"In the broadening top formation five minor reversals are followed by a substantial decline....It is a common saying that smart money is out of market in such formation and market is out of control."
Mass shootings, fentanyl suicides, industrial-scale human trafficking, biblical climate change, de facto global slavery. Life in a human toxic waste dump. One clown to rule them all. Looking back at past decades, Disney Trump was a step migration along America's journey from land of opportunity to land of opportunism:
"Opportunism is the conscious policy and practice of taking advantage of circumstances – with little regard for principles or with what the consequences are for others."
Date: June 20th, 2019
Label: Denial Is Not A Black Swan Event
Humankind's only natural enemy is itself - both at the individual and societal level. A self-destructing adversary equal to the task. Complacency and denial are this species' greatest weaknesses. Contrary to popular belief, one-time unexpected "Black Swan Events" don't bring down markets. Both 9/11 and Pearl Harbor were excellent buying opportunities. What brings down markets is long periods of tranquil complacency attended by mass denial and the accumulation of unsustainable imbalances - the likes of which we've seen like never before, in this cycle. If a marathon runner has a heart attack, that is a black swan event. If a four hundred pound fat man has a heart attack, that is a long overdue event. This society is a four hundred pound fat man sprinting to McDonald's for another Fed-sponsored Happy Meal.
Which gets us to this seminal week with gamblers doubling down on escalating real wars, trade wars, and recession, ahead of the most important global trade meeting of the year next week.
What happens when the perceived lowest risk stocks in the market turn into momentum plays? We're about to find out:
"The slowing economy and increasing market uncertainty have made low-volatility stocks a popular choice for investors this year. They’re likely to stay that way"
The asymmetry in upside participation and downside protection has contributed to what academics call the “low-vol anomaly”
Stocks in the Invesco Low Volatility ETF are trading at 22 times earnings in the last 12 months, higher than their five-year average and the S&P 500’s 18.6 times.
"valuation should not be a concern as long as demand remains high"
Got that? As long as valuation keeps rising, valuation is not a concern. Just ask Bernie Madoff.
As the market top has progressed, more and more money has rotated into this "low-vol" anomaly, causing massive outperformance relative to the average stock. Just two ETFs account for 50% of U.S. fund inflows in 2019. Yes, you read that right.
Getting back to the broader casino, ahead of next week's make-or-break G20 summit, gamblers are euphoric:
The number of lies getting bought with both hands right now is extreme even by Idiocratic standards. All on the flimsy promise of more Fed dopium sometime in the future.
Among today's easily refuted obligatory false beliefs:
1) The tax cut extended the cycle
2) The trade war will be over soon
3) A Fed rate cut is for "insurance" only - great for stocks, and not indicative of recession
4) A weakening jobs market is great for stocks
5) War with Iran is also great for stocks - higher oil prices etc.
6) The world can implode, the U.S. will be the sole beneficiary
Of all the mega lies, this last one is by far the most delusional, now abetted by the S&P at new all time highs. The gap between the U.S. and the rest of the world, is record wide.
On the assumption that what is bad for the rest of the world, is good for the U.S.:
Even within U.S. markets the divergences among sectors are chasmic. The only sectors at new highs are the "low volatility" recession bond proxies - Utilities, REITS, Staples.
The Dow and Nasdaq are not confirming.
Economic cyclicals - banks, transports, autos, retail, are lagging massively:
U.S. Manufacturing PMI lowest since September 2009 (My data only goes back to 2012):
Here we see the small cap Russell 2000 with rising Nasdaq declining volume deja vu of last cycle:
The fake news this week was that professional investors are the most bearish since 2008:
What the article should have said is that investors would like to be as bearish as 2008, but it's not their money, so why hedge? Instead, invent a new imagined reality and pretend no one saw it coming.
In October 2008, the VIX hit 90. Today it hit a 13 handle at the open. There is no comparison on bearishness between then and now.
Also on the subject of bearishness, the profitless IPO ETF has now more than DOUBLED the performance of the S&P year to date (40% versus 18%). While many of the recent IPOs have doubled in a matter of days. Which makes this more of a Y2K-style blow-off than a 2008-level buying opportunity:
“The important theme here is called growth, and investors are looking for growth companies in a slow-growing economy"
Here we see via momentum Tech, that momentum begets more momentum.
And then crash
Date: June 19th, 2019
Label: The Alchemy Of Finance
Those who are concerned about MMT: Modern Monetary Theory - have yet to learn their lesson about the risks from Modern Financial Theory:
Unbounded greed is destroying the economy.
Way back in Y2K, hundreds of unprofitable DotCom companies went abruptly bankrupt when financial markets cut off their funding going into recession. The height of the bubble was 1999 - almost ten years into the longest economic expansion in U.S. history - yet most of those companies were not built to survive one year without needing additional capital. Of course we now know that the bubble was the end of the cycle, not the beginning of a new bull market as everyone believed at the time.
A few years later during the housing bubble, lending conditions eased as the cycle progressed and as risks grew, until mortgage lenders abruptly went bankrupt en masse as the credit markets slammed shut at the end of the cycle.
The Citigroup chief executive told the Financial Times that the party would end at some point but there was so much liquidity it would not be disrupted by the turmoil in the US subprime mortgage market.
He denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance"
In this cycle of non-existent real economic growth, many large corporations will go bankrupt en masse when credit markets once again slam shut. For the exact same reason - rampant greed leading to non-existent management of cycle risk.
Led of course by Energy, but no means limited to that sector:
Modern Finance STILL does not acknowledge cycle risk. In the Finance textbooks, the business cycle doesn't exist. In the discounted cash flow model, the cycle is not a factor in the equation. Which is why as the cycle progresses companies onboard greater and greater leverage. Because corporate profit must continue to grow to maintain share price appreciation.
Which is why right now, nearing the longest expansion in U.S. history - all major companies are leaning hard into credit markets to fund stock buybacks to offset declining profits. Once again, failing to acknowledge and manage cycle risk by reducing leverage as the cycle progresses.
How big are stock buybacks? Put it this way, on a market cap basis, the S&P peaked last October, not in April.
"The decade-long economic expansion, poised to become the longest in U.S. history next month, is facing an existential question: Will it sputter to a halt by next year or keep on chugging at the same modest pace that got it this far?
On the one hand, the expansion is displaying some telltale signs of old age, such as the 3.6% unemployment rate, a 50-year low; the beginnings of a slowdown in business profit growth; and a mounting debt problem – this time inside corporations."
As I write, the FOMC just rendered their decision to leave rates unchanged. Which means that algos are now unwinding their volatility collars. The real market trend won't be known until tomorrow.
All we know is that bond markets see something that stock gamblers and the Fed STILL don't (want to) see.
"Fannie Mae and Freddie Mac, the dominant players in the market, both have been taking on more risk “steadily since the financial crisis.” The Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and the Agriculture Department’s rural home loans program have pushed risk to “the highest level since 2009.”
Median home price ($$), blue:
Short-term rates, red: