Friday felt like a Pearl Harbor attack on Wall Street. Since when did a Thanksgiving Friday fill investors with dread and fear? The day was supposed to have passed quietly, with second-string prop desks locked on a glide path into what remained of the four-day holiday. Instead, the Dow plunged by 900 points, closing near the low of the day after a couple of failed rally attempts while the ‘value’-weighted Russell index fell by nearly 4%. One might have inferred the markets were finally rebelling against all of the arrant falsehoods that have pumped them full of unnatural vigor, especially over the last year-and-a-half as the global economy has tottered. Everything was topsy-turvy as the week ended: T-bonds were screaming, the FAANGs so beloved of portfolio managers were getting pulped, and bitcoin, the speculative Porfirio Rubirosa of this era, was immersed in molten hell. A more than $3,000 decline threatened to become the beginning of a crypto bust. Hold the Bubbly! A few of my colleagues had predicted a major top about where it occurred. Peter Eliades got closest with a magic number for the E-Mini S&Ps that caught the high within a point. My own projection missed by 20 points, or less than half a percentage point — close enough for an honorable mention. That was until I had a closer look at AAPL’s chart. The stock got hit hard, down almost 3%, but there is no escaping the fact that if it were to fall a further 5%, to 146, it would become an even better ‘buy’, according to the rules of my Hidden Pivot Trading System. Since AAPL more than any other stocks reflects the zeitgeist of portfolio managers, not to mention their greed, hubris and stupidity, we shouldn’t be too hasty in assuming that Friday’s carnage will mark the beginning of the end of the stock market’s nearly 13-year bull run. But I wouldn’t given up on the idea entirely, since AAPL’s stall occurred in a potentially perilous place. Specifically, the rally failed precisely at the ‘secondary’ pivot of a major rally pattern, as the chart shows. This will subject AAPL to the jeopardy of Matt’s Curse, implying it could fall below $103 instead of rallying to $188 as might be expected in the absence of voodoo technicals. We shall see, but the ‘mechanical buy’ in AAPL will remain valid in any event, as will the bullish implications this would have for the stock market.
Did you notice last week’s tone change? The whole, eternally benighted world of pundits, economists, Bloomberg news producers, forecasters et al. has been disbelieving the bond rally as the Fed’s ultimately unredeemable portfolio of Treasury debt has grown from merely massive to intergalactic in size. Now the talking heads are having to change their tune in order to catch up with charts that have been no worse than neutral on T-Bonds for months. So what “story” are they telling themselves to explain what they were unwilling to see back in January? Simply that we are witnessing a global “flight to safety” as Covid threatens to tank the economies of Europe and China yet again. Of course, nothing says “safety” like the whole world piling onto the shoddy, brittle edifice of U.S. debt. Trust your instincts: This trend cannot end well. In the meantime, the technical outlook calls for at least somewhat higher T-Bond prices and correspondingly lower yields. On the long bond, that would imply a descent to 1.70% from a current 1.91%. If that level is breached we could see 1.54%. At some point, the lower rates accompanying a bear market in stocks will be seen as reflecting not a flight to safety, but as a manifestation of the catastrophic deflation that has been bearing down on the financial planet, steadily gathering size and strength since the S&L crisis of the early 1990s. Dollar Short Squeeze = Deflation While economists have kept busy trying not to acknowledge that T-Bonds are moving in the wrong direction, a rising dollar has equally confounded them, as well as investors who bet on inflation. Although lower yields are ostensibly benign, albeit faintly symptomatic of the coming deflationary bust, a strong dollar is capable of wrecking the global financial system overnight. I’ve written here before about the prospect of a massive short-squeeze on dollars that — to remind you — are fundamentally worthless. This could happen if something that initially will be spun as a hiccup in the banking system causes short-term lenders to stop rolling their loans. The exquisitely complex bank clearing network — the same one that enables ATMs to spit out $20 bills on demand — will seize up instantly, and everyone in need of money will discover that the digital dollars the Fed creates so effortlessly are actually quite hard to come by in tangible form. So if you’ve got that shoe box full of $5s, $10s, $20s and $100s stashed away as I’ve advised, hold onto it, since it might prove useful when the banks fail to open one day in the not-too-distant future.
John Doerr, the venture capital zillionaire, thinks America should go all-in on measures to control the weather. Although Doerr fears it may be too late to save Earth and its inhabitants from the ravages of global warming, he says a massive investment program would still be better than doing nothing. His role model is FDR, who put America on war footing with astounding speed after the Japanese bombed Pearl Harbor. The tycoon and those he hobnobs with have so much money that they could be forgiven for being unaware that America is broke. Sure, there’s plenty of ‘wealth’ tied up in stocks, bonds and real estate. But valuations are so pumped with hot air that we might as well write off three-quarters of it, since it will vanish anyway in the next bear market. Plunging share prices will bring many painful epiphanies, including the realization that every dime of the nearly $30 trillion owed by the U.S. Government– which is to say, owed by taxpayers — will have to be repaid: if not by borrowers, then by lenders. That is the inexorable logic of deflation, and when it comes we will be too busy dealing with the implosion of Social Security, Medicare and Baby Boomer retirement plans to be gung-ho about taming the weather, were this even possible. Democrats to the Rescue! By then, Americans won’t feel much like spending tens of trillions of dollars for coal-plant scrubbers, thorium reactors, Wyoming-sized solar arrays and recapturing methane at wellheads. Galloping to the rescue, Democrats will propose a new tax on gasoline to jump-start ‘Build Back Weather’. But the sums required just to get to the first stage of this guaranteed boondoggle would dwarf whatever could be raised with a surcharge of even $10 a gallon, not that anyone would still be driving. It’s a wonder that anyone, particularly a savvy financier like John Doerr, could believe the capital exists to attempt the rebuilding of America, let alone try to turn Motherf**ker Nature uncharacteristically benign. Tens of trillions of dollars of gaseous savings are tied up in glorified advertising firms like Google and Facebook, in profitless food delivery services, driverless car- and other AI-hubris, and in purveyors of burritos, virtual entertainment and trendy consumer goods. That is what economists mean when they refer to malinvestment: the channeling of savings — in this case vast sums of it — into companies that either sit on it, squander it, or use it to buy back their own shares. Stocks have become grotesquely overvalued as a result, and it is delusional to think any significant portion of the hoarded capital can ever be freed up to rebuild America’s dilapidated cities, highways, bridges, transit systems, railways and airports. The savings are illusory to begin with, and even if every penny could be diverted into infrastructure, it is absurd to think the bumblers, grafters and big-business lackeys on Capitol Hill could incentivize the process so that it would create anything of enduring economic value.
Who could have predicted that a microchip shortage would threaten to seriously impair the global auto industry? And yet, here we are: assembly plants are unable to ship enough cars to meet demand, and buyers are facing six-month delays and steeply rising prices. This has pushed used-car prices beyond the reach of those who can’t afford showroom new. We sense that the problem could be worse than the industry is letting on because “experts” are saying bottlenecks could persist until the end of 2023. Whom do they think they are kidding? The global economy is so screwed up right now that even a team of MIT eggheads using a supercomputer and petabytes of economic data couldn’t predict where interest rates will be in 30 days, let alone in two years. To say the chip shortage might drag on for a couple more years is to all but concede that it’s likely to persist indefinitely (sort of like the Fed telling us they might consider tightening “next year”). Rosary Bead Shortage The shortages that have cropped up so far have taught us that predicting what will be in short supply next takes imagination. Bicycles, surfboards, certain prescription drugs, ships and shipping containers, workers in many sectors, including construction, trucking, retail, restaurant, hotel and manufacturing — all are in critically short supply at the moment. They are also economically tied, often in obscure ways, meaning that a shortage of pasta could eventually affect the supply and demand for accordions, Chianti and Rosary beads. It has also put consumers on high alert, ready to hoard household items a nanosecond after the mere rumor of a shortage hits the blogosphere. It is predictable that there will be food scares this winter and that they will get the kind of attention that will make us nostalgic for surfboard shortages. A Berkeley friend with an large and very productive vegetable garden behind his home thinks my fears are overblown. I hope so, because if a food scare turns into outright panic, his yard is destined to become all too popular with hungry marauders from the East Bay.
So much for seasonality. Bears were counting on the cyclical fury of autumn to rebuke revelers, but instead it is they who got rebuked, and badly. The stock market’s strong rally during the traditionally difficult month of October has left many wondering what it will take to pop the bubble. It is almost invariably a combination of factors that virtually no one has precisely foreseen. But this time, predicting the onset of the bear’s inevitable arrival would seem to require a bigger leap of imagination than in the past. For how does a bull market end when it is supported by seemingly unlimited quantities of money ginned up by the central bank? Deliberately tightening credit cannot be the answer, since the Fed understands that this would not only reverse the bull market precipitously, it would also doom pension funds, the Baby Boomers’ retirement plans, artificially high real estate prices and a consumer economy already ravaged by the pandemic. The eventual outcome would be a global economy plunged into deepest depression. This is coming anyway, but don’t expect the Fed to set itself up as the obvious cause. And so the game goes on. The money from trees finds its way into the stock market in numerous ways, one of them being corporate buybacks. According to a recent article at Zerohedge, fully 40% of the market’s rise can be attributed to this source. Some of the companies that borrow for buybacks are sitting on surplus cash of their own amounting to billions or even tens of billions of dollars. Why use real money, they have concluded, when they can borrow it at near-zero rates by issuing bonds to yield-starved investors? And so they continue to plow borrowed money into their own shares, driving the shares into outer space without producing a dime’s worth of actual economic growth. Everyone appears to win in this shell game and it continues at a crazy pace, even if all the players understand full well that a rally attributable solely to inflation is ultimately unsustainable. A Win/Win Disaster The win-win aspect of this epic Ponzi has put up some very impressive numbers. Last week’s blowoff in Tesla made Elon Musk the world’s richest man, worth an estimated $300 billion. Tesla shares are so pumped that their value has exceeded the combined value of 14 other global automakers. Bill Gates cannot be far behind, since Microsoft’s steep climb pushed the company once again to the top of the capitalization heap, just ahead of an Apple Inc. valued at $2.5 trillion. No one believes this craziness can continue indefinitely. But when it finally ends, as it must, the consequences are almost too dire to imagine. That is why the stock market is taking so long to build a top: The coming bear market will have tragic consequences for our way of life. We are about to discover how little of value the ‘Information Age’ produces, and how illusory its wealth. The Great Depression brought severe hardship to many Americans, but the coming one will be worse because the fall will come from a pinnacle of material affluence paid for with credit.
The performance of Apple shares has been a reliable harbinger of where greed and hubris would take this seemingly invincible bull market next. Apple is the biggest-cap stock of them all, worth $2.5 trillion, and it has increasingly become a sure thing for institutional investors since bottoming a generation ago below $5. With its broad base of fat-cat stakeholders, the stock has been an ideal market bellwether. More than any other stock, it is responsible for making portfolio managers look like geniuses, and for creating the deception that a U.S. pension system headed for certain disaster in the next bear market is in great shape. This week, however, we will turn out attention to bitcoin, represented in the chart above by a CME vehicle that tracks best bids and offers for bitcoin in real time across many exchanges. It could be argued that bitcoin is an even better bellwether than Apple, since it lucidly captures not only the methodical rigging of the investment casino by Wall Street hucksters, but the unmitigated craziness of the players. They are being cheered on by big banks that surely know better, since bitcoin’s supposed value is backed by…nothing. Without having much actual skin in the game, the banks have been shamelessly talking their book since they conspired to lift bitcoin from pariah status back in March 2020. ‘Wayne’s World’ Nerds This followed a shakeout that would have devastated mainly Wayne’s World nerds who were early adopters and traders of bitcoin. The virtual currency fell from above $10,000 to $3900 before the big boys began to aggressively tout encrypted money as a viable medium for financial transactions. This has yet to happen, in part because cryptocurrencies (although not blockchain technology, which holds enormous promise) offers few advantages over a credit card system that works just fine. Bitcoin has nonetheless succeeded wildly as a vehicle for table-stakes speculation, gaining credibility in the mainstream media because of its acceptance by financial institutions and by high-profile players such as Paul Tudor Jones, Michael Saylor and the Winklevoss brothers. So what can BRTI’s chart tell us? For starters, that bitcoin could move fully 50% higher, to a top at 89,790, before the bull market cycle begun in 2020 runs out of steam. By comparison, the most ambitious target I can come up with for the Dow Industrials is 42,219, a mere 20% above current levels. This implies that if the bull market is entering a blowoff phase, as I suspect, the move in bitcoin will be far more impressive in percentage terms. Most immediately, bitcoin (aka ‘Bertie’) would become a theoretical buy if the correction touches the red line at 59,302. This is in accordance with ‘mechanical’ trade rules of the Hidden Pivot Method. The entry risk is close to $10,000, and so I’ve advised this gambit only for subscribers expertly familiar with risk-cutting tactics made possible with Hidden Pivot ‘camouflage’. In any event, we’ll continue to exploit the bull market’s topping process and its daily deceptions as long as the extraordinary opportunities this presents continue.
Inflation fears are at a generational peak, pushing our stubbornly unfearful Fed chairman against a wall. He may yet prove right in saying inflation will be transitory, but for reasons that should comfort no one. In the meantime, the U.S. dollar seems resistant to the nervous chatter while Treasury bonds, although struggling for altitude, continue to hold their own. Both are near the middle of their respective trading ranges for the last five years, presumably waiting for more persuasive evidence that the inflation we’ve seen to date is about to go out of control. An obvious reason this has yet to occur is that wages have barely budged relative to the soaring cost of groceries and consumer goods. But how high can inflation go, one might ask, when the broad middle class can no longer afford stuff? Answer: Only so far. The wealthy will not have much of a counter-effect, either, since the trillions they’ve banked from the bull market will get plowed back into financial assets and real estate, not CPI items. Meanwhile, the theory that raising the minimum wage creates inflation has been tested and refuted by a pandemic-strained job market. What it does most clearly is destroy jobs. McDonald’s may have rolled over on paying burger flippers $15 an hour — what choice did they have? — but they have minimized their pain by revamping the restaurants so that as few as three or four employees can run an outlet, including the drive-through. For customers, this means it now takes ten minutes to order a burger using a kiosk, compared to 90 seconds when there was someone behind the counter taking orders. Virtually all labor-intensive businesses continue to find new ways to operate with fewer employees, and many of them, including banks, are on the verge of operating without a human interface. Lay off enough tellers and food-service people, and it eventually will kill inflation. Deflation Will Bring ‘Relief’ For now, though, supply-chain problems and the resulting shortages are helping to push up prices and will likely be with us for a very long while. Before the pandemic hit, global delivery systems were operating with the precision of a Swiss watch. Smash it with a hammer, which is what the lockdowns have accomplished, and it will never be the same. But if you are looking for total relief from inflation, there is one thing you can count on for certain: a bear market. When it finally comes, triggering a deflationary collapse that massive credit stimulus has held off for decades, expectations of inflation will vanish overnight. The dollar will break out, yields on Treasurys will fall toward zero, and gold will enjoy safe-haven status for the first time since the 1970s. For more on this, click here to access the interview I did last week with Howe Street’s Jim Goddard; and here for an earlier one with Max Keiser.
If I had to pick one chart that shows why the bull market is probably not over, it would be the one above. To be sure, the 157.26 peak recorded by Apple shares a month ago was a great place for an important top to have occurred; this chart shows why. But THE top? I have my doubts. For if this were so, it would rank as one of the most visually boring summits ever achieved. For permabears who have waited patiently for a fitting climax to the most most insane bull market of them all, it would be like finding a WaWa Market at the top of a Himalayan peak they’d almost died scaling. Setting the Hook A few forecasters had precisely predicted a potentially important top at or very near $157, including your editor. Some of us even profited from put butterfly spreads purchased a month earlier that more than quintupled in value with AAPL’s 12% drop so far. But it could be pressing one’s luck to hold out for more, since the downtrend seems to be struggling increasingly and made no progress at all last week. Perhaps the selloff will turn nasty in the week ahead. But if so, keep in mind that a plunge to the green line would actually be bullish, tripping a ‘mechanical’ buy signal based on Rick’s Picks’ proprietary Hidden Pivot Method. It would also imply an eventual rally to as high as 187.93. This scenario is congruent with one I raised here last week — i.e., that the stock market will rally to yet one more record high, setting the hook in bulls and short-covering bears alike. A steep plunge in the weeks ahead would make a reversal to new highs even more persuasive, and therefore more deadly. Whatever happens, AAPL is still the 300-pound diva whose final aria will signal the end of the bull market begun nearly 13 years ago.
The chart above shows how bull-market tops are made when nearly everyone is expecting one. That’s the case now — for so many good reasons that I won’t bother with a checklist. Just take my word for it: the bull is dying. Most of the reasons the pundits are giving would have us believe the stock market is somehow connected to reality. I won’t insult your intelligence with such claptrap, since you get enough of that on CNBC. I’ll simply mention my own good reason for thinking the Big One has begun: The so-far all-time high in QQQ, a speculative vehicle that tracks stocks favored by the chimps and lunatics who pretend to manage your money, hit an all-time high at 382.75 on September 9 that came within three pennies of a target I’d drum-rolled back in January. Stocks have gone steeply downhill since, giving my magic number a fighting chance to nail it. But perhaps not, or at least not yet. For if Mr. Market is going to set the hook as firmly as possible before taking no prisoners, it wouldn’t hurt for him to push the broad averages, or at least the lunatic stocks, above the September 9 top that has begun to look so promising to permabears. After such a nasty tumble as occurred last week, new highs could set up a knockout punch much like the one that occurred in IBM. The peak that I’ve labeled “False top” occurred in mid-2009, and it came within relative inches of a major Hidden Pivot target I’d disseminated to subscribers months earlier. Imagine my elation when IBM dove sharply for eight weeks after getting within spitting distance of my magic number. Unfortunately, I was so busy patting myself on the back that I failed to notice the waxing vigor of the subsequent bounce. Just a bear blip, I figured. But I was wrong. The stock continued to climb until it no longer looked like corrective rally in a bear market, but rather an assault on the old high. The Ugly Truth Dawns When IBM poked above that high, it accomplished two things psychologically: 1) it made bulls more confident than ever; and, 2) it disemboweled the very last of the bears, who ran up the white flag after frantic short-covering. At that point buying power was exhausted, since bulls were all-in and bears were financially and mentally depleted. You can see what happened next: IBM began to fall, sucking in investors who at least for a while thought they were ‘buying the dip’. It took a few months for the ugly truth to dawn — i.e., that they had been buying into a bear market. The very steep, two-week avalanche that followed in late September reflects this epiphany. Study the chart carefully and let your imagination tell its own story about what investors were thinking as the bloody carnage unfolded. Could it happen again? You be the judge.
[Recently I wrote here that the world’s biggest financial institutions are in Evergrande muck up to their eyeballs, even if they claim that their exposure is small in relation to their respective assets. The trouble is, the supposed assets are as ethereal as Evergrande’s grotesquely inflated real estate holdings. In the guest commentary below, Shawn Brown, a San Francisco friend from the hedge fund world, raises the possibility that behind-the-scenes maneuvering by the Fed is attempting to shore up the financial system ahead of potentially massive Evergrande shock-waves that have yet to be felt. RA ] Who are the 80 Participating Counterparties in the daily $1 Tr+ Reverse Repurchase Facility, and why are almost half of the Primary Dealers foreign? It appears Chinese real estate developer Evergrande is going to stiff offshore creditors in a proposed restructuring designed to zombify the property giant. Is this a dry run for the Fed’s rapidly approaching hyper-hypothecated Treasuries moment? Friday, approximately 50 unidentified counterparties had their access to daily RRP doubled from $80 Billion to $160 billion. According to ADVRatings.com, only seven banks in the world have a market cap greater than $160 billion, and four of them are, dubiously, Chinese. Former NY Fed, IMF and U.S. Department of the Treasury employee Zoltan Pozsar says the counterparties are “sterilizing reserves.” If that’s true, the Fed is about to unleash a literal tsunami of liquidity (perhaps up to $5T) heading into fiscal year end to back-stop the Evergrande contagion and subsequent flight to safety. A Hypothecation Problem The Fed has a serious hypothecation problem, and it is also the reason they’re talking taper: everyone is quickly realizing Evergrande collateral is about to take a 50%+ haircut. The Fed continues to throw shade with terms like “accommodative,” “full employment,” “low inflation,” “climate change,” Covid — and the big zinger, “managing liquidity,” to ensure the financial system is amply provisioned to prevent the plumbing from getting clogged (again). The real story is the coming HYPER-hypothecation; indeed, the Masters of the Universe may be about to pull an Evergrande, stiffing off-shore counterparties who believe their Treasuries are ‘pristine’. Wait till they realize that supposedly pristine collateral has been pledged to dozens of (non-performing) loans, potentially forcing margin calls on some of those 50 or so foreign counterparties and their borrowers. According to the NY Fed list of Primary Dealers, Mizuho Securities USA LLC is one of those dealers who presumably ‘sterilizes reserves’ on behalf of the Fed. Mizuho Securities is a wholly owned subsidiary of Mizuho Financial Group and the world’s 60th largest bank by market cap, at $36.95B. Why would a Japanese Investment bank need more than 4X their market cap in ‘reserves’ if something wasn’t completely broken in the financial plumbing? We are in a fourth generation war, not unlike Klaus’ fourth industrial revolution. Who was it that called these products “financial weapons of mass destruction”?
Bears had a rare chance to get short with impunity last week — arguably the first such free-money opportunity since the bull market began more than 12 years ago. With the Evergrande saga unfolding in real time, shares appeared to be doing a Wile E. Coyote ahead of Friday’s opening. Their gravity-defying behavior reflected one of those deft manipulations where DaBoyz greet whatever fragile bids show up in the early going with a feather-light touch. On Friday, playing it by the book, they scaled back their offers until the very last of the idiots from Mars doing the buying were fully satisfied. The result was that stocks hovered aloft for just long enough that traders who had gotten things exactly right — i.e., realized that Evergrande‘s failure could make the 1998 collapse of Long-Term Capital Management look like a furniture-store liquidation — must have begun to doubt themselves. It was only after the opening bell that they came to their senses with the apparent realization that any selling done on Friday was all but certain to look fortuitous come Sunday evening. Stocks began to fall, but not nearly as steeply as they are likely to fall in the days, weeks and months ahead. Indeed, I am publishing this commentary ahead of Sunday’s resumption in trading to drive home my point, which is this: Evergrande’s imminent implosion could turn out to be the biggest speculative collapse in history. It is going to take down many big players, causing a chain reaction that will definitively end the buying mania that has gripped shares since Covid-19’s “bullish” failure to put civilization into eclipse. Up to Their Eyeballs For now, don’t believe talking-heads blather about how Black Rock, Goldman Sachs et al. hold only relatively small stakes in Evergrande. The truth is, when you connect up the dots, toting up derivatives exposure tied to Evergrande’s epic real estate portfolio, they are all in it up to their eyeballs. Traders and investors should therefore treat every rally as a gift, and every Wile E. Coyote pause in selling as an anomaly. The tempo of the selling is certain to accelerate, and short-squeeze rallies to grow more violent; it will be increasingly difficult to get short. But there should be little doubt that bears have finally got the wind at their backs. The chart above shows that they have some technical support as well, in the form of a recent E-Mini S&P top at 4503, a Hidden Pivot rally target that was a decade in coming.
The weekend brought an autumnal breeze to much of the Eastern Seaboard, and with it raised hopes in some quarters that seasonality will trigger a long overdue avalanche in the stock market. Even a few bulls are hoping for this, since only a rip-snorting stampede out of shares can disperse the potentially explosive, hydrogen-saturated layers of hubris that have accumulated over Wall Street since stocks bolted into the blue 18 months ago. The astounding rally during a global pandemic has made the rich effortlessly richer while doing little to help the broad middle class. It has also undeservedly burnished the reputation of portfolio managers who have done little more than throw Other People’s Money at a relative handful of stocks. They’ve been winning like crazy for more than a decade, so who could blame them for believing their amazing run of luck will continue forever? Of course that’s the way things always feel at important tops, even if the Wall Street Journal and other cheer-leaders for investors’ salacious fantasies will try their hardest to explain why this time it really is different. Love that Kamala! Most of us know better and can smell a top that is becoming increasingly pungent with each fresh instance of unsettling, if not to say appalling, news. The President’s steepening mental decline, for one. The New York Times, the Washington Post and even the Wall Street Journal will somehow find things to like about Kamala Harris when it’s time to cheer her on, but there’s no pretending she’ll be any more effective than Biden. And there’s the delta variant, a contagion so robust that it could conceivably put the world into a second lockdown that will make the first seem like a global street festival. You could always argue that the market has become completely untethered from such real-world concerns, but even then, you’d still have to reckon with shares at valuations that are arguably the richest ever. Building a bubble on top of the existing one seems so implausible that we are left with perhaps three logical alternatives: 1) an extended consolidation sideways that lasts for years; 2) a sharp break to lower levels that are more easily sustainable; or, 3) a full-blow bear market, even though so many are expecting it. How All Bear Markets Begin I’m in the last group and therefore heartened by my friend Peter Eliades’ recent warning about Labor Day tops. There have been some notable ones, as he pointed out, and the risks of another would seem to be heightened by the extreme concentration of capital in just a few lunatic-sector stocks favored by money managers. As if on cue, the QQQ proxy for this group double-topped last week at a new-record high before falling about 2% on Friday. That may not sound like much, but realize that all bear markets begin with a single downtick off a summit that may not become obvious for weeks or even months. But suppose Mr. Market has one more head-fake left in him? The chart of Apple, above, is meant to show how the endgame might unfold. We’ve always considered AAPL to be the most important bellwether for the world’s bourses because it so perfectly reflects the greed, folly and hubris of institutional investors. Based on the chart, I would ordinarily infer that AAPL is likely to reach the pink line, a ‘secondary Hidden Pivot’ that lies 14% above Friday’s close. But I am allowing for the possibility of a trend failure midway between p and p2, meaning it is already under way, or perhaps between p2 and D. That’s because the actual levels have come to be over-watched and over-traded to the extent they no longer work. Thus, in order to find likely turning points, one must use the oceanic voids between the levels. Bottom line: It’s not over until the fat lady sings. Friday’s decline could prove to be the start of the Big One; but if the stock turns and exceeds the old high at 157.26, p2=166.72 would become the minimum upside target, and thence 177.32, midway between p2 and D. We’ll look to get short as opportunities develop, while remaining alert to the possibility that last week’s highs will come to mark the beginning of the end. _______ UPDATE (Sep 14, 10:45 p.m.): So far, so good! AAPL has gotten kicked in the teeth this week and is down around 5% Use the 144.68 target shown in this chart as a minimum downside objective, but also to get short ‘mechanically’ at 149.72 if the bounce gets there.
China is easy to hate, since their leadership is at heart a bunch of double-dealing, lying commie rats. (And yes, the evidence is more than a little persuasive not only that they unleashed a deadly virus on the world, but that they took clandestine steps to protect themselves from it before going public with the bad news). There is nonetheless something to admire and even envy in the way China’s leaders have been going about economic reform. For starters, Xi Jinping has declared war on tech companies perceived as having little to contribute to China’s goal of economic, geopolitical, financial and cultural dominance. Not coincidentally, most of the targeted companies are in the same businesses as America’s hottest firms: consumer goods, advertising, real estate, ride-sharing, finance, gaming and entertainment. Xi’s denying Chinese firms in these sectors access to U.S. capital markets is akin to Biden’s issuing a fatwah against glorified ad agencies like Google and Facebook, banning Twitter for incitement and casting out the moneylenders at Morgan Stanley. The CCP’s clean-up campaign took an interesting — some might say promising — turn last week when they banned effeminate men from TV. It remains to be seen how a generation of children will fare in the relative absence of yin-saturated popular culture, but if it eventually produces a Chinese John Wayne, the West will face an even tougher adversary down the road. Terminal-Stage Consumerism It’s not simply a matter of targeting the kinds of companies we associate with America’s terminal-stage consumerism, income inequality and decadence. The CCP’s reforms are also designed to shift investment capital toward industries positioned to provide a brighter economic future for the Chinese people, and to grow an economically robust middle class. This policy implicitly rejects and rebukes an American-style capitalism that has atrophied to the point where it has become fatally unproductive. I say fatally because U.S. equities markets continue to concentrate trillions of dollars of investment capital in companies like Google, Facebook, Amazon, Apple and Twitter that masturbate Americans, even as high-tech startups that could change the world are starving for funds. I speak from personal experience as an investor in a relatively young Colorado firm that uses terawaves technologies in ways that could revolutionize food safety, homeland security, national defense and healthcare. The company, TeraBAT, has struggled for years to raise a measly $3.5 million dollars even as Wall Street has poured trillions into a real estate bubble, online dating, food-delivery apps, online messaging, driverless cars, social media, smart phones and even donuts. China has decided it wants no parts of this action and banned what U.S. investors would consider “hot” companies from raising capital in the U.S. For good measure, and to ensure that the supply of human capital is of the highest quality, the CCP has drastically reduced the amount of time kids can spend playing video games. This will never happen in the U.S., and it is yet one more reason why China threatens to succeed where Khrushchev’s Russia failed: in burying us. (Click here for a related interview Rick did last week with Howe Street‘s Jim Goddard.)
Jackson Hole hubris was operating at full strength last week as investors around the world anxiously awaited the announcement on Friday that would send the markets into hyperdrive. The broad averages had in fact churned impassively for several days ahead of whatever lame twaddle concerning The Tapeworm lay in store. The question of when the Fed will begin to tighten following a loosening binge that has persisted more or less continuously for a hundred years is the focus of portfolio managers’ tiny, febrile brains these days. How quickly they forget! For taken together, the last dozen or so Tapeworm utterances, hints and titillations would seem to imply that if tightening is coming at all — which everyone knows it is not — it’s unlikely to commence before, oh, maybe the end of 2022 or, for good measure, 2023. Vague enough for you? This dovish meme has been recycled so many times that it’s a wonder it can still send shares soaring. And yet it does, alternating with fleeting dips of feigned fear and dread whenever the Fed even whispers that it will someday be necessary to bring its surreal balance sheet into a semblance of control. Colloquially this is known as “taking away the punch bowl,” an annoyingly dumb cliche coined by a benighted news media to make the somewhat esoteric concept of tightening go down easier with readers who are rightly confused about the bottom line. Getting High in August Still, you have to give the charlatans who manage our expectations their due, since they’ve riveted investors’ attention whenever someone affiliated with the central bank farts, burps or clears his throat. On Friday, Fed Chairman Powell did all three, metaphorically speaking, in promising there would be some tapeworming of monthly bond purchases by the end of this year. We’ve heard this so many times before that if you bet on it, be sure to get odds, since Powell and his colleagues fully understand that any real tapeworming would send the global economy into eclipse for a decade. Their alternative is to keep talking, and it must be conceded that this strategy seems to be working, at least for now. Considering that Powell’s mildly hawkish speech on Friday pushed stocks sharply higher, it would appear the Fed has got spin control dialed-in. If so, it would not be the first time that investor ebullience, along with the stock market, reached frightening heights in the month of August. Meanwhile, although it’s impossible to predict when the obligatory, dovish take-back is coming from the spinmeisters, it is as certain as the next sunrise and apt to follow a punitive selloff on Wall Street. Keeping the stock market pumped is all the Fed really cares about anyway, but it requires bigger and bigger lies to hide this unseemly fact. It helps that the hacks who invent the news are fully onboard and brainwashed by the Fed’s brand of egghead razzmatazz to believe Americans can borrow-and-spend their way to wealth and prosperity. Moreover, because the news media have been conditioned to hang on every nonsensical word from the central bank, even a low-level Fed functionary can impact global securities markets just by reeling off a few scripted bullet points at a Rotary Club luncheon. This dynamic resembles the relationship between the press and corporate muckety-mucks who quiver in their Guccis whenever they have to face some hack reporter dispatched to sound them out on the topic du jour. The scribes invariably report out the story with proper awe and fear, filing dispatches that in the Fed’s case would have us believe they’ve got everything perfectly under control. Yeah, sure. Bipolar Behavior The fund managers know better, of course, even if we tend to think of them as chimpanzees whose buying ‘decisions’ mainly entail force-feeding Other People’s Money into a handful of FAANG stocks while constantly rotating a bunch of others to make investors think their savings are hard at work. So if the chimps are slightly smarter than we tend to think they are, why do they drive shares wacky every time the Fed roils the air with flatulent piffle we’ve heard a hundred times before? The answer lies at the heart of the stock market’s embarrassing histrionics, which are simply a reflex, like an earthworm writhing in strong sunlight. As implied above, investors big, small and in-between have their testicles/pudenda wired directly to the Fed’s PR ‘defibrillator’. Thus, even the smallest jolt of ludicrously mis-imagined news will tend to induce violent spasms. However, they occur not because investors or anyone else take the Fed’s insultingly stupid obfuscations seriously, but because they fear that all the other idiots in the money management business will react to those obfuscations in the way they’ve been hired to react. Machines do the actual buying and selling when the ‘news’ hits the tape, but if the algorithms appear panic-stricken, it is only because they’ve been programmed to anticipate the bipolar behavior that accounts for most price movement in so-called ‘securities’ markets. It is left to stockbrokers, analysts and the news media to explain why these reactions are not only rational, but healthy and, ultimately, bullish.
[Editor’s note: The following was sent out to clients in mid-July by my friend Doug Behnfield, a financial advisor and senior vice president at Morgan Stanley Wealth Management in Boulder, CO. Long-time followers of Rick’s Picks will be familiar with Doug’s work, since his thoughts have appeared here many times. I have always referred to him not only as the smartest investor I know, but one of the smartest guys. He still is. I am grateful to him for allowing me to share his insights with you. However, I must I must apologize for some formatting changes that were necessary due to typographical limitations on my end. Doug’s original letter was meticulously footnoted, and some text that was bullet-pointed I have rendered in paragraph form. Otherwise, the content is unchanged. RA] In all 44 years as a Financial Advisor (aka Account Executive, stockbroker), I have never been aware of any respected stock market pundit that “called the top” in close proximity to the actual beginning of a true Bear Market. However, an associate once gave me a report late in 1987 that had been issued in July, 1987 written by Justin Mamis entitled The Philosophy of Tops. He wrote it just three months before the Crash of October 1987. It has been in my permanent file for decades and I dragged it out a few months ago to remind me how utterly difficult it is to know how high is too high (or how low is too low) in the stock market. After all this experience in the business, I wish I knew, or that I knew someone who knew, on a timely basis. But, alas, it has been too much to ask. That doesn’t mean that I haven’t accumulated a meaningful amount of market wisdom over the years. As Leonardo Da Vinci said: “Wisdom is the daughter of experience”. Amos ‘n Andy had something to say about it too. So here is some of my market wisdom: 1) There are no secular bear markets that are the result of geopolitical,economic or natural disaster events, historically, that I am aware of; 2) Market crashes that occur as a result of these events tend to be “buy the dip” opportunities, and 3) Examples of this are the Covid-19 lockdown, the 9-11 attack on the World Trade Center, Hurricane Katrina and the Cuban Missile Crisis. ‘Let’s Short Everything’ I hosted a dinner in New York City several years ago with Arthur Cashin, Ray DeVoe and David Rosenberg in attendance, among others. Art told the story of the rookie trader on the floor of the New York Stock Exchange in 1962 who blurted out “let’s short everything!” when the news hit the tape that our country was confronting the Russians by blockading their ships bound for Cuba and the market was crashing. The response from Art was, “No, you buy everything. Either this gets resolved quickly or we’re all fried and we won’t need to pay for the trades” (as in nuclear holocaust). Buy the dip. On the flip side, there is a great deal of danger associated with being complacent and fully invested (whatever that means) at the top of a secular bull market when a bear market looms, for obvious reasons. Bob Farrell’s Rule #5 applies here: “The public buys the most at the top and the least at the bottom.” From Justin Mamis’ report on it back in 1987, I have a few favorite quotes: ** “Unlike bottoms…tops seem to come out of nowhere, indeed, out of a glowing, good news climate.” ** “A bull market itself is lulling, like lying on the beach on a lovely summer’s day: at first, feeling healthy, you play volleyball and jog a little, enjoy brief dips, and then, somehow, you can’t keep your eyes open. ‘Isn’t this marvelous?’ you whisper as you doze off.” ** “The one eternal aspect of every market top is that it occurs before we’re ready for it.” Topping Conditions Are Present Many of the characteristics that he cited as topping conditions are also present today. Which brings me to the Treasury bond market. Yields broke out of a low trading range on the upside last fall as the vaccine arrived and the Democrats won the national election. The rise in rates accelerated as the Georgia runoffs produced a Senate majority for the Democrats. This was because the one-party control of the Federal Government seemed to assure the passage of massive fiscal stimulus which was believed to usher in a stronger recovery with inflationary implications. However, the rise in rates came to an abrupt halt in mid-March, just as the last stimulus checks were being issued. Who says the markets are not a discounting mechanism? Since 30-Year Treasury rates peaked on March 18, the popular financial press has been filled with threatening (hopeful?) articles about the likelihood of inflation finally rearing its ugly head (after 40 years?) and skyrocketing interest rates due to the inevitable economic boom ahead. The fact that interest rates have declined dramatically (in the case of the 30-Year Treasury yield, from 2.5% then down to 1.9% currently), renders the debate settled: inflation is transitory. The spike really was about “base effects” from the deflation prints last fall and the short list of components that are bottleneck victims dominating the recently elevated CPI numbers. Those factors are quickly receding into the past. Keep in mind that inflation has a closer correlation to long-term rates than any other measurable economic or market factor. Intermission The Second Quarter saw a downside reversal in interest rates on Treasuries, and Municipal bonds continued to perform well. Gold recovered too. Stocks were higher. Here are some representative Q2 (not YTD) performance figures as of 06/30/2021: The decline in interest rates that began in mid-March accelerated in midMay, just as economic data in general began to disappoint. The red-hot housing market has begun showing signs of cooling off, as has consumer spending, consumer sentiment and industrial production. In addition, the new “Delta Strain” of Coronavirus has been able to infect a broad spectrum of the global population, including those that have previously contracted the virus and those who have been vaccinated. The risk of a weaker Second Half outlook (and into 2022), is supported by the risks associated with the end of Federal fiscal direct stimulus to households, extended unemployment benefits in September, and moratoriums on rent and student loan payments by year-end. Commodity prices have been deflating recently along with crypto currencies and Meme stocks. Lumber, which hit a high of $1,733 thousand board feet (TBF) in May, recently traded at $484, near pre-pandemic levels and down 72% from the high. While the stock market continued its push higher in the Second Quarter, some market analysts are pointing out that there has been evidence of extreme bullishness and speculation being expressed by individual investors. Margin debt is at record highs and that does not include the nonpurpose securities-backed lines of credit that make it possible for all those homes in Aspen to be “bought with cash”. In addition, many arcane market technical indicators such as breadth have deteriorated markedly. Many of the current technical and sentiment conditions are reminiscent of what was outlined in “The Philosophy of Tops”. The predominant leadership for most of the bull market that began way back in 2009; the Mega-Cap stocks, has been faltering since Labor Day. Conventional measures of valuation, including Price/Earnings Ratios (high) and Dividend Yields (low) are at historically unprecedented levels. Scariest of all is the parabolic nature of the advance, particularly coming off the Pandemic-Crash low. The risk of a weaker Second Half outlook (and into 2022), is supported by the risks associated with the end of Federal fiscal direct stimulus to Needless to say, the apparent resumption of the Great Bull Market in Bonds can be helped along by reduced inflation caused by any economic weakness and/or a reversal in the stock and real estate markets.
There is increasing confusion in America about how to handle the rapid spread of Covid’s delta variant. The stock market can usually tell us how much fear is out there, but this time Wall Street seems, if not quite clueless, then certainly heedless. The broad averages have moved steadily higher in recent weeks, caused more by nervous short-covering than by any particular bullishness. There have been no dramatic surges, only a steady, ratcheting ascent that suggests an army of bears have been hard at it, trying to get short at a major top. The irony is that if they would just relax, bull-mania would end overnight, since the rally is drawing its punching power more from buyers driven by desperation than from any other source. With or without them, though, a very important peak is not likely far off. Delta-lockdown worries are bearing down on markets and nearing the red zone as state governors respond with increasingly onerous restrictions on 140 million Americans who have not yet been vaccinated. One-Upping DeBlasio Here in Florida, there are signs that serious trouble could be brewing in the nation’s school systems. In Palm Beach County last week, more than 400 students were quarantined just two days into the school year. Although most of them have not tested positive for Covid, contact tracing has put their school year in limbo. Unfortunately, such turmoil could prove to be a mere squall in comparison to the gathering firestorm in big coastal cities. In New York City, for one, DeBlasio announced last week that the un-vaccinated would be barred from indoor dining, gyms, bars and other places. Not to be outdone, California’s true-blue mayors have already one-upped him with edicts that go even further to restrict movement and commerce. As of Friday, Los Angeles reportedly was considering closing grocery stores and much else to the uninoculated. It is predictable that San Francisco and Chicago will not let L.A.’s quarantine challenge go unanswered. Things have not yet reached the level of hysteria, but once the reaction to ‘delta’ has run its course, if it ever does, we can expect many businesses that survived the first lockdown to close forever. Crazed investors may have contrived to take the first tsunami of business shutdowns in stride, but reckless obliviousness may not yield such benign results this time (if blowing an epic stock-market bubble can be described as benign). The giddy rally of 2021 was based in part on the delusion that as long as Amazon, Google, Netflix, Microsoft and a few other category-killers were doing well, then so was America. A spectacular bull market has reinforced this absurd idea, but it flouts reality, since small businesses account for fully half of America’s GDP. Shut down enough of them and the unemployment and falling revenues that follow will eventually take down the consumer economy and the online behemoths that serve it. Rental Bubble It will also affect the real estate market, especially rentals that have attracted big players such as Invitation Homes and Zillow. Such companies have created a bubble of their own by paying outlandish prices for residential properties, remodeling many of them extensively to attract upscale tenants. In a market as hot as home rentals has been, why should they care about upfront outlays when they can count on a steady stream of ever-rising rent payments over the next ten years? The fatal weakness of this strategy is that tenants are necessarily those who cannot afford to own a home. None of this recklessness will matter as long as stocks continue to rise. Some technical forecasters seem to think the bull market has a lot farther to go and that the Dow Industrials could double or even triple over the next five to ten years. Although it is impossible to show why this can’t happen, my gut feeling is that the so-called “everything bubble” is about to pop. It will very shortly be bucking not only seasonal headwinds, but a notorious history of stock market crashes and panics in the September-October period. If past is prelude, the broad averages are setting up for a memorable plunge. Can we actually identify The Top with technical analysis? Stop by the Rick’s Picks Trading Room and find out for yourself. Shorting lesser tops and making money at it has been our specialty, even if we’ve yet to nail the start of the Big One. The 4461.25 Hidden Pivot in the E-Mini S&P futures that was sent out to subscribers Sunday afternoon is a good example. At the moment, it is working nicely for traders who bet it would contain Friday’s ebullience, if only for a short while. That is how we roll: take a profit and swing for the fences with the 25% that remains. You don’t need to speculate wildly to benefit from the bull market’s robust insanity.
Bloomberg missed the real news in its flippant headline, “Return to the Office Five Days a Week? How About Never Again”. The article was just family-page pap about how work-from-home employees aren’t complaining about the indefinite postponement of a back-to-the-office mandate. With the delta variant on a headline rampage, exile in suburbia seems to suit most of them just fine, and to hell with the 6:00 a.m. commute. The much bigger meaning of this is certain to become the subject of newspaper headlines in years to come, when America’s biggest cities are further along the road to bankruptcy and obsolescence. Bloomberg’s editors will probably be the last to see this trend developing, so eager have they been to cheer-lead New York City’s supposed recovery from the lockdown. They would have readers believe, for one, that the billionaires who fled to Florida, which has no income tax, are eager to return to the Big Apple, where they would face an 11% income levy just for the privilege of watching DeBlasio run New York even deeper into the ground. Paper-Shuffling Sector Bloomberg.com’s blithe optimism aside, it’s painfully obvious that the U.S. economy, most particularly the colossally large paper-shuffling sector, no longer needs skyscrapers to conduct business. Nor will workers have much use for the services and amenities associated with those skyscrapers and with city life itself. This implies that buses, trains, trolleys and taxicab fleets, restaurants, stores, concert halls, parks, theaters and so many other things that make urban living worth the hassles will be used less and less over time. Do you see the economic problems this will create? If Bloomberg’s editors do, they didn’t say so; for nowhere in the article was there any mention of the fact that user-based revenues associated with urban amenities will either have to be massively written down or replaced by taxpayers. The drop in revenues is already being felt, although vast quantities of Federal aid to cities has both masked and delayed the consequences. But make no mistake, taxpayers eventually will have to make up the shortfall, coughing up trillions of dollars over time to keep pension checks and healthcare benefits flowing to retired government workers. And although the cost of maintaining urban infrastructure will diminish somewhat with less usage, it will still be one of the biggest items in city budgets. Deflationary Spiral To escape the burden of steeply rising taxes, the affluent will step up their exodus from big cities, creating a deflationary money spiral that will feed on itself. This will worsen when subsidies from the U.S. Government are scaled back. But what would happen, you ask, if Congress enacts a $3 trillion ‘infrastructure’ package on the heels of the $1 trillion porkpalooza about to be approved? Almost for certain, much if not most of the money will be wasted in ways so infuriating that we cringe to imagine them. Optimists and editorialists should ponder the meager results of the U.S. Government’s $20 trillion War on Poverty, lest they grow overly enthused about what a $3 trillion shot-in-the-arm to political cronies might accomplish.
If you’re worried that interest rates are about to explode because of inflation, the graph above would seem to offer comfort. From a visual standpoint, the gentle rollover that has occurred over the last several months has sapped the vigor from a menacing spike that had pushed yields on the 10-Year Note from 0.40% at the start of the pandemic to a high of 1.76% in early April. The surge also failed to surpass previous highs near 2%, suggesting there is considerable resistance at that level. For the time being, this holds positive implications for the U.S. economy, since T-Note rates largely determine how much mortgage and corporate borrowers must pay for loans. It also helps to sustain the illusion of a stability in the global banking system. That’s because even a small tightening of the interest rate screw would have dire consequences if applied to the $2 quadrillion of borrowing amassed in the derivatives market. These financial instruments are used ostensibly for hedging, but over time their use has expanded to accommodate leveraged speculation on a cosmic scale. A Network of Nerves What would it take to crash this market? No one has a clue, although it is probably fair to say that it is as complex, and therefore ultimately as fragile, as a human nervous system. The synaptic connections are based on trust rather than neurons, however, and that is why a systemic failure would likely be total rather than merely in one “hemisphere” or the other. A further implications is that if stress levels got high enough, something akin to a stroke would result. Fortunately, with ten-year rates at a current 1.24%, we are well below the danger zone. That’s equivalent to a blood-pressure reading of perhaps 130/80. Realize, however, that this seemingly normal reading exists only because it is controlled by a Federal Reserve that continues to dispense massive doses of QE stimulants. Buyers of stocks at these levels implicitly believe either that a serious panic is not possible, or that if it comes, the Powers That Be will quell it by putting Jerome Powell on the evening news to narcotize the herd. Another Possibility Even if we are not tested in this way, there remains another scary possibility that almost no one is talking about: economic collapse caused not by soaring interest rates and a plummeting dollar, but by falling asset values. Real estate and energy resources are the chief sources of worry, since they are the main collateral for borrowing that has inflated the derivatives market to ten times the size of global GDP. Were prices for homes and crude oil to fall as hard as they did in 2007-08, nominal borrowing rates of 1.5% would turn into crushing real rates. This actually happened post-2008, when homes in the U.S. lost an average 34% of their value in less than three years. We would be in an economic depression now as a result but for the fact that the Fed had plenty of room to ease credit. Mortgage rates were around 6% at the time. Now, with rates already at historic lows below 3%, that remedy no longer exists. The system is far more leveraged as well, and energy-sector collateral is in a bubble. The crucial importance of this bubble to the delusion that we can avoid a ruinous deflation is underscored by the fact the stocks and energy prices move in lockstep together. Wall Street loves higher energy prices, but the romance is fated to last no longer than the bull market in stocks. When the two begin to fall in tandem, it will be as though there were no bottom. The Plunge Protection Team, SIPC, the FDIC and other would-be heroes of moral-hazard may attempt a rescue, but like the Charge of the Light Brigade, it will be doomed from the outset.
My astute friend Greg Hunter at USA Watchdog weighed in recently with such a despairing outlook for the dollar that it’s probably a good time to determine whether the charts support this view. Here’s the post from his site, which over the years has featured my own thoughts on deflation, the global economy and other topics: The Fed keeps telling us that inflation is going to be transitory, and things will fall in price and go back to normal soon. Nobody is buying this in the real world where people are watching their dollars fall in value and are paying more for just about everything. In simple terms, the dollar is tanking. Maybe this is why JP Morgan is the first big bank (with many to follow) that is putting high-net-worth clients into crypto currencies. Bo Polny says this is all part of a “Jubilee year which began in September of last year and ends in early September of this year.” Polny says, “Expect to see in the next four to five weeks a fall of the dollar, the world’s reserve currency. This could start as early as next week causing a run into tangible asset that include gold, silver and crypto currencies like Bitcoin. All hell is about to break loose on evil.” Sounds ominous, for sure. However, it flatly contradicts a forecast I’ve held to for decades – that deflation would ultimately wreck the global economy, driving the dollar into such scarcity that many, if not most, Americans would have to barter to survive. This may seem hard to believe at the moment, given the Fed’s unprecedented monetary blowout and the illusory prosperity it has created. Most of the digital cash has gone into investable assets, triggering a seemingly unlikely run-up in stocks during a year of Covid lockdowns. It has also created a real estate bubble even more extreme than the one that popped in 2008, nearly taking the global economy with it. This Isn’t the 1970s We should note that the current inflation is very different from the one of the 1970s. That was self-perpetuating to the extent wages and prices drove each other higher in a seemingly endless spiral. The current inflation is not self-perpetuating; rather, it is being fed by an increase in paper wealth that will reverse and crash in the next bear market. Nor are people desperate to trade dollars for physical assets as occurs in a hyperinflation; mainly, it has been Baby boomers spending a significant portion of their paper wealth on second homes in desirable locations away from urban centers. Still, one might ask: With the Fed and every other central bank inflating like there’s no tomorrow, how could deflation possibly result? The answer lies in the inescapable fact that every penny of what we collectively owe must ultimately be repaid –if not by the borrower, then by the lender. This implies, for one, that when Biden and the Democrats “forgive” student loans amounting to $1.7 trillion, creditors will eat the entire loss. Twelve zeroes worth of receivables will be wiped from their books with the stroke of the President’s pen; shortly thereafter, yacht prices will begin to soften ever-so-slightly in West Palm Beach, and the market for $20+ million homes in the Hamptons will appear to totter, producing small tremors in Aspen, Scarsdale and Atherton. Now imagine this implosion multiplied a hundredfold. That’s what will happen when the inevitable bear market in stocks unfolds. It will suck far more digital dollars into a black hole of deflation than the Fed could conceivably monetize in an unrehearsed attempt to hold off a collapse. The deleveraging will not stop until it has reduced the $2 quadrillion financial derivatives market to an infinitely dense singularity. A thousand financiers working 24/7 and backed by the full faith and credit of the U.S. Government will not be able to pry loose even a dime of credit from this market for at least a decade. That’s how long it will take, at a minimum, for a wrecked middle class to push their credit scores back above 400. Dollar Short-Squeeze The collapse will end our misplaced faith in a bank clearing system that is ultimately as fragile as crystal, rendering ATMs and credit cards useless overnight. Money markets will seize up like a flash-frozen ocean as lenders refuse to roll overnight loans, instead demanding settlement in cash. That’s when we will discover that real cash-dollars are actually in short supply. In the absence of a functioning market for digital dollars, the resulting short-squeeze on real ones will be like the squeeze that pushed the shares of Gamestop and AMC into the stratosphere. The comparison is appropriate because, like debt issued by those two companies, the dollar ultimately is just a worthless I.O.U. For the time being, however, the dollar will remain under pressure despite assurances from Fed bag-man Jerome Powell that inflation has peaked. We should note, however, that the dollar has not exactly collapsed under the weight of QE derangement. To the contrary, and as the chart above makes clear, the greenback is down just 4% from the sweet spot of its pre-pandemic trading range. Moreover, a key, long-term support at 90 has survived two brutal shakedowns this year. Although the support could conceivably give way on renewed selling, nothing in the chart says this is likely, let alone that the dollar is in a condition of imminent collapse. Bear Sinks All Ships It is even arguable that the dollar index’s sideways move since early 2015 has been base-building for a moon shot to 120 or higher. That would be extremely bad news for anyone who owes dollars, since they would be far more difficult to come by. Unfortunately, this problem will eventually enmesh us all, since it is not just a matter of mortgages and car loans, but also of our collective liabilities for private pensions, Social Security and Medicare. These are the deflationary whales that will bear down on us when the actuarial folly that has sustained them lies fully exposed by a stock-market bear. The whopping debts that we owe ourselves cannot be monetized without hyperinflating the programs themselves into quick oblivion. That’s one reason why the economic endgame is all but certain to feature deflation rather than hyperinflation. If there is a silver lining, it is that deflation will visit pain on borrowers that is more or less commensurate with their sins of excess. It would also leave intact the banking system and other institutional conduits of credit. Hyperinflation, on the other hand, would destroy the bond markets that enable lending, throwing the economy into a state of barter indefinitely. Could things ever get that bad? Most surely. It would simply reflect the deleveraging of illusory financial wealth that has grown to more than ten times the size of global trade in actual goods and services. Like the stock market, the world’s financial system is trading at an absurd multiple. Even more absurd is the notion that the massive debt-overhang can be stage-managed indefinitely with a sham “taper” crafted by the charlatans at the central bank.
The latest attempt to move the global economy away from the dollar’s dominance involves a plan by Biden to issue $650 billion of Special Drawing Rights (SDRs) through the IMF. Ardent fans of the greenback needn’t worry, however, since this sum, as large as it seems, is just a drop in the bucket compared to a derivatives market that supplies more than $2 quadrillion to the world’s biggest financial players. The dollar is the only currency big enough to handle their action, which dwarfs global trade in actual goods and services of no more than $90 trillion. Under the circumstances, it’s unlikely the dollar will be replaced any time soon. The $650 billion supposedly will enhance global liquidity, as though more liquidity were needed in a world where financiers can borrow practically unlimited quantities of money for next to nothing. China’s communist government is backing the SDR expansion, although for reasons that are doubtless different from Biden’s. One suspects that globalists have Biden’s ear and that he is unwittingly going along with them because, well, because he was witless to begin with. For its part, China undoubtedly thinks more funny-money loosed in the ether can only be a good thing, since the CCP’s main enterprise these days is helping poor countries go deeper into hock for Belt & Road projects. Pinto Beans for the Poor The SDR initiative is being touted as a way to make the world more “green” and “sustainable,” which is another way of saying that anyone who opposes it is trying to make life even more miserable for the poor. Arguably, they will in fact be better off, since even if $600 billion of Biden’s giveaway goes toward purchasing fleets of Bentleys and sumptuous vacation homes for Third World dictators, the $50 billion that eventually trickles down will still buy a lot of pinto beans, Monsanto seed, prescription drugs and sacks of cement. Meanwhile, Biden and his commie friends can gin up as many SDRs as they want and it’s not going to change things significantly. Think of it as a game of Monopoly in which a splinter group called Park Place LLP is formed to generate side-action with $1,000 worth of scrip. That’s only about 5% of what the official bank holds, but because it is not nearly as leverageable or fungible as “real” Monopoly dollars, the partners will eventually fritter away their “SDRs” paying hotel rents, utility bills and jail fines. Similarly, players who are dealt Biden SDRs will be constrained from multiplying them in the way a single real dollar magically becomes 50. To avoid having to write another commentary about why the dollar is here to stay, let me address an ungainly theory that frequently resurfaces – i.e., that America’s energy-producing enemies will gang up on the greenback by demanding payment in other currencies. The simple fact is, the world is perfectly happy paying for something as valuable and useful as oil with a currency that is in almost infinite supply. If Russia, Iran or OPEC were to demand payment in harder money – gold bullion, for instance — sales would quickly drop to zero. End of argument.