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.
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?"
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.
"As long as the five most overbought and overowned stocks don't implode, this will all be fine"
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:
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.
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.
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...
Picture 100 x LTCM, because that's what's coming...
