Monday, October 15, 2018

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...

Oct. 1, 2018:

In a nutshell, gamblers are now trapped between the Scylla and Charybdis of Fantasy and Reality:

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"