Monday, March 11, 2019

Ponzi World Is Ending

The third false rally of the third false bubble. Only the most dedicated denialists don't see this coming aka. going. Having learned nothing from their last clown, this one was sent to finish the job...

"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."

Ponzinomics, Entropy, Fraud, Corruption, Denialism, Artificial Intelligence, Fake News, Globalization, Environmental desecration, Corporatism 

In order to keep my most recent posts near the top of the blog, this post will be an open-ended stream of consciousness. The most recent ramblings will be at the top. 

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

In summary:

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.

July 2007:

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:

The Lies Get Larger At The End Of The Cycle

We're at that point in the cycle wherein the salesmen have to try that much harder to con the marginal dunce, to make the quarter. It's Ponzinomics, if you didn't buy your degree from Wharton, you wouldn't understand it. The biggest jobs miss since 2008 is the catalyst for a 50 point S&P short-covering rally, so far...

The casino was reaching prior oversold levels, and bounced at the 200 day. Both open gaps above the market just got closed, leaving multiple open gaps below the market, going back to December.

The Transports were multi-decade oversold at the end of last week:

Some bimbo on CNBC last week, it doesn't matter which one, was advising not to worry about the Transports, because the Railroads just made a new high.

Which is what happened in October 2008:

The long awaited Boeing crash has arrived compliments of 737s falling from the sky. Somehow the news always corresponds with parabolic speculation coming to a screeching halt. 

The largest weight Dow component was down -17% from recent highs at the open. Volume is ~8x average at midday.

Chinese stocks are driving this short-covering rally back into the weekly island:

Oil is back-testing the broken trend-line deja vu of December

Retail sales in January "beat" expectations, but December was revised lower still. The fake wealth effect took a heavy toll. This latest (delayed) data will revise down Q4 GDP and Q1 GDP, as GDPNow just fell back to .2%

Don't worry, it's only retail apocalypse:

"...just two months into 2019, it sure looks like the U.S. retail scene will continued to be plagued by a stunning number of store closures — and perhaps quite a few retailers going out of business for good."

In a single 24-hour period last week, Gap, J.C. Penney, and Victoria’s Secret announced they would be closing more than 300 stores combined"

Retail short-covering another last leg of the stool:

I had an epiphany today that one of the drawbacks with Ponzinomics, among a few others, is that the downside of the Ponzi cycle takes its toll on certain professions - realtors, investment advisors for example that rely upon steady asset price inflation. And when that goes in reverse, it feeds back into 'Conomy in the form of lower commissions.

Of course then the reasons to buy must become more urgent and hence more specious. 

Which is where we are in the "cycle"

I call this the crash ratio because it shows that the casino is held aloft by fewer and fewer very large stocks

This chart shows that last year's 10% and 20% decline have not deterred Skynet from shorting volatility

This should do the trick...

Sunday, March 10, 2019

An Inconvenient Con Job aka. "No One Saw That Coming"

Fortunately, everyone has a good excuse, they can just say they believed Trump...

For several years after 2008, skeptics of printing money to inflate asset values described the policy as "Extend and pretend". However, after the 2016 election it was reinvented as "Greatest 'Conomy ever". It was the exact same con job, under new management featuring higher interest rates and reduced casino liquidity. A bigger circus and no safety net. 

Here we see U.S. homebuilders with rest of world (ROW) stocks. I knew I had seen that chart somewhere. 

There are several reasons why Larry Kudlow still predicts 3% GDP in 2019, all data to the contrary. First off, because he's a dunce and a con man. Although that's strictly my opinion based upon listening to him for thirty years. Secondly, the government shutdown has obfuscated and further delayed already delayed backwards looking data. Third, economists right now uniformly believe that the impact of laying off 800,000 Federal workers for a month and forcing them to use local food banks, will "rebound" in the second quarter once they pay off their payday loans at 400% annualized. Fourth, they assume that tax refunds absconded from the middle class to the wealthy won't impact 2019 GDP, because they ignore the fact that the marginal propensity to spend is far higher at lower incomes. Fifth, they assume that the critical December holiday sales collapse was a "fluke", as was Friday's payroll collapse. But most importantly, they are all ignoring the collapsing fake wealth effect which is what the past ten year "expansion" was predicated upon. Which I will now discuss next...

The reason why economists can't predict recession is because economic data is lagged. It's impossible to predict the future by looking in the rear view mirror. Markets usually lead the economy, however, in this cycle the relationship between markets and the economy was inverted via the trickle down "fake wealth effect". The operational gimmick during this entire cycle was the well known "quantitative easing" policy of buying up government bonds in order to force investors further out onto the risk curve. Global policy-makers expressly pursued this policy to generate an artificial sense of economic wealth and well-being. The long-term net effect was to drive a chasmic gap between market valuations and long-term earnings potential while wholly desensitizing speculators to risk. On top of that shit pile add in record stock buybacks which are also highly cyclical. Billions in fraudulent Chinese IPOs. A tax cut for the rich paid for with higher interest rates for everyone else. A year long trade war. Cap it off with a reversal in Fed balance sheet liquidity now into the second year. 

All of which means that the new "leading indicator" is speculative appetite, best indicated by pot stocks:

Meanwhile, the fake wealth effect is going in reverse.

Here we see that household (total) wealth as % of GDP (red line) reached a new record high in 2018 and then rolled over in the fourth quarter. The blue line is the median sales price for homes:

If we look at the rate of change of home prices on a longer-term view, we see that there was never a time when a negative decline did not lead to or precede a recession.

Going back sixty years:

Going back to the household net worth graph and this time overlaying the Fed balance sheet, the question on the table for anyone who can fog a mirror, isn't why this is happening, it's why do they assume it's not happening?

What matters is that this time around everyone 100% agrees with my opinion on Larry Kudlow.