Monday, April 9, 2018

'BTFD' Makes Crash Inevitable

Cozy consensus doesn't create two-way markets, it creates one-way markets. The 0% return on capital emanating from 2008 made it inevitable that gamblers would come to believe in the zero sum impossible - markets that never go down and economic cycles that last forever. Wall Street is unanimously betting on a Black Swan bull market for 2018, and they have ample followers. It's no one's job to say when this con job is ending...

"Greedthink is a psychological phenomenon that occurs within a group of people in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome. Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative viewpoints by actively suppressing dissenting viewpoints, and by isolating themselves from outside influences."

Once again, Skynet is defending the 200 day moving average at all costs, as over-zealous futures shorts get burned again. The battle of the 200 day enters its third week...

Stepping back for some perspective, the basis for this stalemate lies in the fact that bears see this as the market top, while bulls see it as the bottom of a correction. In other words, they "see" the exact same thing and yet arrive at diametrically opposite conclusions. Unfortunately all sides can't be right. First off, here we see the volatility term structure which hasn't been this elevated for this long since 2011 and before that 2008.

Which means that bulls have been continuously underestimating volatility.

Which gets to why a crash is inevitable. Currently there is near unanimous consensus on Wall Street that the market will end higher in 2018. No one predicts a major crash, despite the fact that another year higher would make this the longest bull market in history. In other words, they are unanimously predicting a Black Swan bull market.

"The bull market is set to celebrate its ninth birthday in March, and if it remains intact into August, it will officially become the longest in history"

Unfortunately, economists use lagging data to predict recessions. And they compete with weather forecasters for who can be wrong the most often. Meanwhile, Wall Street's mantra is to "dance while the music is playing". Hence it's no one's "job" to predict when this shit show will end. Furthermore, there is extreme conflict of interest in every industry from oil, to real estate, to subprime auto loans, to never see it ending. All of which evinces a profound misunderstanding for how markets actually work. Because when there is overriding consensus on the never-ending extrapolation of good times forever, then markets don't price in risk in advance. There is no cash buffer for when bad news comes along and the market is priced lower. 

Which gets to my first point, bulls see this as just another routine correction, similar to 2015. The market fell, rallied, retested. And then continued higher. Aside from the blow-off top in this period, and the fact that the 200 day was never broken, it's a superficially plausible theory.  

Which is why they've been buying this "retest" with both hands. Whereas ironically in 2015 they sold the retest, because they didn't assume the decline was a mere correction. And in doing so, they flushed out the sellers.

You may recall that the crash in 2015 was caused by Yuan devaluation. Yet here now we see that yuan devaluation has magically been reinvented as a buying opportunity. Again, the social mood Jedi Mind Trick at work:

There was more skepticism last April than there is now:

In other words, consensus does not create healthy two-way markets that can absorb bad news. They create fragile one-way markets, which either go up relentlessly or they go down relentlessly.