Monday, October 15, 2018

Global Warning Ignored

The bad news is that the $1 trillion dollar tax cut sugar high is wearing off making sudden market plunges far more frequent. The good news is that these global-assisted plunges are being completely ignored. Just like every other risk.

Because that's how we roll baby...

"Haibin Zhu, chief China economist at J.P. Morgan, said the bank's baseline scenario is for the U.S. to impose tariffs on all Chinese imports. That means "real painful economic events in 2019" 

Memo to all employees: All painful events must begin after bonus is paid

"There's been a denial factor in the market"

I don't believe it

But first, a message from the Denialist-in-Chief: He admits that Global Warming is no longer a hoax, but he's going to fix it by making it worse. The same way he fixed the big, fat, ugly bubble, by making it bigger, fatter and uglier. Because every denialist knows that's how you fix all problems - by ignoring them and making them worse. People who believe this fucking fraud deserve all of what's coming. 

Speaking of ignoring risk, last week's market plunge saw the VIX gain 200% in five days. It was the fourth largest five day % VIX spike in the past twenty years. 

Here I show the largest five day % spikes in the VIX over the past twenty years. The five largest all came since 2008. Two came this year alone. I overlaid the Rest of World to show that these vol spikes are really just overnight gaps that are assiduously ignored:

In addition to overnight risk, the other factor causing these dislocations is the fact that the tax cut sugar high is wearing off. 

Buybacks have been especially powerful lately. Flush with excess cash from tax cuts and the strong economy, US companies are on track to repurchase $1 trillion of stock this year for the first time ever, according to Goldman Sachs. Last month Goldman Sachs even warned that the looming blackout period posed a "near-term risk" to the market.

"It is no coincidence that the markets are struggling the most when this financial engineering technique is removed..."Buybacks artificially suppress volatility."

The S&P 500 closed below its 200 day today, now Skynet is working overtime to gain it back in the overnight.

Because barring that, it gets FUGLY...

Fortunately, there's a safe haven from all of this risk:

"Walmart and AT&T Inc are two dividend stocks that can help keep your portfolio protected from a prolonged market downturn or even an economic recession."

With advice like this who needs enemies?

Truth Or Consequences. The Choice Was Made.

The only way to rationally understand this era is to realize that we now live in an old age insane asylum. 100% Japanification. Once you understand that, choices get real simple.

Truth or consequences...

How did the "best and brightest" get sucked into this mass delusion? Easy, in this era intelligence was the biggest impediment. Being a dumbfuck is now a major advantage. It might even make you president one day. Picture the dumbest people you know at an auction pretending to be wealthy by bidding up their own assets, the higher they bid, the more it validates their strategy. Then try to work backwards to a sane valuation...

Throughout this insanity, one guy kept it together, I'm not sure how. Once in a while I check in to see how it feels to be sane again:

Oct. 1, 2018:

In a nutshell, gamblers are now trapped between the Faustian jaws of the casino:

The maxim that inflated the bubble:

"The market can remain irrational longer than you can remain solvent"
 - John Maynard Keynes

And the maxim that is now deflating the bubble:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion"
- Ludwig Von Mises

Back in 2015 I called this dilemma "Shanghai Surprise". 
For those who slept through Ponzi Finance 101, circa 2015, hedge fund manager (Hugh Hendry) explains the mechanics behind Shanghai Surprise aka. "Imagined Realities":

"I am taking the blue pill now"
"There are times when an investor has no choice but to behave as though he believes in things that don't necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news is that mankind clearly has the ability to suspend rational judgment long and often."

China is set to record its weakest growth in GDP in 25 years. Yet it seems to have entered a bull market and may be where we deploy much more of our risk capital next year. That's because the recent exuberant run up in onshore Chinese equities seems to me to amply demonstrate the power of imagined realities"

This was the longest bull market in history. Why? Because everyone who shorted insanity back in 2008 had to capitulate to the trend before this cycle could end. Which confirms my overall gambling hypothesis - dumb money drives out the smart. As long as there is a segment of society that will believe anything, reason and rationality have no place around speculative markets. In a society that aspires to Idiocracy, rationality is insanity. 

Given the experience of the past decade, I have developed my own hypothesis about markets. It's part Social Mood, and part commonsense. It's quite simple actually: speculative markets devolve into a race to the intellectual bottom. Those who come to markets with reason are eventually forced to capitulate to insanity or leave the casino. Many Social Mood theories posit that "the animal spirits" drive markets. I'm saying it's even worse than that - the dumbest people eventually end up driving the market far beyond any sane valuation. Which is another way of saying that despite being a multi-billion dollar industry, "market research" is a total waste of time and money. Reason and rationality have no part in speculative risk markets. 

One by one, this era's greatest hedge fund "gurus" - many who profited from 2008's Big Short - Kyle Bass, John Paulson, David Einhorn, Bill Ackman - got taken to the woodshed. Einhorn famously declared one year ago that "value investing may be dead". One year later and it is now back in fashion.

Here I overlay the Hedge Fund VIP index - the most commonly owned hedge fund stocks, with the Momentum Factor ETF - the mega caps exhibiting highest momentum (Microsoft, Apple etc.):

They're the exact same thing. Momentum speculation drove Wall Street's "best and brightest" to converge on the same handful of overbought and overowned stocks. 

Here we see Active Managers drank the Kool-Aid with respect to risk exposure.  

Which gets us to where we are today, the second maxim:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion" - Ludwig Von Mises

"What about borrowed tax cuts, doesn't that extend the cycle of credit expansion by raising interest rates faster? That's what my advisor told me"

Goldman's basket of growth stocks with the highest return on equity has modestly outperformed the S&P 500 this year...Apple, Microsoft, Nike and Deere are among the stocks in this basket"

Someone is lying, it's either Goldman Sachs, or Goldman Sachs:

The insane irony of it all.

The Artificial Intelligence bubble is ending...

"Please don't feed the Black Swans"

Sunday, October 14, 2018

Hanging From The Rafters

This week should be interesting to say the least. Can the bulls slip the noose? Or will this be the most shocking and devastating market crash in history?

Were the soothing words from Herbert Hoover mid-week the last cinch of the noose?

So far, this has been a classic bull trap. When the Transports confirmed the "Dow Industrials" it seemed that the breakout above January highs was on solid footing. There was only one problem, the Dow has been reconfigured to include several Tech stocks which are what powered it to new all time highs.

However, the pure-play Industrials NEVER confirmed the Transports:

What gamblers were doing is bidding up Transports under the auspice of an improving economy and then using the rally as confirmation of an improving economy.

Not to say that they are new to conning themselves:

Remember GE? Wall Street had that most venerable of U.S. industrial companies removed from the Dow, because it wasn't confirming their 300 P/E momentum-driven delusion:

In summary, the broader market never confirmed the S&P breakout.

It was all stock buyback driven tax cut sugar high:

Now of course the casino is still massively concentrated towards Tech stocks. And it's even more skewed than ever due to the recent re-shuffling. Microsoft and Apple have greater weighting than before. No surprise, these are the two stocks that haven't broken down. Yet. 

Here we see that Apple is still near record highs, whereas their primary Asian (Taiwanese) supplier is in 2008 mode:

So the jury is out on Info Tech as long as Apple and Microsoft don't roll over. At which point they will implode the entire casino. 

Where this all gets interesting is in the positioning. Because as one would expect, an aging society confronted with persistent deflation has no "choice" but to increase their exposure to risk. Which is what we see below via Mutual Fund cash balances. 

Overlaid with cash balances are the pure play Industrials shown above. In Y2K, gamblers exited ahead of the recession. In 2008, they lingered a bit too long. This time, they're ALL IN.

"Technology and internet-based companies are known for their high profit margins, and many have reported explosive growth in recent years, with corresponding gains in their stock prices. That’s made them particularly vulnerable to higher interest rates, because it makes the stocks’ already high valuations look even more stretched."

"Sears Holdings, the parent company of Sears and Kmart, is among dozens of prominent retailers to declare bankruptcy in the era of Amazon"

"There was no one left to use up"

Saturday, October 13, 2018

Donny Trump: Lord Of The Flies

What happens when you bet it all on your saviour only to find out he's the exact opposite? Dissolution. After all, something good has to come out of this...

What separates the U.S. from developed nations is its willingness to exploit its own people. The exorbitant cost of being "exceptional". The Banana Republican party has a special predilection for preying on their own dementia'd hillbillies. After all, who wouldn't fish at their own trout farm. Hard to believe, but taking from the poor to give to the rich, is never "reflationary", any more than a bank robbery is accretive to GDP. The problem with the Darwinian model is that eventually you run out of people to use up. And that's when Wall Street's Magic 8 Ball-derived forward earnings estimates turn back into a pumpkin.

America is becoming blighted by self-inflicted stupidity and denial. These are the back to back headlines in my newsfeed:

First article:

"First came Hurricane Irma, which clobbered the Florida Keys and parts of Lee and Collier counties last September. Then came the toxic red tide and blue-green algae on both coasts. Now Hurricane Michael – a near-Cat 5 storm that pounded Panama City and reduced Mexico Beach to rubble – is again testing the state’s tourism industry. Can it recover?"

In the second article, Larry Kudlow, like so many other industry-owned bukkake whores fashions himself a climate scientist now. He's not even competent in Economics. However guess who is finally coming around. That's what a good ground and pound will do for you.

"Sen. Marco Rubio (Fla.) acknowledged the scientific consensus that humans are the chief contributor to climate change."

Speaking of sleazy Larry and a good ground and pound, what happened this week is that the global liquidity crisis that has afflicted the rest of the world since the tax cut came into effect, finally reached U.S. shores. Catalyzed by a "better than expected" jobs report. The tax cut inflated the fake wealth bubble via the stock market, and the tax cut is now imploding the bubble via the bond market. Case closed. The casino is up a mere 2.5% on the year, despite an asinine trillion dollars down the stock buyback shit hole. Four percent of GDP. Now the only global dollar "liquidity" is in the Cayman Islands. 

The biggest theft in human history without any comparison:

But don't take my word for it. 

"What roiled the stock market this past week wasn’t the short-term rate targets set by the Fed, but the longer-term yields set by the bond market"

“European banks are running out of borrowing capacity,” Goldman writes. “After five years of negative short-term rates, their profitability is low, their stock prices are falling, and their credit is deteriorating. They can no longer borrow the dollars required to construct the hedges that local investors need.”

ZH: Ground Zero Liquidity Crisis
“Putting it simply – the soaring U.S. deficit requires an even greater amount dollars from foreigners to fund the U.S. Treasury"

Getting back to the bigger picture, the U.S. has become a Third World nation as indicated by George Orwell in 1984. The Inner Party consists of Bill Gates types who say the world has never been better, while making it their life's mission to justify their obscene wealth. If it's so obviously better, then why does it require you to prove it? What technique will you use, Jedi Mind Trick?

Then, there's the Outer Party, the Brett Kavanaugh's of the world. Privileged frat boys protected by other privileged frat boys. Whose life mission is to ensure there's always plenty of (other people's) skin between them and the dirty work.

Alternatively, there's the developed world model. Which is waiting for those who aspire to be something other than a lying sociopath.

Lehman 2.0: An Inconvenient Delusion

"If they raise rates even just a little bit, it's all going to come crashing down"
- Forrest Trump, Sept. 26, 2016

This week, the Fed, Wall Street, and Trump were at odds explaining how the "best recovery ever" is imploding due to a 2% Fed rate. All three boxed in by their own lies. 

But not nearly as trapped as those who trusted proven con men.

For the archaeologists out there, the narrative of the day is that "the greatest economy ever" was just derailed by interest rates at 2%. Because who wouldn't believe that story? Jeff Gundlach would, we know that much. I suggest it will be cold comfort to Trump supporters when he blames the Fed for popping his mega bubble given that he alone convinced them it was the greatest economy ever.  

Worse yet for Donny and his apologists, what actually happened, is that Trump's borrowed tax cut inflated the stock market bubble via $1 trillion in stock buybacks and then subsequently popped the bubble due to the higher interest rates driven by the tax cut. It was all a self-inflicted circle jerk.  

Even Jeff Gundlach should know there's no such thing as "free money":

Here we see homebuilders and ten year rates going in opposite directions since the tax cut came into effect:

The rest of the world was warning this "Black Swan" event was coming. Day in and day out for eight months straight. But the U.S. was decoupled from reality right up until October 1st. It turns out that trade wars and global liquidity implosion are not "accretive" to earnings after all. 

The U.S. housing market was warning for eight months as well. Both imploded by Donny's "free money":

And of course autos were warning:

"The stock has suffered as auto sales in 2018 have declined and that is leading analysts to cut their earnings estimates for the company"

What changed in October for the rest of the casino?

Rewind to a few weeks ago in September, the early warning sign came via 3rd quarter profit revisions. Because nothing against the Fed's backwards looking data, and Wall Street's forward looking magic 8 Ball, the best "tell" on the economy comes from CEOs themselves. Perhaps the fact that they were selling with both hands, should have been a warning that the tax cut sugar high was wearing off:

But here is where it gets real. Because back in September, the outperforming Transports sector mysteriously left the party. In other words, the very sector that was deemed to be "confirming" U.S. expansion, had a change of mind:

transport equities took a nosedive today, following a downward trend that began mid-September. Stocks across modes of transportation took hits, impacting companies involved in rail, air, and maritime freight markets

freight markets continue to show signs of weakening as the outbound tender volume index (OTVI) for the U.S. has fallen 3.3% over the past seven days"

This week, Transports gave up all of their year-to-date gains. Nine month of gains evaporated in three weeks:

Now, Wall Street, Trump, and the Fed are all trapped by their own false narratives. Each one blaming the other for an "awesome" recovery that fell apart due to a 2% Fed Funds rate. Anyone who attempts that argument proves they were a lying dunce in the first place.

Meanwhile, global liquidity continues to shrink at a rapid pace. 

"Swept along by super-easy money, investors have debated for years how world markets will react when this central bank largesse inevitably ends. Now the liquidity tide is about to turn, and they have only a few months to adjust."

While markets reached dizzying heights during the easy money era, that flood will dry up by the year-end"

After a near decade of money-printing and zero interest rates, the shift for markets will be momentous."

Here we see the combined Fed, ECB, BOJ balance sheet is nearing the level at which they expanded policy. Instead they are all rapidly shrinking accommodation.

Add in the fact that we just entered the stock buyback earnings blackout period, and one wonders who is the marginal fool now?

We just learned this week that it's not Skynet.

"The iShares Edge MSCI USA Momentum Factor ETF seeks to track the performance of an index that measures the performance of U.S. large- and mid-capitalization stocks exhibiting relatively higher momentum" 

What we didn't learn ten years ago this month, is that con men can't change their narratives quickly enough to get every one out. Sadly, that's inherently impossible.

In summary, delusion has been derailed. 

Any questions?