Sunday, June 30, 2019

Global Synchronized Asset Crash

While the middle class eroded for another ten years straight, the burden of truth has remained on us skeptics of "free money". As it was last cycle, the price to pay for popular delusion will be steep...

No bearish blogger can compete with the re-allocation of $200+ trillion in global assets from risky to riskiest taking place at the end of the best first half in two decades. Attended by human history's largest tsunami of industry bullshit. The popular delusion in 2007 was that garbage mortgages could be packaged together into a lump of coal and come out the other side a AAA-rated diamond. The popular delusion in this era is on a magnitude that dwarfs the last one - the ubiquitous belief that printed (free) money is the secret to effortless wealth...

One of the reasons why the Democrats can't find their ass with both hands ahead of 2020 is because they too have been propagating the popular delusion that low interest rates improve the economy. Ironically, Trump got elected due to "free money" funding the steady erosion of the middle class, yet now he propagates the delusion more than anyone else.

Despite ever-more "free money", the quality of jobs in the U.S. has deteriorated for four decades straight, as has the quality of benefits. Underemployment is the biggest economic issue of our time, seldom discussed, and NEVER addressed. Trapped in a deflationary death spiral - cheap capital funding more automation - leading to cheaper capital.  

Until politicians stop propagating popular delusion and hence always looking for gimmicks and simple solutions, nothing will change. The steady erosion of the middle class will continue. 

Case in point, some Democratic candidates are talking about printing up some free money and using it to write-off all student loans. 

What they should really do if they wanted to solve the problem, is instead of printing up a big pot of money, they should just make student loans legally dischargeable in bankruptcy, the same way EVERY OTHER kind of debt can be discharged. That would allow borrowers to make their own choice - some would file bankruptcy, others with small loans would continue paying, but then it would also "discentivize" future bad lending practices.

After 2008, the enslavement of a generation went into over-drive, compliments of popular delusion, and societal moral bankruptcy. You know it's bad when even the banksters are against bad lending:

"JPMorgan CEO Jamie Dimon sounded off on the massive student debt crisis he says is crippling Americans and wiping out the middle class"

Getting back to the topic of gambling and where things stand now, first level set to the 2016 Shanghai Accord. 

The optimists say this is mid-2016 but with an impending rate cut. Us "pessimists" say this is 2016 with a trade war - the Shanghai Discord. 

Not everyone can be right.  

This time around, us realists have the bond market on our side. The yield curve (below) indicates that long-term bond yields are now lower than short-term bond yields. Which normally makes no sense - why would anyone accept a lower yield on a riskier (longer-term) bond? Because the market is saying that while rate cuts are indeed coming, the Fed is way behind the (yield) curve. 

This has now all become a bet on the economy and the Fed's ability to pull it out of recession, despite their limited ammo and the fact that they are once again behind the (yield) curve:

Bear in mind that the tools central banks have to "reflate" the economy have the same lubricating effect on risk markets at the end of the cycle as they do at the beginning. Meaning that all of this yield curve collapse and attendant rate cut talk is pushing investors further out on the risk curve, late in the cycle. 

Late cycle, early cycle, what's the difference?

The difference goes back to subprime and economic risk. There was a point in time during 2007/2008, as documented in the book and movie "The Big Short", when in fact the insurance (CDS) risk premium on subprime bonds went DOWN, even as economic risk rose. Why? Because ironically, as the global economy deteriorated, central banks pushed yields lower, causing a late cycle yield-seeking rush into risk. Those betting AGAINST subprime took their biggest drawdowns right before the crash.

That's where we are right now in the cycle.

Everyone knows that corporate debt is the next subprime, but they keep shoveling money at it, hoping insolvency will improve:

"Corporate borrowing poses a danger to the global financial system and could trigger a crisis in the same way US sub-prime mortgages sparked the 2008 banking crash"

a dramatic rise in borrowing in recent years by businesses with low credit scores means the market for corporate debt is becoming increasingly unstable...collections of low-grade corporate debts packaged for sale to investors, is reminiscent of the steep rise in their forerunner – collateralised debt obligations – that “amplified the sub-prime crisis”.

the most visible symptom of potential overheating is the remarkable growth of the leveraged loan market"

“I think one of the unintended, yet in hindsight predictable, outcomes of ZIRP [zero interest-rate policy] was to force investors into looking for returns anywhere they can find it”

The ad-sponsored media has done the most in propagating popular delusion. The quality of U.S. news at this juncture is the other side of dog shit. 

This week in Barron's
Ignore Insane IPO Valuations. This Is Not A Bubble 

What this all means is that the term "safe haven" is the most bastardized term on the planet.

Yes, again. 

There's only one safe haven: "safe" being a relative term.

Gamble at your own risk.

Saturday, June 29, 2019

The Art Of No Deal

Somehow Herbert Hoover Three-Card Monted stocks to the best first half in two decades, based on a trade war escalation. Let's face it, the guy is good. The secret to managing any old age home is the continual lowering of expectations...

This headline was from seven months ago, at the cusp of a "deal". Today, nowhere near a deal, and only 45% chance of a deal between now and the end of the year. 

It appears that Wall Street's unanimous expectation for a trade truce was no accident. One of the side benefits of Treasury run by Goldman Sachs.

Trump said: “We’re taking in a fortune, and frankly [it’s] not a very good thing for China, but it is a good thing for us."

The business community by and large disagrees...I don’t see any path to a deal and we’re stuck with 25% tariffs on $250 billion of goods.” 

The issue of intellectual property remains a key sticking point despite the agreement to restart trade talks...The Eurasia Group, for its part, sees only a 45% chance that a trade deal gets done this year"

Last November, that truce led to a fleeting RISK ON rotation to beaten down cyclicals (banks, transports, energy, industrials), EM stocks, and of course semiconductors. How long that party lasts is anyone's guess. The last time it lasted a few hours on Monday:

The longer-term implications of this renewed truce is that the recently escalated trade war drags on indefinitely with no resolution in sight. Meanwhile, it vindicates the Fed's "patient" approach and lessens pressure on them to cut rates in July. All of which means double bad news for Trump's 2020 election rigging gambit, because it puts no additional pressure on China to settle the trade war and no pressure on the Fed to cut. The slow steady bleed through to the economy and corporate profit will continue.

"Seven of the 11 sectors have seen more companies issue negative EPS guidance for Q2 2019 relative to their five-year averages"

The net effect of this latest "truce" - is that it locks in tariffs at the new higher level set in May. Meaning May was the escalation selloff and June was the "trade war hopium" rally which vaulted the casino to the best first half since the Asian Financial Crisis imploded the second half of the year. The net result is that gamblers bought an escalation in the trade war with both hands.

Only the Casino-Croupier-in-Chief could pull something like that off. It reminds me of the TARP bailout rally. A lot of short-covering in the face of very bad news. 

"Best first half since the Asian Financial crisis"

"Stock analysts overall are sanguine, predicting earnings will grow 6.7% in the fourth quarter and in double digits early next year...that forecast hinges on a sweeping trade deal with China"

Re: First article above:
"The Eurasia Group, for its part, sees only a 45% chance that a trade deal gets done this year"

I was starting to wonder, how much of this recent ramp was algos painting the quarter...

"This means so much of stock trading is now in the hands of automated buyers and sellers that the market is increasingly sensitive to headlines and more prone to sharp price swings"

Passive funds have attracted $39 billion of inflows so far this year, whereas active funds lost a whopping $90 billion in 2019"

Friday, June 28, 2019

The Trump Of Denial Over Reality

A year and a half of trade war brinkmanship is coming to a head this weekend. Gamblers are euphoric. Somehow they've come to believe that trade wars are good and easy to win...

Wall Street is unanimous in their belief in another truce. The best case scenario is also their base case scenario.

“The “best case” for this G-20 is a similar outcome to the last"

"...While both leaders appear open to a truce, they have hardened their positions ahead of the talks, leaving it unclear how the United States and China will resolve the tensions that have thrust the world’s two largest economies into conflict...There are still big substantive issues to resolve...I don’t know how you make a deal in the next year and a half that changes the direction of the U.S.-China relationship.”

“They want to make a deal more than I do,” Trump said. “The Chinese economy’s going down the tubes.”

There is a strong belief in China — both inside and outside the government — that Mr. Trump needs a deal more than Mr. Xi, given the 2020 election."

This society is no stranger to groupthink complacency and mispriced risk. Three years ago this week, markets rallied hard into the Brexit vote under the assumption that a "remain" victory was a lock. When the "leave" camp won, global markets shit a brick. The S&P futures were limit down overnight. And again, later that year, markets rallied ahead of Clinton's locked win. Only to be shocked by Trump's victory. Limit down. Of course, subsequently markets went vertical on the prospect of tax cuts.

Now we will find out if that initial sell instinct was correct. 

Based upon (over) valuation and collapsing fundamentals alone, Goldman puts the risk of a crash at 60% - the highest since the Global Financial Crisis. That doesn't include any additional impact from trade war escalation.

Semiconductors are ground zero in this trade war, with China demanding that the restrictions on Huawei be lifted.

Semis are finishing up a three wave rally ahead of the meeting:

Via Reuters:
“Chipmakers are a proxy for trade optimism”

“They have become the trade du jour for traders betting for or against a trade deal”

Any questions?

Momentum gamblers still haven't figured out the party is over:

Don't try this at home

You know you're an optimist, when:

The global carry trade has flash crashed three times in the past several years: Brexit vote, Trump election, G20 selloff in December. Since last week's FOMC, the USDJPY pair have been trading lower along with bond yields.

Oil futures algos have already priced in a trade agreement, despite substantial downside risk:

"A further deterioration in relations between the U.S. and China could set off a chain of events that would push oil down more than 50% to as low $30 a barrel, according to Bank of America Merrill Lynch."

That may cause Chinese authorities to let the yuan weaken, making oil that’s priced in dollars more expensive in the world’s largest importer and stunting demand growth, he said. Beijing might also decide to ignore Washington’s sanctions against Iran and resume crude imports"

"It was a triumph of denial over reality"

"Investors poured $14 billion into US equities last week, the most since March of last year"

investors essentially shrugged off meaningfully weak economic data that has been plaguing key US regions, like the Empire State Manufacturing Index posting its largest decline in nearly two decades "

The VIX has been rising in tandem with the market. We haven't seen that since January 2018:

June 26th, 2019
Stock Funds Post Largest Two Week Inflows Since The Election

Wednesday, June 26, 2019

No, They Don't See It Coming

The reason "no one" saw this coming is because delusion is fully priced in. The problem with bailouts is that gamblers just keep onboarding more and more risk until everything implodes at the same time. Instead of running away from risk, they run straight toward it. Economists used to call this "moral hazard", back before they adopted Disney-O-Nomics:

mor·al haz·ard
"lack of incentive to guard against risk where one is protected from its consequences"

Moral hazard exhibit A (2008) and B (now). Both times when the Fed signaled full capitulation, gamblers became inappropriately euphoric and dropped their hedges.

There are several reasons why Wall Street and average investors don't see the biggest crash since 1929 coming, primarily because Disney World has come to fully believe in Disney Markets. Having been well-conditioned to believe ANYTHING except the truth. What passes for economics today is merely recycled failure waiting for the next central bank bailout. 

Today's ubiquitous true believers in Disney markets point out that today's set-up is eerily similar to 2016's Shanghai Accord - coordinated CB bailout, earnings recession, commodity selloff, rotation to deflation plays, all of which ended up just fine - once Trump got elected.

The most obvious difference of course is that the goal of the Shanghai Accord was to keep China intact. Whereas the stated goal of Trump's trade war is to implode China. Which makes this era, the Shanghai Discord.

Three years of vacation from reality later, and the Accord and Discord are "the same", except for these main risks that have accumulated in the meantime:

More global debt, more trade war, more concentration risk, less hedging (see skew above), more euphoria, no tax cut to offset deflation, and of course a far bigger stock market bubble funded entirely with debt. Aside from that the two eras are identical. 

First off, in any other cycle, the return to extreme deflation would be seen as a reason for extreme caution. Now, it's seen as a reason to front-run central banks. Here we see the MAGA reflation delusion is now fully dead, as global bond yields return to the pre-election lows amid record negative yielding global debt. 

"What, me worry?"

At last week's FOMC-sponsored all time S&P high, the only bullish argument was that things are so bad, one must make a full bet on a Fed bailout. In other words, there is absolutely no bull case other than to believe that printed money is the secret to effortless wealth. Even by the bulls' own admission.

Barron's, June 21st, 2019: How To Make Easy Money
"You really have to stay appropriately bullish in the face of nothing but bad news"

Which explains how escalating trade wars, collapsing global growth, negative bond yields, declining corporate profits, peak jobs, imploding housing, all get bought with both hands. Delusion is fully priced in.

Meanwhile, as I've shown many times, today's "safe havens" have all morphed into extremely crowded momentum plays.

Consumer Staples for example, which just failed at the same level as Jan. 2018:

The other big difference from 2016, is that MAGA inflated a much bigger stock market bubble. Most of which was due to leveraged stock buybacks which neither benefited the economy nor the average stock. However it did inflate corporate debt to a record high while generating unsustainable earnings growth. It also created the largest non-recession deficit in U.S. history ex-WWII.  

Further to the topic of market concentration, Bob Pisani wrote an article today on the topic I wrote about yesterday: The dumb money bubble

Instead of MAGA, he replaces Google with what else, Facebook and Disney.

"As long as the five most overbought and overowned stocks don't implode, this will all be fine"

What all of Wall Street and economists still ignore is the role of social mood in markets. They place full faith in their Magic 8 Ball derived forward earnings estimates, which are currently turning into a pumpkin.

Way back in 1936, John Keynard Maynes coined the term "Animal spirits" as an early description of social mood. I call it greed. Nevertheless, few people it seems wish to ascribe late cycle insanity to something as pedestrian as misplaced euphoria.

All of this algo-manipulated euphoria serves only one purpose.

To make the quarter. Or in this case, the best first half since LTCM blew up the world in the second half of the year, as money piled into the U.S. following the Asian Financial crisis. 

Then as now, the U.S. was the last domino to fall.

"Global stock markets will record their best first half performance in more than two decades, as central banks signal a new wave of stimulus to prop up stuttering economies."

Picture 100 x LTCM, because that's what's coming...

Tuesday, June 25, 2019

A Big, Fat, Ugly MAGA Crash

The political movement based solely upon a vacation from responsibility, paid for by all future generations, is now backed into a trade war quagmire of its own making. The reign of greed and corruption now self-destructing...

Going into the critical G20 summit, the Fed "put" beneath Trump's trade war re-election gambit, just got removed:

And no, they don't see it coming:

Fittingly, the four largest cap stocks in the casino right now are dubbed the 'MAGA' trade: Microsoft, Apple, Google, Amazon. In the past year, each of these mega caps took a run at the $1 trillion market cap, and then spontaneously imploded shortly thereafter. Microsoft is the last one above that level, making it the most over-owned and over-bought stock in the history of the planet, compliments of the dumb money bubble and passive indexing.

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

Someone who can be believed doesn't need to start everyone sentence with "believe me":


The catalyst for implosion today was the unwinding of what Zerohedge described last week as Trump's 2020 election rigging strategy. The plan to use trade war brinkmanship to coerce Fed policy. Because what could go wrong.

Today we found out: Having had sand kicked in his face, Trump's nominated Fed chief Powell came out swinging, indicating that the Fed policy mandate does not include rigging elections.

Fed Chair Jerome Powell said the central bank is assessing whether current economic uncertainties call for lower rates...He also said the Fed remains independent of “short-term political interests.

At the same time we learned that lower rates may not be forthcoming, we got news today that the Fed has lost control over the housing market:

"lower mortgage rates haven’t unleashed a new wave of demand"

“It’s harder for the builders to compete against resale inventory that is priced significantly below where their asking price is now”

The other side of the trade ledger is capital flow:

"Chinese buyer enquiries on U.S. property were down 27.5% in the first quarter of 2019 from the comparable year-ago period"

It takes a special kind of hubris to take an existing bubble, make it 10x bigger by filling it with nothing but bloviated hot air, and then believe that the problem is "fixed".