Saturday, April 21, 2018

The Global Sugar High Is Wearing Off

Supply-Side Trumpflation visualized:

First off, I must give full credit to Trump for pursuing peaceful overtures with North Korea. By this time in his administration, Bush had pretty much already dismantled the Middle East. After all, war and war manufactures are the only "things" still Made In America...

And on that note, Defense was the only sector that made a new all time high this week. Meaning that the ultimate recession trade is no longer a safe place for gamblers to hide...

And, asinine tax cut and Obamacare demolition aside, I also have to agree with Trump putting the economy ahead of the stock market for the first time in forty years. Nevertheless, if I were a stock market gambler I would be highly paranoid that the wrecking-ball-in-chief is out to tank the market. Whereas 2017 was the year of cheerleading stocks higher, by contrast 2018 has been one shot after another aimed at the stock market. From the tax cut pounding high yield junk bonds and dividend stocks, to the trade wars pounding Industrials, tweets against tech firms and tech mergers, and yesterday tweeting against oil. Now he inadvertently just took out Defense stocks. 

But per the title of this blog post, this has all been a case of willful self-delusion. A sugar high fueled by unfounded optimism and reckless spending by all sectors of the economy at the end of the cycle. 

"U.S. President Donald Trump’s tax cuts at the end of 2017 and the plans this year to boost federal spending by hundreds of millions of dollars are responsible for half of the upgrade in the fund’s outlook for this year and next."

You could argue that we all owe Trump a favour: his decision to hit the accelerator might finally propel us out of the mire left by the 2008 financial crisis. But he may also have created the conditions for the next recession." 

In other words, half of global growth is predicated upon the U.S. And yet, we already know that the sugar high is wearing off.

ZH: 2007 Deja Vu. Credit Cycle Indicators Flashing Code Red 

"We continue to see evidence that argues in favour of a very late-cycle environment"

Here is the problem, this is not 2007. Policy-makers, Wall Street, and investors have completely mis-timed this end-of-cycle for a variety of reasons. Fake optimism over Supply Side tax cuts was first and foremost. 

However, the other erroneous assumption was that this cycle would end like all of the others. Everyone was looking for the yield curve to fully invert before they called recession. 

Per the above article:
"An inverted US yield curve has preceded ISM index dropping below 50 (i.e. economic contraction) 7 out of 7 times since 1977 with 12-month lag."

But there won't be a one year lag this time. Why? Because the sugar high pulled forward consumption and now the drop-off is far faster than what we've seen previously. Moreover, the tax cut, Fed balance sheet rolloff, fake reflation, AND record Treasury short positions, has kept long-term yields artificially bid, thus preventing inversion.  

Here is what happened: Last Fall, giddy "consumers" went on a consumption binge. And what did they buy?

"Americans are opting for pickups and SUVs over cars at a record rate, as those larger vehicles now comprise over 60 percent of the market for new vehicles in the U.S."

It’s no secret why Americans are choosing trucks and SUVs more often. The job market is strong; unemployment stood at 4.1 percent in October. And gas has been relatively cheap, hanging below $2.30 a gallon for most of the last year."

Fast forward five months later:

"April 20 (UPI) -- The surge in gas prices coming from higher crude oil prices means OPEC is cancelling out the gains of U.S. consumers from a tax break, GasBuddy said Friday."

Which is why we know where we are in this cycle.

"Credit card debt is only a problem if it becomes unaffordable. Unfortunately, there are signs pointing to that being the case. Major credit card issuers—including Capital One and Discover—are reporting increasing charge-off rates"

Late late.

Friday, April 20, 2018

"Dance, Like A Well-Trained Monkey"

Record margin balances are leveraged to record oil futures positioning. At the end of the cycle. This shall be a deep burial...

"Everyone to the other side of the boat"

What we witnessed this week was a global mad scramble into cyclical "reflation" trades, specifically Oil, Energy stocks, stock brokerages, and short Treasuries, as the global hypersynchronicity of "inflation" went viral...


Any questions?

The worst thing any gambler can do is load up on cyclicals at the end of the cycle. That's why it's called "the cycle", because it's cyclical. Holy fuck. We're doomed.

"At a minimum, the risk of another inflation undershoot has diminished. All the near-term risk is to the upside."

Meaning that gamblers are all on the same side of the boat. Record margin-leveraged to record oil speculative futures positioning. Unfortunately, higher interest rates and higher gas prices are momentarily "inflationary", but then they quickly turn back into a deflationary pumpkin. True inflation is a sustained increase in the money supply that lifts all prices throughout the economy most importantly wages. True inflation is not a zero sum game wherein higher gas prices take purchasing power away from other sectors. 

I think they are starting to figure this out. They have correlation figured out, they just haven't made the connection to causation:

Which means, they are starting to figure out Ponzi reflation:

In the meantime, the true cost of this fake inflationary hysteria has been inflicted on recessionary safe havens:

"And did we mention that consumer staples are [still] expensive? The sector has been trading at 19 times earnings, while the S&P 500 only at 16 times...
If a wider rerating is occurring, there is a long way to go before value buyers begin to kick the tires."

In summary, as long as frackers don't roll over, this latest delusion will all be fine.

Economics: A Confidence Game

"You have to dance like a trained monkey, while the music is playing"

In order to calculate the average person's financial IQ, take their actual IQ and subtract 100. Call it the "greed" tax. Whereas the bond market represents economic reality, the stock market represents economic fantasy. Until the end of every cycle, when they meet again...

"Bull market!"

There's a straightforward reason why the typical EconoDunce never sees recession coming. It's because they can't predict the future. Therefore, they look in the rear-view mirror and extrapolate the past into the present. Which works, nine times out of ten, meaning they're only ever right due to sheer numerology. And of course when they are wrong, they are catastrophically wrong.  

For central bank economists the forecasting dilemma is worse, much worse. Since they control the monetary levers of the economy, there is pressure on them to convey an optimistic bias. They don't want to be seen as contributing to economic weakness, so they continually spin negative data as positive. Not only do they extrapolate the past, they inflect it higher. 

Wall Street economists exhibit an even bigger problem than the former two sets of dunces. Wall Street of course wants to sell more stock, so they have what used to be called "conflict of interest" - One of just many old-world concepts the Idiocracy has long since abandoned. Along with social responsibility, personal maturity etc. In other words, Wall Street Economists embed all of the biases listed above: linear extrapolation, over-optimism, and conflict of interest. So when they make their Magic 8 ball predictions for their clients at the beginning of the year, they are loath to abandon them by April. Because that would prove beyond any doubt that they're total fucking dunces. Best to leave some margin of doubt.  

All of which is good background context for what is happening now, globally. Last week we learned that European macro had inconveniently and *unexpectedly* crashed back down to post-2009 lows. Due to the fact that global synchronized reflation was entirely an end-of-cycle confidence game.

"What a difference a few months makes. The best year in a decade in terms of euro-area growth has given way to a series of surprisingly weak economic readings across the 19-nation bloc."

The dimming data --- have also turned Europe into ground zero for a question increasingly bedeviling investors: Has the global synchronized growth story that powered the bull market peaked? It also leaves them with a dilemma: jump back in or assume the best is now behind them"

That is quite a dilemma. Giving new and unexpected meaning to the word. Perhaps we should ask E*trade the proper course of action at this point in the cycle. To only complicate matters for gamblers, here is what Draghi said today:

"Notwithstanding the latest economic indicators, which suggest that the growth cycle may have peaked, the growth momentum is expected to continue"

Here is what gamblers heard:

And please remember:

"The expectation for higher inflation is not out of line with consensus opinion. Indeed, higher inflation is the consensus view of those sampled by Bank of America's latest monthly global fund manager survey, as net 82 percent of respondents earlier this month expect the core consumer price index to rise over the next 
year. Notably, this is just under the post-crisis high of 86 percent, recorded last month."

Notably, cycle high reflation peaked in 2010. And notably, these are not intelligent people.

They are hypersynchronized idiots. Bad news comes in one end and bullishit comes out the other. 

Thursday, April 19, 2018

Hypersynchronized Idiocracy

This was the third failed global rally in four months. What comes next will be the biggest financial clusterfuck in human history, as record numbers of massively over-leveraged gamblers all hit "sell" at the exact same moment, while being front-run by infinite numbers of co-located servers. All amid non-existent liquidity...

CNBC, Feb. 1: Ameritrade CEO: "It's Been An Amazing Ride"
"There is an enormous amount of new retail money coming into the market"

"Here's what you do: Wait ten years until the end of the cycle,  until the Fed is tightening, Wall Street is selling, and the economy is rolling over. Then go all in on record margin"

April 17th, Interactive Brokers Earnings Call
"average margin loans for the quarter reached a high of over $29 billion as our customers capitalize on our lower margin rates"

April 20th, 2018
"Notably, customers were net buyers of about $6.9 billion of securities compared with $1.6 billion in the prior-year quarter."

Ironically, Etrade and Interactive Brokers are both IBD Momentum stocks. The brokers are being gunned higher by their own margin loans. 

No sound required.

ZH: Liquidity: Now You See It, Now You Don't
"Liquidity is the ultimate paradox in finanace. It’s always there when you don’t need it and never there when you need it most. The reason is crowd behavior, or what mathematicians call hypersynchronicity (a fancy word for everyone doing the same thing at the same time)...Right now, indications are that liquidity is growing scarce and it may be time to sell stocks and increase cash allocations"

Whereas hiding the subprime turd inside the mezzanine debt rose bush, was the dumbfuck idea of 2008, in this era, the meltdown trigger will be "dynamic hedging". Brought back to life circa 1987. What this fabricated term boils down to is taking asinine unhedged risks with other people's money under the make-believe auspice that  algos can hit the exits ahead of everyone else. Despite the fact that everyone else believes the same thing.

It's hypersynchronized idiocy. 

Speaking of which, deja vu of 2008, the freight train of deflation is bearing down on the hypersynchronized Idiocracy, because they're all looking in the wrong direction...

Apparently "no one" remembers 2008 anymore. Which makes perfect sense. It never happened. It was a once in a lifetime debt crisis, solved with more debt. So forth. Somehow, despite almost ten years of non-stop deflation, featuring global interest rates at 500 year lows, the concern right now, amid cycle high interest rates, is still inflation. 

So that got me thinking, when was the last time that inflation concerns were ubiquitous? Let's take a look. It turns out it was precisely 10 years ago this month when serial fucktards were last concerned about Ponzi reflation. And yet, by the end of that same year, they quickly realized they got head faked:

And what else peaked in early 2008, and is also peaking right now?

Hint: It's the one asset class in 2008 that peaked DURING the recession itself:

It's crude oil (black), (and commodities in general).

2008: $140/bbl (see above)
2014: $110/bbl
2018: $70/bbl

What's behind the big commodities rally?

Record positioning for a big commodities rally. What else?

Never fear though, just as Trump imploded the Dow with trade wars, and Tech with blocked mergers, now he's going after oil:

Oil just moved back into contango for the first time since October, indicating the *resolved* glut is resuming. 

In other words, artificially fabricated inflation will disappear instantaneously, limit down.

"Traders in the space see the rally continuing in the face of a trade war threat and as the market gets more comfortable with the global economic growth theme."

While global trade wars continue to fuel global economic growth, inflationistas can rest easy as the Fed is taking the proper steps to stamp out growth. 

Meanwhile, back at the ranch:

"...indications are that liquidity is growing scarce and it may be time to sell stocks and increase cash allocations"

"The index is down more than 18 percent since hitting an all-time high in January"

"The Smart Money Index turned downward as early as June 2008, long four months before the September market swoon"

FOMC policy meeting:

Tuesday, April 17, 2018

The Last Trump Casino

The Idiocracy has finally found the cure for inequality.

Collapse due to rampant criminality...

"If you're looking around the poker table and you don't know who the patsy is, it's you" 
- Warren Buffett

Many people have speculated as to how Forrest Trump's ill-fated turn as reality TV president might end. Would he be impeached by his own party? Would salacious rumours, rendered true, chasten his alt-Christian base with an affair so sordid that even their squalid ranks would balk?

Or, for once, would they question RepubliCon orthodoxy that tax cuts for the ultra-wealthy create broad-based prosperity, which has only been diametrically wrong for forty years? 

Of course not. Despite the biggest volatility implosion in history a mere two months ago, "no one" at this late date yet believes that turmoiling markets, bereft of fools to con, will  render final verdict on what in the end amounts to Supply Side Dumbfuck-o-nomics taken to level '11' at the hands of a master con man. 

Although, some appear to be getting closer to the truth...

"Those who hate Trump already think he’s a crook; those who love him don’t care

I believe this assessment is wrong. 

I am unaware of anybody who has taken a serious look at Trump’s business who doesn’t believe that there is a high likelihood of rampant criminality.

The narrative that will become widely understood is that Donald Trump did not sit atop a global empire. He was not an intuitive genius and tough guy who created billions of dollars of wealth through fearlessness. He had a small, sad global operation, mostly run by his two oldest children and Michael Cohen, a lousy lawyer who barely keeps up the pretenses of lawyering and who now faces an avalanche of charges"

We learned this week that Wall Street's con men have already figured out that Trump-o-nomics is a game of three card monte.  For his part, Warren Buffett never once blinked, now sitting on record cash, while telling everyone else there's nothing left to buy, so keep buying. However, sadly, the serial-conned sheeple have once again been conned into buying and holding the bag through thick and thin. Hence they are the only ones left to learn. 

Which gets us back to the last Trump casino. 

Amid fundamentals at or below 2016 levels. Wall Street positioning at or below 2016; and technicals at or below that same level. The door out of the casino is closing.

Banks tell the story. Despite today's Netflix bid, the big banks were following the yield curve lower today, now following the 2016 analog:

Meaning that the casino doorway is as wide as banks are from their 200 day (red). 

As of today's close, large cap stocks are one year overbought, and yet, as we see in the lower pane, there is less and less participation:

Here is where it gets interesting, relative to the 2016 analog. 

The true "safe haven" trade - not counting Netflix - consisting of Utilities and Consumer Staples, is inherently weak:

The other problem of course is that the Fed got conned as well. 

Why? Because they are experts at turning a blind eye to rampant criminality.

Just as they blew up the housing market in 2007, this time they locked the sheeple inside the casino. With help from Wall Street and Trump, of course. 

House Of Cards

The casino has lost its institutional sponsorship. Another generation of gamblers bilked. Shocking...

"The allocation to global technology shares also fell sharply — to a five-year low...Yet, FANG and big-cap tech stocks remained the most crowded trade for a third month"

It's the 300 P/E safe haven trade

Netflix peaked concurrent with the casino, the last two times...

Deja vu  - gap higher, island. To be followed by the third island reversal of fortune?

The starting point for the January rally was the mid-point for the Feb/March rally, is the end-point for this April rally. Now that is some serious delusion...

"Fund managers' allocation to stocks is at an 18-month low, and many believe the market has peaked or will peak this year."

Now we know what this is all about:

"The allocation to global technology shares also fell sharply — to a five-year low, according to the latest monthly Bank of America Merrill Lynch Fund Manager Survey."

Any questions?

"the yield curve appears to be close to inverting, and an inverted yield curve is widely considered to indicate an imminent economic recession. So you will be reading more and more about them in coming weeks."

Individual gamblers are tapped out as well:

"Companies dedicated $305 billion to share buybacks and cash mergers compared with $131 billion in wage growth in the first quarter"

The joke will be on them

The rest of the world is waiting, patiently

"Enjoy the economic impact from the tax cuts while you can, because it won’t last long, according to two reports released Tuesday.

Morgan Stanley and the International Monetary Fund put out strikingly similar reports, saying the $1.5 trillion Tax Cuts & Jobs Act will basically give gave the U.S. a sugar hit."

The Morgan Stanley report — titled, “The Downside of Fiscal Stimulus” — is particularly negative. That report argues the benefits of fiscal stimulus are mostly priced in"

Revolving credit (Change $, blue). Consumer credit delinquencies ($, red)