Hazardous Immorality 2018

The global "everything bubble" is ending. But don't tell anyone, because they're likely the ones who are imploding. The problem with bailouts, is that they don't teach criminals a fucking lesson, thereby leading to far bolder and more brazen crimes - the likes of which are commonplace today. I call this hazardous immorality, and once upon a time it was a widely known concept...

Moral Hazard: "In economics, moral hazard occurs when someone increases their exposure to risk when insured. This can happen, for example, when a person takes more risks because someone else bears the cost of those risks"

I just watched a new movie on Netflix (and in theaters) on Chinese IPO fraud propagated via U.S. financial markets...

The fraud itself is very straightforward and overtly corrupt: Companies based in China cannot be investigated by the U.S. SEC, so their U.S.-filed financial statements are taken at face value. Meanwhile, the "Big Four" accounting firms have branch offices based in China whose audits are essentially corrupt and worthless. Which is deja vu of the ratings agencies in 2008s subprime debacle. So, for example, "PWC" may give its imprimatur to China Corp. but the audit findings are meaningless. The company may not even have employees. In addition, the Chinese government has a policy of never prosecuting fraud perpetrated on foreign investors. Which means that ALL U.S. listed Chinese IPOs - currently in the neighbourhood of $1.1 trillion - could be fraudulent to lesser or total degree. No one knows.

The documentary starts out by describing ~300+ reverse mergers that took place in the immediate aftermath of the subprime collapse. These were Chinese companies that were merged with near-defunct U.S. companies, so they could skip the IPO process. The U.S. companies were already listed. These were almost entirely frauds. 

Most of these reverse merger companies have already been delisted to the tune of ~$50 billion in investor losses, but here is one for example:

We see that this new fraud was hatched in the throes of the global financial crisis

Over time of course, the fraud has grown to encompass a deluge of U.S. listed Chinese companies. 

Last week alone, fully 50% of the (8) IPOs were China-based companies. 

What this points to is systemic fraud in the U.S. stock market imported from China and ignored by the SEC, the Big Four accounting firms, Wall Street, and investment advisors. 

And yes, the bubble is bursting.

But really, in a post-bailout anything-goes nihilistic Idiocracy, chasing revenueless Biotech, value-less crypto-currencies, over-hyped FANG stocks, and condo flipping,

What's one more fraud?

Return To Zion

Every so often the stoned Idiocracy is reawakened to the fact that their thought dealers are total fucking morons. This occasion should be somewhat more jarring...

Life in the Matrix has taught the Idiocracy two things about "investing" in Ponzi schemes:

1) "The good news is that mankind clearly has the ability to suspend rational judgment long and often"

2) Crashes are good because they mean more dopium.

What they still haven't learned despite multiple lessons, is that the cure for higher interest rates, is higher interest rates:

Hedge fund manager, Hugh Hendry, on life in the Matrix circa 2015:
"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."

Fast forward to imagined realities 2018:

"Earlier this year, fears about a sudden spike in inflation and an earlier-than-anticipated withdrawal of monetary stimulus caused yields on sovereign bonds to rise sharply"

The new bogeyman appears to be a slowdown in global growth

the euro-zone economy – the international success story of 2017 – has slowed to its weakest level since January last year

Other signs of slowing global growth have emerged in Japan where manufacturing output has lost momentum. In China, whose economy is expected to slow this year as a result of Beijing’s crackdown on debt, the manufacturing PMI for February suffered its sharpest drop in six years.

If the deceleration in global growth gathers pace – divergences in monetary policy will persist...Fears over an earlier-than-expected end to the quantitative easing programmes in Europe and Japan, which continue to buoy investors’ appetite for so-called “risk assets”, now look overdone."


"Everybody to the other side of the boat"

"Don't worry, when we crash again we get more dopium.  Assuming no one gets margined out in the meantime"

As I said yesterday, this is 2016 deja vu. Except for one minor detail, lower pane:

...the deflation trade has been pre-imploded by, what was it again...

The massively crowded fake reflation trade:

"fears about a sudden spike in inflation and an earlier-than-anticipated withdrawal of monetary stimulus caused yields on sovereign bonds to rise sharply"

"While there are plenty of reasons for investors to be nervous right now, fears about a surge in inflation and a sudden draining of the QE punch bowl are not among them"

Except in the country with the world's largest market cap

Federal Reserve Balance sheet normalization

Fed balance sheet reduction started at $10 billion/month in Q4. Then it went up to $20 billion/month in Q1 which is when the wheels came off the bus. Now in Q2 it's set to increase to $30 billion/month.

Any questions?

Fed balance sheet (blue)

Dow (red)

After all, that was the plan:

"The aim of the Fed’s purchases over the past decade was to boost asset prices, and there could be a “symmetric reaction” once the assets roll off"


"Would I lie to you. Again? Oh ye of little suspended judgment"

I actually agree with two-face on this one, I just think that his timing is bad. But then again, so is mine...

GLOBAL RISK OFF: THE CYCLE IS OVER

This was the week that global fake reflation turned back into a pumpkin. Barring more porn star interviews, the 200 day Maginot Line is a mere 35 points away from Blitzkrieg...

This week Tech, Financials, and bond yields all tanked at a rate last seen at the end of Q4 2015, as Skynet put lipstick on the pig for quarter end. 

Bueller?

Facebook having been taken to the woodshed last week, it was Amazon's turn to get pole axed Wednesday on news that Trump was targeting the company for unfair tax treatment. Later in the day, White House spokesperson Huckleberry Sanders denied that report, so the stock rallied. 

Then this came out today:

The problem with being a spokesperson for a pathological liar, is that you never know who is showing up for work today.

Which was the exact same risk I alluded to last week relative to the "bullish" trade war with China. Contrary to popular belief, paranoid schizophrenia is not "priced in"...

Despite the tech wreck, Skynet defended the 200 day Maginot Line at all costs, closing the quarter at the exact same level as Monday's porn star open. 

I think we all see where I'm going with this...

Whereas last week saw all things 'yield' get hammered. This week was Tech's turn. For the month of March overall, there was a change in leadership, from bad to worse. The Nasdaq is now flat on the year, while Utilities are down on the year. 

Basically tying two rocks together to see if they float...

Risk is now OFF in China Tech, Biotech, Emerging Markets, FANG mega tech, crypto currencies, and mid-cap momentum. 

It appears that Bitcoin leads the casino, by a few hours...

The Nasdaq kissed the two year trend-line good bye today...

What this means of course, is that despite relentless BTFD, and even more relentless hyperbole, risk is fully OFF globally for the first time in two years. Just don't tell anyone, because it's still a secret. 

For some people...

In summary:

"Until recently, being a mega-cap stock — and investing in one — was the best way to get returns out of this stock market. Not anymore. As the first quarter of market trading comes to a close, the largest U.S. stocks will go down as the biggest losers."

The chart of the week has to be this one. Note the negative divergence in breadth relative to last time...

This is what happens when zombies drink too much Kool-Aid. 

They start to believe in fairy tales, and seek out whomever will tell them their bedtime story. 

April Fools

I think we all see where I'm going with this...

When the casino opens on the highs and closes on the lows every day, that's what is known as a "bear market", and a sign that institutions are selling. But don't take my word for it...

For those gamblers waiting for the big "retest" vis-a-vis the February low, they will be surprised to learn it has already taken place and failed...

For example, the second largest S&P sector. Notice this doesn't say the worst month since February 2018:

Also already below the February low on a closing basis:

Materials, Autos, Retail, Homebuilders, Healthcare, Construction, Oil Services, Consumer Staples

Which leaves...

Crude oil:

As we see, the world's largest energy stock is well below the February low...

China Tech:

Growth/Momentum:

And...large cap Tech

As we see in the lower pane, most Tech stocks are already below where they were in February:

And the most glaring negative divergence of all, of course:

Welcome To The Hotel Californication

"They stab it with their steely knives, but they just can't kill the beast..."

Unfortunately, you can't warn stoned zombies. I've tried. There is a symbiotic relationship between the salesmen purveyors of bullshit, and the sheeple consumers of bullshit. They need each other, the way a fentanyl addict needs his dealer.

TechNihilation is well underway. It's all up to recession stocks now. The sheeple remain oblivious. The younger generation has never learned the word "sell". And the older generation can't remember what they had for lunch yesterday. Tech gamblers are caught in the perfect storm of imploding iphone sales, the Facebook data privacy fiasco, and now this:

Donny is now targeting the most overowned and overbought mega cap pile of junk on the planet:

As I write, the casino is parked on the 200 day moving average. Skynet using every tool at its disposal to keep from breaking last support. Each bounce weaker than the last, attended by ever-larger doses of unadulterated bullshit to keep the sheeple from bolting...

TechNihilation is a fait accompli. The technical damage is done...

But here is where it gets interesting.

The leading sector right now is Utilities which of course is a recession play. All very bullish, I know. Unfortunately, compliments of the Fed, Utilities are the overall weakest sector - having been negative for the entire year-to-date:

Which is why the most important chart is not of Utilities, it's of stocks versus bonds, because the massively over-crowded Gundlach/Gross fake reflation trade is force unwinding:

All of which is why, this is going to lead to an inevitable mega crash. Because once the Utilities 3-wave correction is over, this turns into a no bid market...

In the meantime, "BTFD" remains the order of the day...