Monday, September 30, 2019

In Greed We Trust

What is religion today beyond recycled greed and self-interest, bounding down the road to Perdition, behind the Anti-Christ...

Modern finance theory can't explain why nominally intelligent people keep making the same mistakes over and over again, each time expecting a different result. It all comes down to three things: greed, greed, and more fucking greed...

Pot stocks
FANG internets
Crude oil
Reflation Trades
Chinese/EM stocks

Recession safe havens (Utilities/Bond proxies)

A cogent mind would ask how do we break this monetary-fueled gambling addiction and otherwise restore sanity to real investment? It all comes down to breaking perverse incentives. As always, greed and instant gratification are at the heart of the problem. Which explains why Wall Street analysts are almost always uniformly bullish on stock market prices. There is no upside from downside, hence better to be blindly optimistic. 

The current instant gratification model asymmetrically rewards short-term performance over long-term results and protection of capital. This asymmetry is embedded in the annual Wall Street bonus model. It's at the heart of what drove otherwise moderately intelligent people to buy up insolvent subprime CDOs in the weeks before they imploded. After that they returned to bagging groceries where they belonged in the first place. 

It's what drives Hugh Hendry's "imagined realities". It's the monetization of useful idiots.

"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."

Clearly, central banks have successfully reverse engineered this endemic greed addiction via their stimulus programs. The trickle down fake wealth effect never fails to place this society in a state of blissful narco-coma, however temporary. Central banks are subsidizing rampant speculation. In a sane society not otherwise obsessed with zero sum gambling, the central bank incentives would drive economic investment in the real economy. Which would mean ending the self-destructing perverse addiction to low interest rates. In a society over-flowing with capital, the cost of capital is not the problem, the lack of real return is the problem. The fact that we need ever-cheaper capital to make this model appear to work, is the key sign that this model is no longer working. 

In the meantime the downward spiral continues. What we notice from Disney markets is the vast amount of market manipulation taking place on and around options expirations. The vast amount of market manipulation taking place at the end of each month. And the even greater amount of market manipulation attending the end of each quarter when bonus accrual takes place.

The abiding academic belief that these are still "random markets" is a patent falsehood. These are heavily manipulated markets using free money and leveraged derivatives to achieve short-term performance benchmarks. Today's financial curriculum has in no way caught up with the modern day alchemy of money-printed markets.

Here we see via the Biotech sector that algorithmic risk-seeking peaks at the end of quarters. Although this latest quarter (Q3) has been a bit of a struggle, indicative of collapsing liquidity:

Add-in record leveraged stock buybacks and the amount of market manipulation taking place right now is unprecedented. Again, all part of the obligatory deception to drive abiding belief in the status quo. Markets must never fully price in underlying risk.

One year ago, a few pundits warned that the impending stock buyback blackout period would lead to significant volatility. They were right.

“Buybacks provide a tremendous amount of support to the market, and with blackout season coming, we won’t have that added measure of support”

What could go wrong?


September 27th, 2019:

In the Information Technology sector, 29 companies have issued negative EPS guidance for the third quarter, which is nearly 45% above the 5-year average for the sector of 20.1. If 29 is the final number for the quarter, it will mark the highest number of companies issuing negative EPS guidance in this sector since FactSet began tracking this data in 2006."

The Information Technology sector is expected to report the second highest (year-over-year) earnings decline of all eleven sectors at -10.1%. At the industry level, four of the six industries in this sector are projected to report a decline in earnings: Semiconductors & Semiconductor Equipment (-30%), Technology Hardware, Storage, & Peripherals (-14%), Electronic Equipment, Instruments & Components (-9%)"

China's markets are closed for the remainder of this week and through October 9th for "Golden Week", so who will put a fake bid under their markets is anyone's guess.

Needless to say, it won't be Trump:

Speaking of central bank muppets, gold is getting shellacked during Golden Week. Just the latest momentum traders taken to the woodshed:

"Gold speculators sharply raised their bets this week for a 2nd straight week and by the most in the past seven weeks. The boost in bullish bets brings the current standing to the highest level since July 5th of 2016"

Which leaves only one bubble still standing...

Sunday, September 29, 2019

A Fatal Crack Addiction: Cheap Money.

This society of corporate automatons has many deadly addictions, however none is as deadly as the addiction to cheap money. The key lesson NOT learned in 2008 is that the U.S. financial sector is run by proven criminals. The problem with bailing out criminals is that it invites far greater criminality...

What springs to mind when I say criminality, is illegal aliens buying $750k McMansions no money down, using subprime loans circa 2007; however, that is chump change as to how cheap money has been abused in this cycle. Today we are witnessing the most fundamentally warped abuses of modern financial theory never before imagined. The entire financial and economic community is now complicit in this fraud. 

Once upon a time when banks did most of the lending, economists fretted over the liquidity trap - a scenario in which interest rates reached a level at which no one would be willing to lend. After, all why would anyone lend money at 0%, when the downside from default could range to -100%.

Enter modern day securitized markets wherein interest rates have now fallen below negative territory for trillions of global assets. This unprecedented phenomenon can only be explained by the perversion of modern day finance which now places deflationary economic outcomes ahead of the real economy. And why today's gamblers want lower interest rates so badly. It's a very unhealthy addiction for the real economy.

Cheap money has put this society into a brain dead coma:

"What our fake-businessman president fails to grasp is that doing so would leave the central bank with little way to fight a recession should his trade war and other economic policies tip the economy into a downturn...most people don’t approach the U.S. economy like a failed Atlantic City casino"

Under the discounted cash flow model, tradeable securities are priced based upon the underlying discount rate. When that rate falls, the "value" of the future cash flows rises. Central Banks are now taking full advantage of this fact by pushing investors further out on the risk curve by collapsing interest rates. Worse yet, these perverse incentives now prioritize investment in secondary securities far above real fixed investment. Because fixed investments do not trade on casino markets, which means there is no opportunity for a capital gain. Take a construction project for example - there is no available liquidity exit for that type of investment. This starvation of the real economy creates a downward death spiral that paradoxically leads to lower interest rates. Essentially, deflation is now cannibalizing the real economy while risk assets remain artificially elevated.

Record negative interest rates should have been viewed as a warning sign that global deflation is totally out of control. Instead, it was subsidizing extreme speculation:

And bidding up bond proxies to ludicrous valuations:

Worse yet, companies are swapping out workers for automation, compliments of free money. Which is a recipe for mass unemployment.

And of course mass corporate bankruptcy:

"Job cuts announced due to [corporate] bankruptcy have hit the highest level since 2009"

The obligatory delusion that lower interest rates leads to more "investment", assumes the economy is not going into recession. Despite the collapse in interest rates, it's now a lack of real fixed investment that is exerting downward pressure on the economy.

However, hot money "investors" in secondary markets don't care as long as they get lower interest rates. Which is why they don't fear the trade war. 

"The downturn in business spending has been blamed on the Trump administration’s nearly 15-month trade war with China"

This lethal malincentive of death spiraling interest rates continues until the day when the door unexpectedly slams shut on junk IPOs, insolvent fracking stocks and various other Ponzi borrowers dependent upon rollover financing. 

And then it's time for everyone to say once again:

"No one saw it coming"

Except for the exact same guy who saw it coming last time.

July, 2007: Chuck Prince Wants To Keep Dancing. Can You Blame Him?
"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."

Saturday, September 28, 2019

The Make Greed Great Again Pump And Dump. Is Over.

The net effect of MAGA was to cut taxes for the ultra-wealthy and raise interest rates for everyone else. Which is deflationary, and hence a very expensive vacation from responsibility...

The trade war substantially accelerated global deflation, but then again, that was the "plan":

ZH: The Fed Is Underwriting Trump's Trade War

The best laid plans of known con men often go awry.

Trump's biggest mistake was firing Janet Yellen. She never drank the MAGA Kool-Aid. Whereas, like every other dunce, the current Fed was fooled by Trump's "Greatest 'Conomy in U.S. history" bullshit. Sexism is going to cost MAGATards everything. Everyone knows men blow shit up better than women. 

Trump: Sept. 26th, 2016:
"We are in a big, fat, ugly bubble, and we better be awfully careful. Because we have a Fed that is doing political things by keeping interest rates at this level"

On the subject of mass delusion, it's indicative of America's moral collapse that no matter how much poverty flourished, economists at large and indeed most people, would never stop believing that greed solves poverty, even while the burial plot kept getting deeper and deeper...

 “At every level we want more. Whether it’s the currency of beauty, the currency of fame, the currency of branding or the currency of sexuality, ‘Fake it till you make it’ can be just as valuable as having money."

"We’ve gone from a culture that prized hard work, frugality and discretion as the central tenets of the American Dream to a culture that prized celebrity, bling and narcissism"

Donny Land

Most never once stopped to question the self-destructive competition for "more". Even when the system of capitalism morphed from a system to generate prosperity, into a zero sum Darwinian game of unprecedented exploitation.

No matter how many warnings reality provided. No matter how many asset bubbles ended in greater insolvency. A society incapable of learning. Endlessly manipulated and conned until the American Dream turned into a hunger games Powerball lottery.

This entire mirage is compliments of "survivor bias" - always referencing the ever-dwindling pool of winners. While ignoring the ever greater pile of bodies stacking up in the background.

It's how all Third World countries operate. Poverty is invisible.

"No one saw it coming"

The "free money" spigot just slammed shut:

"The party is over. That’s the clear and unequivocal message coming from the market for initial public offerings, or IPOs, in the wake of the failed and overhyped IPO for Peloton, the exercise bicycle company, and two recently pulled IPOs—the one last week for the We Company, parent of WeWork, and the one yesterday for Endeavor Group Holdings, the parent of Hollywood superagent Ari Emanuel’s fever dreams"

"Tim Armour, the CEO of the Capital Group, which has nearly $2 trillion in assets under management, said at a Financial Times conference last week that the demise of WeWork’s IPO may be akin to the proverbial ringing of the bell at the top of the market."

"In its most recent report, Fasanara likened negative rates to “the magic and poisonous blood-red wishing apple, sending Snow White into deep sleep.”

The liquidity crisis arrived in September in the overnight lending market, but it was assiduously ignored. 

August 17th, 2019:

"Last month the U.S. Treasury laid out its plans to borrow $814 billion between July and December"

U.S. dollar liquidity is deteriorating and “is reaching a point where it may require drastic action if measures aren’t taken to address it soon,”

This is classic Econ 101: "Crowding Out" wherein public fiscal deficits suck up all available liquidity in debt markets. 

U.S. debt, year-over-year change, $billions:

The record central bank priming has led to record corporate bond issuance at record low yields (high prices). Which has created a self-destructing mega bond bubble consisting of ebbing demand and inflated supply at ridiculously low interest rates which in no way price in default risk. As in the IPO market, record liquidity artificially suppressed insolvency while the financing window remained open. 

"Liquidity risk is highly underestimated today,” the hedge fund wrote. “With it, the so-called ‘gap risk’, especially overnight gap risk"

"A volatility formula based only on the high-low range would fail to capture volatility from gap or limit moves. Wilder created Average True Range to capture this “missing” volatility"

U.S.A.rrogance Lost Cold War 2.0

"Rome seeks its own glory, wars against other peoples to subjugate them, revels in material existence, lives off the work of slave labor, allows many to die of poverty and starvation, and promotes entertaining circuses and gladiator spectacle."

What we are witnessing in real-time is the "controlled" demolition of Globalization. Controlled, being the operative fantasy. This never-ending corruption infotainment spectacle has served a useful purpose in diverting attention away from what is going on in the real world, back towards ad-sponsored blowhards. America's last competitive advantage being continuous bullshit.

"At the end it became a non-stop buffoon-o-rama"

History will say that extreme arrogance, greed, and abject ignorance of history combined to play a pivotal role in America's downfall on the world stage. Three decades ago, the U.S. accelerated the downfall of the Soviet Union via a Cold War arms race expressly intended to collapse the Soviet economy. The belief now is that a trade war will do the exact same to China - collapse a competitive hegemon. And win re-election.

Really, what could go wrong?

“This is not a struggle which can end up with one loser and one winner”

Yet, that’s precisely the way Trump and some of his hawkish allies have framed their confrontation with the Chinese. Talk of a “decoupling” between the world’s two biggest economies — once a fantastical notion — appears to be gaining traction." 

The only decoupling taking place right now, is from reality.

Here below, we see that this existential crisis was entirely self-inflicted. Prior to Y2K and China's admission to the WTO, U.S. manufacturing employment was relatively stable and corporate profits were growing at an organic rate. However, post 2001, the decade-long outsourcing bonanza collapsed U.S. manufacturing while profits skyrocketed:

Here we see manufacturing employment (blue line) with labor share of the economy.

One and the same:

2001: Issues In China's WTO Accession
"United States trade negotiators played the lead role in negotiating China’s entry into the world economy."

"China, it is sometimes said, “has an economic vision that is fundamentally not free-market oriented but mercantilist.” Some fear China will displace Japan as our most troublesome trading partner."

This argument is fundamentally flawed for several reasons. Perhaps most importantly the U.S. global trade deficit, which reached an all time record of $330 billion in 1999, primarily reflects the extraordinarily low rate of savings in the United States. Because of meager domestic savings, a large fraction of U.S. domestic investment must be financed by borrowing from abroad."

Of course the argument that China is mercantilist was not flawed at all, it was 100% prescient. China was merely copying Japan's model. The fact that the U.S. needs to run a massive trade deficit to fund over-consumption has nothing to do with the mercantilist argument. China's stance on trade has not changed in decades. Again, the U.S. is the only country that used to believe in free trade. Still believing in trade-financed profligacy of course. 

Therefore Trump must now reverse two decades of industrial arbitrage in time to win the election, while running a $trillion+ budget deficit. It's an impossible fool's errand of the highest order, hence how Trump got the job. If he amplifies tariffs as some have suggested in recent days, he faces imploding consumption and corporate profit. Or, as floated on Friday, he can target the bilateral financial linkages, which will bring about an even faster global market collapse. One that is already well underway. 

Barring another "truce" or interim trade deal, the next round of tariffs goes into effect October 15th. Unfortunately, no one knows what Trump will do from one day to the next, often contradicting himself several times in the same week. Having no real strategy other than keeping a Twitter mob entertained. Nevertheless, the non-stop market manipulation is having less and less effect on markets. Historians will say that he backed himself into a corner and had no way out politically, economically, or financially. 

No question, global central banks have sponsored this obligatory delusion of controlled and "easy to win" disintegration of Globalization. Which is why we are now seeing unprecedented divergences between global macro economic reality and risk asset prices. Capital managers are unwilling to accept a zero % rate of return, since it's not their money anyways. Which is why they are betting on the controlled "decoupling" hypothesis.

Global capital(ism) is at risk like never before in modern history, but one would have no way of knowing it by risk positioning and the continuous stream of bullshit.

What were home gamers doing throughout all of this?

Getting more and more stoned.

“Most patients have reported a history of using e-cigarette products containing THC"

Friday, September 27, 2019

Happy Nuclear Option

On the eve of China's national anniversary next week, Trump is planning a special gift to China by blocking all U.S. investments in Chinese companies - $1.2 trillion of which are listed in the U.S. His goal is to crash the Chinese stock market in order to gain leverage in the trade war. Sadly, for those who would claim they never saw it coming, having a moron as president does not meet the definition of a "Black Swan event". Quite the opposite - it's ample warning.

Anyone who trusts Trump will trust anyone, and can't be saved from their own cynical acceptance of "corruption as usual"

Trump's buffoonish arrogance never fails to entertain and delight his Twitter mob. And what central role does the alt-right media play in concealing market risk by monetizing useful idiots with lethal Bannon-esque Kool-aid.

"We hold all the cards in the trade war"

What we see below via this week's headlines is called blatant market manipulation, which used to be illegal before criminals took over the White House. I suggest this will be a good hard lesson for true believers in rampant criminality. 

Given that they are the target market being manipulated:

"Shares of Alibaba and other Chinese companies plunged in a sudden move after reports the White House is considering ways to limit U.S. investments in China. 

Bloomberg News reported on Friday Trump administration officials are weighing delisting Chinese companies from American stock exchanges and putting a limit on U.S. government pension funds’ exposure to the Chinese market."

Delisting Chinese companies would affect billions of dollars in investment pegged to major indexes, just as the Chinese government is taking steps to increase foreign access to its markets."

U.S. Momentum Tech just took out the last line of support:

Trade-war ravaged cyclicals also broke the 200 day:

Small caps as well:

Wall Street is finally realizing that funding the implosion of the economy is a dumb idea

"Multiple initial public offerings have gotten trashed, most recently exercise bike maker Peloton

“When it comes to ‘platform’ companies, venture capital has done a generally terrible job building these businesses into viable companies,”

It was a great week for Utility stocks, so perma-bulls went home fat and happy.

Right once again.