Friday, April 20, 2018

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)

Monday, April 16, 2018

The Linear Extrapolation Of Bullshit

What "we" didn't learn from 2008 is that economists can't predict the future. They can't even predict "now"...

Given that U.S. economic policy is predicated upon sheer fantasy, it's apropos that Netflix is spending billions of non-amortizing debt on new binge watching content. It's a corporate ponzi scheme built on top of a U.S. ponzi scheme, built on top of the Globalized ponzi scheme. Asinine assumptions resting upon even greater asinine assumptions. Wall Street estimates can be located under science fiction...

Netflix is bid after-hours on news that it will burn $4 billion in cash this year, assuming it has continuous unfettered access to credit markets to fund Ponzi growth. If not, the stock will promptly go to zero. In other words, it's a massive call option on indefinite economic expansion. Which expires with zero notice.  

More than any other stock, perennial high-flyer, Netflix, epitomizes the smoke and mirrors behind today's Ponzi economy. It's a company attempting to borrow its way out of debt by borrowing ever-larger sums of money to fund fake growth. A non-amortizing leap of faith on perpetual Ponzi growth. Meaning it resembles the U.S. Treasury. 

"The Congressional Budget Office last Monday released a report that for the first time officially projected the federal deficit rising to almost $1 trillion in 2019 and then staying at or well above that previously unfathomable level every year through 2028."

But, in reality, it's far worse than that, because like all good Ponzi estimators, today's EconoDunces took the second largest expansion in history and projected it out forever. They never take the possibility of recession into account. Therefore, CBO estimates of trillion dollar deficits for the next decade, are the best case scenario.

Here are their assumptions:

Baseline scenario:

"Potential output is projected to grow more quickly than
it has since the start of the 2007–2009 recession"

Worst case scenario:

"CBO projects a soft landing for the economy—in which
the output gap closes through slower, but still positive,
economic growth—but there is nevertheless a risk of
recession. That risk does not stem from the duration of
the current economic expansion, even though it has lasted
more than eight years—longer than the average"

They threw that last part in there just so we would know for certain they're idiots. In case we had any doubt. 

The punchline has to be this:
"The largest effects on GDP over the decade stem from the tax act."

The truth of course - as it has been since Reagan - is that the primary effects on GDP are from the resulting deficit itself. The obligatory conflation of debt as GDP. Supply Side dumbfuck-o-nomics at level '11':

Meanwhile, this just in:

If this is correct, then it confirms what the big banks said last week - that the tax cut "plink" was 100% con job, as CBO estimates for GDP in 2018 are already off course. To say nothing of the coming decade.

They're already wrong one week into their fucking projection. 

All of which means that Netflix and by extension the S&P 500, is a Ponzi delusion built on top of an even bigger economic Ponzi delusion. A call option on the non-amortizing status quo.

Right now, every investment advisor is assuring their clients that stock market valuations are reasonable. Just as they were doing in 2007:

And Netflix is once again exhibiting the power of imagined realities


A Deep State of Denial aka. The Inconvenient Truth

Proven idiots are not in denial about global warming, they're in denial about EVERYTHING...

The deep state visualized:

"All forward decks are now open for swimming"

Trump's "Mission Accomplished" rally has bid the casino for the present moment, as the battle for the 200 day Maginot Line enters its fourth week.

Unfortunately, Wall Street couldn't be bothered to update their linearly-extrapolated forward profit models based on the latest data, despite requiring only that they add a minus sign. So instead they went back to their Magic 8 ball and decided the data is wrong, therefore it's time to buy high risk stocks. As if the delusional bulls needed any more encouragement. 

It's a testament to the current level of denial that today's bulls have decided that a multi-decade super cycle top, is actually a correction level bottom.

ZH: This Can't Be The Top, So It Must Be A Bottom

"Because if this was the top, we would all look like a bunch of idiots"

Of course there were no facts or data to back up this assertion - just a big fucking moron broadcasting his own delusional opinion. Which is convenient because it's hard for me to refute something that doesn't even exist. Which is how this society operates by the way. 

Putting my dunce cap on for a moment, we can see how they arrived at this opinion. Sort of...

Here we see the medium-term S&P view:
The January rally was smooth and silky. The February rally was a bit choppy. And this latest delusion is an overlapping mess. Nevertheless, the casino just tagged break-even for the year, which happens to be the 50 day moving average (blue line).

As we see in the lower pane, large cap breadth is only now back to where it was at the February low. And ominously, selling volume is rising in lockstep with the trend-line.

It's on the three year chart where the real delusion comes into play. Bulls such as the one cited above, seem to believe that this decline was a repeat of the late "mid-cycle" correction circa August 2015, which is to the far left. Timewise it's about the same duration, however, as we see, technically this current pattern has far more in common with the late 2015 top. 

The fact that by August this will be the longest bull market on U.S. record plays no part in any of this of course...

So the technicals and the fundamentals both line up with a deflationary decline, but compliments of obligatory mass denial, gamblers are now also doing battle with the Fed as well.

"Don't fight the Fed, much"

NYSE breadth momentum is more overbought now than it was at the top, while sporting an identical divergence:

And of course banks confirmed on Friday that the tax cut for the ultra-wealthy went to the ultra-wealthy.

Go figure.

Here is where it gets interesting. Last week I said that end-of-cycle short-covering was a key factor driving this market. Skynet knows that the only buyers are above the market.

"Leadership" currently consists of left-for-dead retail stocks, such as Macy's. Here we see that beginning in 2016, a massive divergence emerged between consumer sentiment (black) and the travails of bricks-and-mortar retail. One that we didn't see during the last cycle.

In other words, sentiment has diverged historically massively from economic reality. Yet another testament to the powers of mega bullshit:

(Delayed) hedging is also following the script from the January top:

The animal spirits have been duly tapped

And the short-covering, volatility squeeze is heading in the same direction. At least for the five of us who still believe in reality.

Which means that this is either the last chance to buy, or it's the last chance to sell i.e. the exact opposite of what every fool believes right now. 

Which is how this society operates by the way.

In summary, denialists can't afford for this count to be right