Imagined Realities 2018: The Downside Of Denial

Those who've adopted denial as a way of life are about to be disabused of their newfound belief system. The downside of "imagined realities" is buying a ticket to stand in front of the freight train...

Two massive overnight selloffs got bought with both hands this week, because everyone knows that global implosion is a buying opportunity. 

This is 2015 deja vu, except with 10x risk:

But first, Wall Street is out reassuring nervous clients. The party isn't over, we're just playing a new game now:

"I don't think the party is over. I think what we are seeing is a transition in regimes, one from where markets were comforted by ample, predictable liquidity to now having to recognize that divergent fundamentals are going to be the driver of asset prices...We see interest rate differentials between Germany and the U.S. stretched to high levels"

When asked which market indicators were keeping him worried, El-Erian replied: "I think that this divergence theme is a really important one..."The second issue that I think that is important is underestimated liquidity risk"

Got that? We've switched from a party based on liquidity to a party based on divergences. The only risks are divergences and lack of liquidity. Holy fuck. With logic like that who needs enemies?

This is the fantasy that Wall Street is still selling its clients. Ignore the two MASSIVE overnight selloffs this week, and focus on U.S. economic and policy divergence.

Deja vu of 2015, it gets even dumber. This week's Barron's cover story is where to find bargains in Chinese stocks.

The prevailing belief on Wall Street is that the Chinese government is in control of the stock market. Leave aside the fact that it has already lost $3 trillion in value. That is the equivalent of the entire France stock market.

If this is control what does lack of control look like? Remember the last major selloff (circled) in 2015. The government banned short selling, halted the market for days at a time, and then banned selling altogether.

It only lost -50% of value. 

Recall, back in 2015 Hugh Hendry made the exact same bet on "Imagined Realities" - that China's ability to reflate markets was "limitless", hence slowing GDP and other macro issues were of no concern. That bet worked for a time until China was forced to devalue the currency, which pole axed global markets. 

This time, the Chinese government's ability to expand liquidity AND defend the currency is already out of runway. 

Cue El-Erian and policy divergences: 

"We are going to see more pressure on the FX markets"

You see, this is what happens when gamblers ignore everyone else in the world and only focus on themselves. 

They begin to see other people's hardship as merely an "opportunity", for monetization

And then one day they find out that they were the only opportunity left

And their denial has been monetized.