EconoDunces knew they couldn't reflate the real economy since it was being arbitraged away for corporate profit, so instead of inflating the economy, they inflated asset valuations instead. Therefore even as the underlying economy was losing value, the prices paid for it would be gaining value via the fake wealth effect. This may sound like a good idea in theory, but it comes with some problematic after-effects. For those who already owned financial assets this was great, since it allowed them to cash out at higher valuations, assuming they were smart enough to realize this was their last chance to do so. Unfortunately for anyone who spent their hard earned money buying stocks in the meantime, they were paying prices that bear no relation to reality. The bagholder effect.

RepubliCons have amply proved for the historical record that they are the party of dedicated morons. This is not a political statement it's merely a statement of inconvenient fact.

"Democrats expect a recession and Republicans expect strong growth"

Doesn't Faux News warn these people that they're being conned?

 Stock market cap / GDP:

Wilshire total cap index / U.S. Federal debt

Those with top-heavy fears might worry about the underperformance of one gauge linked to the S&P that gives more weight to smaller stocks, he adds. But it’s “not really a big deal” as the equal-weight S&P is up 6.2% this year, not that far behind the regular index’s 7.9% rise, he says.

"Once Trump gets out of jail, he will cut taxes. He said he would..."

Second loans, such as home equity lines of credit (HELOC), are booming. HELOC originations were up 10 percent year over year in 2016, hitting an eight-year high, according to Black Knight Financial Services, and they continue to rise.

Ironically, the new boom comes just as the pain of the last home equity line boom is ending. 

Good news, our mega bubble is intact, but the U.S. is imploding:

"The weakness in BMO's Q2 results was largely a Made In The USA issue, led by a big jump in commercial loan loss provisions, but also impacted by a dramatic slowdown in commercial loan growth"

FP: Repeat After Me, There's No Systemic Risk From Home Capital Group

"We call this threading the needle"

Wall Street:
"Don't worry, we found a new way to make money, betting that Central Banks got this rate normalization exactly right..."

"...and betting that OPEC's output cut is working..."

Thursday, May 25, 2017

Then There Were None

"They were too preoccupied with gambling to realize the world was imploding..."

Stock sector rotation says recession
Bonds say recession
Commodities say recession
Deflation says recession
Loan growth says recession
Retail ex-Amazon says recession
Banks say recession
Carry trades say recession

In other words, the goal of this last melt-up is to get Amazon over $1,000/share and Bitcoin over $3,000. While everything else implodes in real-time...

The OPEC meeting came, went, and disappointed...

Oil prices fell sharply on Thursday after an OPEC delegate said the oil producer group had agreed to extend cuts in production by nine months to March 2018. That disappointed some investors, who had hoped that OPEC might reduce output even further to drain a global glut that has depressed markets for almost three years.

But who cares about that when Amazon is making a new breakout high towards $1,000:

Or should I say, $999:

Bilzerian told his 22.3 million Instagram followers on Wednesday afternoon that he “just bought a sh*tload of bitcoin” and that “it’s so crazy watching that sh*t f**king go up it’s like... betting a bunch of money on the Super Bowl.”

Now THAT is a key reversal:

"OPEC disappointed, which means buy tech stocks"

BTFD: "Buy the fucking depression"

Wednesday, May 24, 2017

Maximizing Risk Going Into Depression

As is fitting of an eight year Ponzi Party, gamblers are reaching for maximum risk in front of the steamroller...

The Nasdaq is in melt-up mode:

Here we see graphically what yesterday's post was saying - the recession trade is on in full force, even as speculators flock to the riskiest assets...

First, the recession trade:

Here we see Bitcoin, IPOs, and internet stocks all peaking at the exact same time, for the first time ever...

This will end badly.

Don't ask me how I know.

The Fed knows best...

"Wait until something breaks and then back off a bit..."

Another PhD mega-dunce:

"Here's what we'll do, we'll borrow 3% and call it 3% growth"
"What about 4%?"
"Don't be ridiculous"