The Walls Are Closing In On I, Clownius

I've said all along, the choice is between humility or humiliation. The latter path was chosen. Rule #1: Never go FULL Trump...

History will not be kind to the Carnival-Barker-in-Chief:

All of Trump's lies are coming home to roost as he is learning the lesson every toddler learns the hard way -  that the "strategy" of ever-larger lies ends very badly. Trump's economic con job is collapsing in real time. But unfortunately he was far too successful in convincing the 'C' students at the Fed, who are among his true believers in the "greatest economy of our lifetimes". Now he is trapped by his own lie, unable to explain why a strong economy needs a massive reduction in interest rates.

This week he is coming unhinged ahead of the Fed's Jackson Hole Summit on Friday. Most of this is barely literate much less coherent. The second post regarding Germany is particularly batshit crazy, on par with his entire presidency. The "strongest dollar in history" comment is a blatant lie. 

"Strongest dollar in history"

The (relatively) strong dollar drives inflows into U.S. financial assets. The reversal of which will not be kind to true believers in non-stop bullshit.

What changed in the past week is that a week ago Trump blinked in the trade war with China. Now the blood is in the water. Wall Street is no longer willing to back the de facto loser. Article after article after article explains how Trump lost the trade war. The realization has arrived that Trump is playing checkers against an opponent playing chess. Trump over-played his hand by listening to Peter Navarro at the expense of everyone else on his economic team:

"The average American household will be down $1,000 per year thanks to the newest round of tariffs on Chinese goods, according to J.P. Morgan."

The fact remains that were it not for 4% borrowed GDP, the U.S. would already be deep in recession. Which is why the only stocks making new highs right now are momo junk and recession stocks. Led of course by the Keynesian bombing of foreigners - primary beneficiary of mega deficits:

Nevertheless, the myth of the "strong consumer" lives on in the minds of con men desperate to make the quarter:

Trust proven con men at your own risk

And prepare for the hardest landing

Here Comes Super Crash aka. Day Of Reckoning

"Someone told me long ago

There's a calm before the storm

I know, it's been comin' for some time"

Market fragility has grown inexorably over the past decade. But like everything else in this decrepit society, it was assiduously ignored. What comes next won't be a mere crash, it will be a super crash. Top down algo-driven market making doesn't work. The Trump casino is rigged to explode...

The idea that HFT computer algorithms could manage the stock market solely using index-levered technical strategies based upon price momentum, was a failed gambit from the beginning. Over time, the disconnect between price and value grows until such time as the reckoning is a one time "event" rather than a function of continuous price discovery. 

As we learn below, we can breathe easier knowing that last week's selloff was accelerated by out-of-control program trading. It was in no way caused by the deteriorating fundamentals. To believe that these programs are still in control is a fool's errand of the highest order.

Last week's mini crash is the latest reason to buy stocks - it was only due to poor liquidity and technical momentum failure:

"The drastic moves in stocks and yields were merely driven by technical flows in an environment of poor liquidity, says J.P. Morgan’s Marko Kolanovic."

“Despite fundamental risks, recent equity and bond moves were mostly technically-driven”

In other words, fundamental risks are extremely high, but they don't account for why the market tanked. That can instead be ascribed to low liquidity momentum strategies that happened to have failed for no apparent reason. Just buy the market and never know why one day you should have sold for some random unforeseen reason. 

Due to the rise of HFT, there is now a belief that markets are priced based upon what someone last paid for something, irrespective of fundamentals. This is the guiding principle behind high frequency trading and so-called "quant" strategies.

I have no doubt that these strategies are what is moving markets on a short-term basis, however, they are also causing the kinds of disconnects that lead people to believe that fundamentals no longer matter. Unfortunately, contrary to popular belief, over-valuation can never be "priced in". These strategies have created a value gap below the market, representing the difference between where markets are trading now based upon momentum HFT, and where they would be trading if fundamentals were the primary factor. Let's say because one day the momentum strategies fail for no apparent reason.

Index-driven strategies are what have allowed the market to disintegrate below the surface of the S&P futures, on a scale we've never seen before:

Eighty percent of trading is now carried out by computers, which is why so far the downturn in human trader sentiment hasn't impacted the market. Worse yet, today's pundits point to the recent decline in bullish sentiment as a contrarian reason to buy stocks. Meanwhile, the algos are still bullishly positioned, across volatility, oil, treasury (shorts), S&P futures etc. Which is why the downturn in social mood has yet to be "priced in" to the market. These momentum strategies continue operating in a vacuum of reality right up until they fail due to low liquidity and reversing price momentum. 

All of which is a disaster wanting to happen, warned over and over again by the various flash crashes that have taken place over recent years. Including the one last week that is already being used as an excuse to buy more stocks. 

"Valuations don't matter"

"Concentration risk doesn't matter"

"Volatility doesn't matter"

Or does it? Apparently JP Morgan doesn't know what JP Morgan is saying:

"A familiar bogeyman is lurking alongside the gut-wrenching swings across assets of all stripes: illiquidity. It’s problematic even by the dire standards of August, according to JPMorgan Chase & Co."

As volatility rises, market depth declines exponentially, exacerbating price moves"

Addicted To Easy Money

Of all of this society's deadly addictions, the deadliest by far is its addiction to cheap money...

Northman Trader: Enjoy the CONfidence Game
"Markets can’t be left on their own. Economies can’t be left on their own. We must always intervene. Our market system no longer functions without intervention, be it central bank or fiscally driven."

The fundamentalists ignore the technicals. The technicians ignore the fundamentals. Economists ignore economics. Politicians lie constantly. The sheeple trust proven psychopaths. It's staggering the amount of risk that can be ignored when central banks are printing money. Our "market system" no longer functions as a market system...

Once upon a time the global economy was slowing at the fastest rate since the Global Financial Crisis. The world's two largest economies were locked in an existential trade war, 1930s style. The stated U.S. goal was to bring China to their knees to force them to sign a trade deal wholly against their interest. China's goal was to push the U.S. into recession to push the sitting president out of office.

Global bond yields were the lowest in world history. Global stocks had peaked 18 months earlier. U.S. stocks were at record valuations, viewed as the last safe havens. Pundits explained away valuations as reasonable due to recessionary global interest rates. "There is no alternative" was the mantra of the day. The U.S. budget deficit was record wide at 4% of GDP while GDP growth hovered at the 2% level. A recession in the hands of any honest generation. China's currency was devalued to a cycle low. The U.S. Energy industry was going bankrupt at an accelerating pace. U.S. retail store closures were the highest in U.S. history. Hard Brexit was becoming more of a certainty with each passing day. Global economic uncertainty was record high.

    


U.S. stocks oscillated perilously between their 200 day and 50 day moving averages. The average U.S. stock had peaked ten months earlier. Dow Transport theory had failed to confirm the recent Dow high. Stock buybacks were at record levels for the second year in a row, funded by record corporate credit. Recession stocks were leading the "rally".

Five Nasdaq Hindenburg Omens had warned of impending crash as the gap between the average stock and a handful of mega cap Tech stocks grew record wide.

The Fed had begun lowering interest rates as "insurance" against global turmoil. The yield curve was screaming recession, which pundits explained away as being due to the (relative) strength of the U.S. economy. Volatility was at the highest point of the year as 90% down days and low volume short-covering rallies tested the 200 day moving average for two weeks straight. U.S. bond issuance was set to extract ~$400 billion of liquidity out of global markets over the coming six week period. Unprecedented in U.S. history. Active managers had reduced their risk exposure which left U.S. stocks at the mercy of HFT algos well-documented for their increasingly erratic instability. The algos were programmed for only one goal - filling open gaps in the market. By way of proving their seamless reliability at making round the clock markets.  

Notwithstanding random "unforeseeable" limit down crashes when key moving averages are broken.  

Mind the gap

Judge Not, Lest Ye Not See What's Coming

"You know I hate, detest, and can't bear a lie, not because I am straighter than the rest of us, but simply because it appalls me. There is a taint of death, a flavour of mortality in lies - which is exactly what I hate and detest in the world"
- Joseph Conrad, Heart Of Darkness

It looked as though George Bush would end this Roman Circus. He took a pretty good shot. But compliments of deaths of despair, the Idiocracy found another gear lower on the dumbfuck scale - an expert at evading taxes of every kind. MAGA is maximum regression and irresponsibility in every direction. Which means that this is going to make 2008 seem like a joyride by comparison.

"All forward decks now open for swimming"

Corporations are extremely efficient at killing off this species. We are no longer humans, we are "consumers". We now exist solely to be fed back through the meat grinder to prove that economists and their failed ideas are not entirely morally, financially, and intellectually bankrupt. The main lesson not learned from 2008. Fast forward two years of MAGA nirvana and deaths of despair have reached a new record. Which presumably portends well for Trump in 2020, although like all aspects of Trump's crumbling election rigging strategy - this gambit appears to be peaking early.

I get why the shrink-wrapped zombies need to be South Park cocained in their moments away from the burrito assembly line. Being used up to make the quarter leaves no room for questioning the official narratives. The longest expansion in U.S. history will continue forever. Fifty years ago, we were sending real men to the Moon. Fast forward a half century and today's Lost Boys question that it ever happened. Their ritalin-collapsed brains in no way capable of understanding what it would take to get there again. All while today's alt-Reality reactionaries throw away what's left of their final hour, strutting and fretting the demographic destiny of the "progressives". Sound and fury signifying the Age of Trump. Intentionally blind to the banquet of consequences now set before us by their own serially-corrupt regressives. Those wholly incapable of charting a path to a better future that doesn't have them at the center of the universe.

All of which speaks to Japanification - The stagnation of a society by and for the benefit of an old age home incapacitated by self-inflicted change. The downside of denial being the avoidance of adaptation. Adaptation, essential to human survival.

In the race to the bottom certain countries will always reach that point first. The weakest links break the chain. And then all hell breaks loose. 

At this late stage, bonds are screaming recession, and sector rotation within U.S. stocks is also screaming recession. The only stocks still "working" are deflation trades. 

"Navarro said that the yield curve is actually sending a positive signal. He said foreign capital is coming into the bond market due to the strength of the Trump economy"

Navarro sees a bullish case for the U.S. economy this year. He said the Federal Reserve needs to embark on very aggressive interest rate cuts through the end of the year"


"As long as the Fed understands that a strong economy requires aggressive interest rate cuts, this will all be fine"

Globalized Capitalism Is Destroying Wealth

August 2011 featured a Treasury funding crisis. August 2015 featured a Yuan devaluation. This August features both, for maximum deflation...

Under the current "system", the hardest working people get paid the least, while robber barons sit around getting monetary bailouts. Asset bubbles create permanent liabilities offset by temporary asset prices, leading to what used to be called "indentured servitude", before this generation of locusts took control. Meaning that globalized capitalism destroys more wealth than it creates - now wholly dependent upon ever-greater central bank bailouts to keep from imploding. Until policy-makers put more purchasing power in the hands of the middle class, the battle is lost. Contrary to ubiquitous belief, sugar high asset crashes are not "reflationary":

Post-2008, global central banks coordinated liquidity to boost asset prices, creating the all-important trickle down fake wealth effect. The early holders of Bitcoins, pot stocks, venture IPOs, and corporate insiders were the beneficiaries, leaving the latecomers holding the bag. Late in the cycle, Trump's tax cut went straight to the Cayman Islands.

Now, they are out of ammo:

"If ever the U.S. economy could use a strong tax cut tail wind, it could use one now as conditions weaken around the world.

But the tail wind isn’t there."

Increased demand was itself limited by the fact that so much of the tax cut proceeds went to higher-income households with lower propensity to spend."

Borrowed tax cuts for rich people are highly deflationary, as we saw this week. The death of the U.S. Treasury market, predicted by almost everyone on the planet - including the master deflationist himself, Robert Prechter - has been greatly exaggerated.

And has greatly annihilated anyone who bet against Treasuries:

Enter Peter Schiff - master inflationist - to spin record deflation into record inflation. His shiny gold investment that is about to go "ballistic" by coincidence happens to be the only thing he ever owns.

A few facts followed by his usual non sequitur conclusion:

‘This is going to be the inflationary recession, there’s no way out and it’s a political disaster for Trump because the recession is going to start before he finishes this term, which means he won’t have a second term.’

I 100% agree. It's the timing, that is going to be "tricky". Because between now and "inflation" stands asset crash and rioting, neither of which will be reflationary.

This is where it gets interesting, because the 2011 analog is still 100% in play. Way back in August 2011, the U.S. Congress FAILED to raise the debt ceiling, which caused a technical default in the Treasury market. Contrary to popular belief at the time, Treasury bonds skyrocketed as yields and stocks collapsed. Gold had been rallying into the event and continued rallying into August, and then collapsed around the third week.

Here below we see that gold is now the most overbought it has been since the peak 2011 (RSI, top pane). 

"Peter Schiff can't always be wrong"

Since 2009, each round of quantitative easing (bond buying) paradoxically has led to LOWER Treasury bond prices, higher yields and higher stock prices. Because it was reflationary. Likewise, Trump's deficit-driven quantitative tightening is now leading to lower bond yields and lower risk asset prices. Because it's deflationary.

"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,” warned Gaurav Saroliya, director of macro strategy at Oxford Economics, in a note on Wednesday."

Until policy-makers decide to bail-out the middle class, I suggest that margin calls will be the order of the day for gamblers front-running central banks, on the assumption that they are still in control of deflation:

Faith In Central Banks Is About To Get System Tested

The biggest risk the casino faces is that gamblers no longer fear risk. They've been systematically conditioned by free money bailouts to front-run central banks straight into risk. Which places the Global Financial System in the hands of a mad man managing global affairs on Twitter. Yet "no one" sees it coming because today's "safe havens" are now the riskiest assets...

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

We are watching a 1987-style waterfall crash in real-time

This week saw the heaviest selling pressure in several years. The Dow is testing the 200 day from the underside:

Comparisons to May and October need not apply, as gamblers have been seeking shelter in the junkiest stocks:

Crash risk reached a new extreme this week:

Nomura is out warning that risks have increased since last week's Lehman-meltdown warning:

ZH: Odds Of September Lehman Shock Have Increased

Why September? The argument is around seasonality, which I find unconvincing at a time when idiosyncratic risk is exploding in broad daylight.  

They note that algo positioning is still bullish across the board. Because apparently Skynet doesn't have social mood.

Where it gets interesting is that despite the risks, Nomura still recommends overweight in the "defensive/low vol" bond proxy trade - the most crowded trade this side of Momentum Tech. Both being "long duration" deflation trades. As in, extrapolate the recent past into the indefinite future and pretend recessions no longer exist. 

Which is Wall Street's massively crowded consensus trade now:

"Buy low-beta & defensive stocks, sell high-beta & cyclical stocks"

Sell Banks, Transports, Retail, Autos, Industrials, Energy aka. "Economy"

"Buy"

"Low-volatility funds are proving popular as many cautious investors keep preparing for a still-unseen, but long-anticipated, market downturn"

“Trying to call the market is generally a bad idea.”


I would point out that these are not really safe havens since they were down -45% peak to trough in the last bear market. I would also point out that they are also not really low volatility:

Why hedge when central banks can fix everything after-the-fact? An imagined reality that didn't pan out so well in 2008:

Gamble at your own risk

And remember, the dumb money should never try to time the market, because then the smart money would have no one to sell to:

ZH: Mass Confusion Reigns Supreme

"Markets are super noisy and jerky right now. Yield panic, recession concerns, headlines and tweets bringing about massive price swings in any direction. It can spin anyone’s head."

"He rocks in the tree-top all the day long

Hoppin' and a-boppin' and a-singin' his song

All the little birds on Jay Bird Street

Love to hear the robin go tweet tweet tweet"

Worshipping At The Altar Of Self-Interest

"We are all born originals - why is it so many of us die copies?"

- Edward Young

We've learned a lot in the past decade. Mostly we've learned that there is literally nothing this species won't believe - beyond the truth - in order to achieve competitive conformity. The basis of the consumption-oriented perpetual high school popularity contest. The Creator blessed-be-she has a great sense of humour when it comes to the hairless monkey. As the sheeple now double down on their Casino-bankrupter-in-chief.  

The headlines at this juncture oscillate between the asinine and the ludicrous. Trump has now made the China trade deal contingent on the peaceful resolution of the Hong Kong protests. All but assuring a deal will never take place. What would be analogous to China making a trade deal contingent on the U.S. halting mass shootings by implementing gun control. It's executive buffoonery via semi-literate Twitter gibberish. 

Meanwhile, the Madoff whistleblower now asserts that General Electric - one of America's most venerable blue chips - is a bigger fraud than Enron. I suggest he broaden his gaze to the epic stock buyback con job taking place across the entire S&P 500 funded by this era's corporate equivalent of subprime CDOs. The largest leveraged buyout in human history. 

On the race to the bottom, a new all time low in the thirty year Treasury yield as bond shorts get annihilated by imagined reality aka. "Greatest 'Conomy ever":

"Specs have consistently been bearish on the 10-year note this year and have been consistently on the wrong side of this market as the 10-year note has surged due to safe haven demand and concerns over the economy."

From a casino perspective, the S&P is uneasily camped at the 200 day as of Thursday mid-day. The 200 day was rinsed twice last week, followed by a double rinse back to the 50 day. Now back at final support:

The rest of the world is not waiting to see how this movie ends

Nasdaq breadth is looking more and more like December:

December 2008:

A new low in the crash ratio as Skynet gives it all she's got Captain

It turns out that the secret to defeating deflation is not handing out more money to rich people.

But who knew?

This final lesson will require some "shared sacrifice"

In summary:

"What the wise man does at the beginning, the fool does at the end"
- Warren Buffett