Alright guys - get your beers cold and bongs packed because in an autistic Zerohedge style I’m going to lay out my full-blown bear theory and explain in painfully long detail my thought process for why I think this may actually finally be it - the long awaited & fabled stock market top and ensuing bear market that may or may not exist anymore. Get ready for some truly retarded Bear Porn Conjecture.
TL;DR
The Fed is going to continue royally fucking up and is going to cause the next great stock market downturn. Dollar will spike, stonks will go down. Good time to go cash gang, long dollar, yolo LEAP puts.
Alright – let’s go.
The Fed has no fucking clue what they’re doing. In what may end up being one of history’s most ironic full-circle plot twists, just as it was the Fed that saved the world economy in 2008, it may be the Fed that causes its’ collapse more than a decade later. I will make the case for this by outlining my thought process in five parts:
- Trouble brewing in the FOMC
- The Fed has become a ticking time bomb
- Three occurrences underway
- What it all adds up to
- Invalidation scenarios
1. Trouble brewing in the FOMC
The Fed is making it painfully clear that they are at best internally-divided and/or paralyzed and don’t know what to do; or at worst are starting to become more hawkish. This was apparent in Powell’s last press conference. Markets are freaking out with the Feds flip-flopping and obvious lack of decisiveness and direction. The Feds decisions have become too volatile and unpredictable to maintain their perceived put support for the market. The MO of being data-dependent and wait and see has gotten muddied with global weak growth factors and trade war risks. This mantra of ‘wait and see’ has mutated into just winging it. The Fed seems to want to be able to say to the market:
“Look, we don’t think the domestic data is that bad, and we’d like to hold or raise because that’s what our traditional MO & core dual-mandate is, but we don’t want the markets to tank…so here’s a pity 0.25 cut k thanks fuck off”.
While the markets are trying to tell them:
“That pussy 0.25 shit isn’t going to cut it. We get it, but the problem is that you’re living in the past. Today, in reality, you’re not in charge of just the US economy like you were in the early 1900’s – all central banks and thus the global economy takes its’ cues from you today. This is the future. You’re making hawkish decisions in the vacuum of US data, when you’re really de-facto in charge of the world data; and the rest of the world’s data merits nothing even close to hawkish. In fact, what we want is fast and aggressive easing – the yield gap between the rest of the world and the US is too wide and it doesn’t make any fucking sense. Why would the best (US) assets in the world also give me the highest yield relative to dumpster fires like Europe? That defies the physics of finance, the equation is backwards and we’re going to buy the fuck out of that opportunity. Until that yield-gap tightens, we’ll just keep buying up dollars & treasuries because you’re literally the only game in town for us big boys in fixed income & currencies. Did we also mention that we’re flush with cash thanks to the global printing presses over the last decade?”.
The markets had been giving clear signals that holding, let alone raising, was not what the global financial systems needed. So when Powell started beating the drums for Fed support going into the summer and advertising that the Fed also had the responsibility of doing “whatever is necessary to maintain the recovery” the markets of course took that as a signal that maybe the Fed was finally listening to them; that Powell had cemented a dovish dominance over the FOMC and was ready to start an easing cycle. We know of course, that what actually ended up happening was the “mid-cycle adjustment” debacle that brought massive volatility back to the markets.
To say Powell whiffed is an understatement – he couldn’t have dropped the ball harder in his miscommunication with the markets, and it’s his continued miscommunication that’s setting up things for the downside bigtime. He set the stage and put the bar extremely high going into the Aug. 1 announcement without knowing if he could actually deliver. It’s almost like he overestimated his ability to bend the FOMC to the dovish stance he wanted, and didn’t expect to run into such serious opposition from old-school domestic-data-centric hawks like Rosengren and Esther. But he did, and you could see it all over his face during the press briefing. He looked defeated, like he knew he screwed up and miscalculated the whole thing. The old school domestic-data hawks weren’t going to let him have the easing cycle he wanted, despite alarms flashing everywhere in peripheral assets classes. But Powell can’t go back in time, the things that have been set in motion in the global debt and currency markets are now underway and undoable (short of a total 180 from the Fed and they all start worshipping at the dove altar). The Fed cut rates and the dollar still hasn’t broken down and global yields are still plunging even further.
This is a clear car crash happening in slow motion. But why OP? Ah, to answer that young autist, I must give you a bit of a history lesson as to why the Fed has essentially become a caveman driving a Ferrari.
2. The Fed has become a ticking time bomb
The Fed is for the most part still operating like it’s 1913. Their role has been a bit of an evolving grey area over the decades, but to this day they still concentrate primarily on their core dual-mandate of domestic employment and inflation. That’s the key word here, domestic. Nothing in the economic or financial landscape looks like it did 100 years ago. The world has become saturated with globalization and the Fed is now the sole central bank from which the rest of the world hinges all their financial decisions on, period. I don’t think JP Morgan would’ve ever envisioned a Fed as all-powerful as the one we have today, or if he did in his wildest dreams, I bet he would’ve also envisioned that their roles and responsibilities would’ve proportionally grown as well. But they haven’t – they operate in a vacuum with the same instructions that were given to them before the fucking jet plane was invented, let alone electronic and interconnected global financial markets.
So the Fed, which in reality is in charge of the global financial system, is for the most part only considering domestic data when making their decisions. Oblivious to the fact that by refusing to evolve, adjust, and widen their mandate in a modern post-QE world (don’t fucking tell me they need Congressional approval to adjust their mandate when Powell can go out and invent the expanded recovery shitshow), they end up making decisions in a vacuum by only looking at a fraction of the picture. It’s like the Fed is a grown-ass adult trying to solve a calculus equation that the whole world is depending on them to get right, and their response is:
“Well when I was a kid Mommy and Daddy only ever told me I needed to worry about adding and subtracting. I don’t care that I’ve gotten older and the math has gotten more complex. They never told me I had to do multiplication and division so fuck you – I’m going to solve this one same way I always have, with addition and subtraction”.
That’s the Fed’s mentality, particularly the hawks. Their mandated/legal role has become so far removed from the actual role they play in reality for global markets that I almost don’t see any way this doesn’t blow up. The Fed is still trying to go back to its’ roots and operate like it had for decades when they would raise and lower rates based on predictable cycles, but markets are trying to tell them that those days are gone and the Feds role has been changed and augmented forever in a post-2008 QE world.
You can just see that while Powell wants to put his foot on the gas and start easing aggressively, that the dissent both publicly and privately in the meetings from old-school hawks like Rosengren and Esther have him between a rock and a hard place. He’s captaining what’s starting to look like a divided FOMC. It was extremely telling that nobody voted for a .50 cut and didn’t commit to a further one. That should be worrying to anyone thinking the Fed may come to its’ senses and initiate an easing cycle.
The Fed should’ve never hiked, and they certainly shouldn’t have dropped the ball as hard as they did on Aug.1. They’re looking at the domestic economy and seeing good numbers and to them that’s a classic sign to hold or raise rates, but they’re completely ignoring the modern global flows of capital as leading indicators and how they’ll have a future impact on the economy. To be a fly on that wall would be epic, to watch the two sides battle. I imagine it’d go something like this, with the hawks turning to Powell and saying:
“Wtf are you doing? We’re charged with caring about the US economy, not the rest of the world. Fuck those brown people, I voted for Reagan. The US economy looks fuckin good, the playbook my grandpa used, the one I was trained with 40 years ago, says to hold or raise. Don’t deviate from party lines bro, you may be the Chair but you’re still new in this bitch. This aint the fuckin ECB and we’re not gonna put ourselves on a path to that negative rate shit when the data looks good”
And of course, you can just imagine Powell is trying to respond back with:
“You dinosaurs are fucking retarded. Look at the Dollar. Look at the yield curve. Look at global capital flows and the rest of the world’s yields. We need to ease hard and fast, but I’m also timid as fuck and don’t want to stir the pot. So whatever. I’m already worth $100MM and I’m old and tired and don’t feel like fighting this fight so fuck it you guys run the show. I’m out, Jeopardy’s on.”
OK OP, get to the point.
Settle down young paint-chip eater, we’re getting there.
So what’s all this setting us up for? The answer is simply two words: Dollar surge. Why? Because when you add the backdrop I just broke down to the number of scary occurrences underway, they point to that as the logical outcome.
Get another beer, pack another bowl. We’ve got 2 big parts left: the three occurrences underway & what it all adds up to.
3. Three occurrences underway
Occurrence 1: Reflexivity between the Fed and international fixed income markets
I mentioned earlier that Powell could not have fucked this up anymore, and the reason is because everything is about the expectations game. After the Fed hiked last Dec., all asset classes (in particular equities) started seeing more volatility and this freaked the Fed out. So going into the summer they started advertising that they would reverse that course and that they had made mistakes; they were communicating as clear as day to the markets that rates were for sure not going higher, and there was a good chance they could be going lower for longer. So what did this result in? Well, as expected, global markets adjusted and started to price in a narrowing gap between the US and the rest of the world as the big players scrambled to get in before further cuts came and drove global yields lower.
This was the rest of the world saying “OK – maybe the US won’t be the only kid on the block now that their yields are going to come down”. The other side of that coin however, is that the world also saw this as a last chance opportunity to get into US yields before they went even lower. This was evidenced by the Dollars counter-intuitive melt-up even as the Fed was advertising they’d be easing, which theoretically should devalue the Dollar. So we had a Dollar melt-up and a last minute dash for a lot of money to come into Dollars and treasuries before the Fed announced a .50 cut or an easing cycle. The Fed comes out and does the exact fucking opposite of what they hinted they would do – they not only don’t get super dovish, but they do the minimal bitchass 0.25 cut and switch to a hawkish stance of waiting and seeing instead of being decisively dovish. So the global currency & fixed income markets freaked, now thinking that they can’t trust the Fed’s word. Their response was pretty much along the lines of:
“No. Fucking. Way. You just pulled a complete 180 on us. You overpromised and underdelivered when there was no need to. Alright…well, now since we can’t trust you and have no idea what you’re thinking or doing, we’re just going to have to improvise and adapt here because capital needs a home and we’re sitting on mountains of it. Cutting, raising, we don’t care. You’ve already set the wheels in motion for lower rates globally, and your rates in the US are already way higher than anywhere else. The Dollar continues to break out and has been in a solid uptrend since the start of 2018 and is still one of our favorite safe-haven assets next to the Yen. So…we’re just going to keep buying dollars and treasuries. If you continue to cut that just means our p/l goes up, and if you pause or raise then it’s still a win because we’ll just keep buying m0ar attractive yields as the gap widens between the US and the rest of the world. If you had just gone into aggressive easing you might have been able to put a lid on the Dollar and the yield curve inversion, because even we can’t keep bond prices parabolic forever. But you fumbled and now we’re just going to buy the fuck out of the Dollar and your treasuries because we have no idea what the fuck you’re doing. Thanks to the damage you’ve done to global currency & bond markets via your communication shitshow, the yield-gap has widened even more and we find your dollar and yields to be even more attractive now – regardless if you cut another pussy 0.25 in September or hold.”
The Fed is making these rate decisions that have dramatic effects on the Dollar and yields while not paying attention to them because, that’s right, you guessed it – say it with me:
“tH3 dAt@ l0Oks gUd!!!”
So what this all adds up to is a dangerously reflexive scenario between international markets and the Fed. The international currency & fixed income markets perceive that the Fed is either clueless or hawkish, and thus keeps buying up more dollars and bonds to hedge against uncertainty because fuck it why not – US yields are still the best. Meanwhile, the Fed, sipping tea in their burning house saying ‘this is fine’, continues to meander and send confusing signals to the market that they may or may not cut hold or raise – which translates in all languages to “we have no fucking clue what we’re doing and our members aren’t on the same page”.
International markets, seeing this, get even more skittish and continue to buy Dollars and treasuries. As other big international players that were previously skeptical/on the sidelines see these price moves, they start to FOMO in and reinforce the price action, causing a feedback loop between all these players and how they’re interpreting the Fed and investing their funds.
Likely outcomes
- Dollar surges
- Yields plummet and the curve goes tits up inverted, albeit not overnight/super rapidly.
- Stonks go sideways at best and are held up by lower yields in the bond market, but more than likely they go down as equity markets start to freak about the yield curve and the Fed’s Birdbox shitshow.
Occurrence 2: Trump, Gyna, and the Fed
There’s been some pretty interesting conjecture over the last few weeks by Peter Schiff, namely that Trump’s additional 10% $300bn tariffs were meant to be less about Gyna and more of a message to Powell that he needs to cut rates. I normally don’t listen to Schiff, but in a macho bravado kind of way I see some similarities between him and Trump. So I think he may actually be right; or at least partially. I think Trump probably sees it as two birds with one stone as it’s no secret that he’s starting to lose patience with the Gynese.
Gyna and Trump look like they’re coming to an impasse as the US wants Gyna to change its’ laws and the Gynese are not fuckin having it, and who could blame them. Can you imagine if they demanded we changed our legal system? We’d tell them to get the fuck off our porch before we get our gun, and rightfully so. But Trump also doesn’t want to take no for an answer, and he’s banking on this being his art of the deal masterpiece. So Trump will keep pressing Gyna thinking the more he ratchets up the tariffs, the more pressure he exerts on both Gyna and the Fed to get the two things he wants, a bigly deal with Gyna and lower rates.
Meanwhile Gyna is too stubborn to make a meaningful deal, and the whole thing is actually giving the commies ammunition to stir the nationalism pride pot (ex-Hong Kong stuff). They seem too proud to acquiesce, even if it does make sense for them to reform their shady legal and financial system which is long overdue for a country & economy of their size.
And the Fed? Well we just saw exactly what all this meant to the Fed, pretty much dick. Powell started pounding the table for easing because of trade war risks and other uncertainties, and at the next meeting Rosengren and Esther pretty much bent him over and went full Deliverance on his ass. The Fed, despite Powell’s cries in the woods that no one is hearing, doesn’t give a fuck about the trade war because the hawks that are starting to run the show only care about the data. To them, the trade war will only be an afterthought when and if it starts to show up in the data.
To make matters worse, the hawks are also old-school in that the optics of maintaining Fed independence are very important to them, and maybe rightfully so. But the point is that as Trump continues to ratchet up pressure directly on the Fed with calls for deeper cuts, the hawks that are now starting to call the shots are even more inclined to not cut exactly because Trump is screaming for it. Trump may know the art of the deal, but he’s totally miscalculating this one in calling the Fed’s bluff. They won’t blink – they don’t have to. They’re just an organization made up of people like you and me. People are vain and have pride and the FOMC hawks are no different. Why would they bend the knee to Trump when their job security doesn’t depend on it, and there’s a defensible rationalization for maintaining Fed independence AND the data looks good? Arm an academic in one hand with a worthy cause that also happens to stroke their ego, and in the other hand with a defense that’s logical on its’ face-value, and they’ll cling to them for dear life. Even if the whole thing is perverse and distracts from what actually needs to be done to avoid a downturn, not what should be done on institutional principals of optics.
Likely outcomes:
- Trump keeps tariff pressure on, Gyna doesn’t blink, and Fed will say they care but won’t.
- Trump will keep direct pressure on Fed calling for cuts. Fed not only won’t blink but they’ll do the 9-year old reverse psychology thing and get even more hawkish in the name of independence optics.
- Dollar & bond prices will continue to climb as markets freak. Yuan will continue to plunge, meaning we will continue to import from Gyna despite tariffs because of our buying power increase. But Gyna will start to decrease their imports of US goods because our shits now way too expensive for them in currency moves alone, forget about the counter-tariffs.
- The surging dollar concerns the Fed a bit, but because so many of our goods come from Gyna and they now have large price increases to compensate for the tariffs and currency differences, the Fed doesn’t really care about the surging dollar because they see healthy inflation ticking up, which is actually just the prices of Gynese goods going up.
- This sets up a goldilocks bear scenario as the Fed gets bait-and-switched by the Gynese price increases disguised as healthy domestic inflation, which will encourage the Fed even more to either hold or raise, but certainly not aggressively ease.
- Stonks down, bond yields lower, dollar up.
Occurrence 3: The Fed digs in on being data-dependent and gets tricked by the Gynese disguise
The Fed is starting to draw their battle lines, and they’re making it clear that they’ll be almost entirely data-dependent and not heeding any attention to other asset classes or external risks like the trade war. This will be the nail in the coffin that cements the whole downturn. It’s all about the Dollar, I can’t overstate this enough. The Fed continues to punt on it though, living in an absurd fantasy where according to them their rate decisions supposedly have very little impact on the Dollar. When asked about it they continue to throw their hands up and basically say “Not our department, take it up with Treasury” when in reality an aggressive easing cycle would be a dramatic headwind for the Dollar.
So, with the occurrence of the Fed not giving a fuck about the Dollar well underway, that sets up a bigly problem for when the Gyna metrics start showing up in our data. As previously mentioned, because of the Dollar strengthening and Yuan plummeting, the trade war probably won’t decrease a ton of our consumption of Gyna goods. Yes, some companies may scramble to move supply chains and all that noise, but a lot of them will also just say screw it and raise prices knowing the Yuans plummet and Dollars surge will make up the difference. We’ll still be importing tons of shit from Gyna, that’s not going to change. What will change are the real prices of those goods, which the Fed will look at and view as healthy domestic inflation. But in reality that’s just a result of the trade war and massive currency fluctuations, namely the Yuan.
So we end up having a Fed that gets bait-and-switched by the Gynese price increases disguised as healthy inflation, and the FOMC gets head-faked into either holding or raising as the Dollar continues to climb. But hey the data looks good so who gives a fuck about the Dollar and the yield curve, right?
Likely outcomes:
- Fed makes massive miscalculations and either holds or raises because they get tricked by the Gyna price data.
- Dollar has already been surging, but goes straight parabolic like we’ve never seen.
4. What it all adds up to
- Potential hyper-disinflation if the Fed keeps punting on the Dollar.
- The Fed tries to emergency reverse course and go full blown aggressive easing but they just add fuel to the fire. They send the Dollar through the roof as global players scramble to get in before the punchbowl gets completely yanked.
- If you think about the previous two Bear markets, both had obvious catalysts that took roughly 8-11 years to play out. For the dot com bubble, tech stocks had arguably gotten way overvalued as of around the mid-late 90s, but they didn’t peak until 2001 even though everyone saw the crash coming in slow motion. Same with the housing crisis, the boom which took place in the 2000’s was a long time in the making. Housing and economic experts had been warning about it for a while (yes yes reee Mike Burry I know. He banked off it and was early to call it but was def not the only person sounding alarm bells on RE in 06-07). This one will be no different with QE which has no one as worried about the effects like they were immediate post-recession. Those bears died out a long time ago and today if you try to make a case to any investor why QE is harmful they’ll look at you like you’re smoking crack, even though a 2 year old could tell you there’s some seriously fat chickens that are going to have to come home to roost at some point.
- I believe this will be it, this will be the black swan that was right in front of everyone’s faces but no one saw coming. The dead myth that the uncharted-territory of QE would have harmful effects may be rising from the ashes; and in what may end up being the most epic twist of irony, it may be the Fed’s original QE (meant to provide liquidity) which helped plunge the worlds yields into uncharted territory that produced the perfect-storm environment 10 years later for the Dollar to surge higher because of other countries buying which would rapidly tighten liquidity as dollars become more scarce. What’s worse than a global liquidity crunch? An unprecedented debt crisis that spirals out of control as a side-effect of the dollar surging. Remember, the stronger the Dollar gets the more expensive it becomes for the US to service its’ debt.
5. Invalidation scenarios. None of this plays out if:
- Full blown trade agreement happens. Boost in profits would mitigate Dollar surge.
- Fed sees the light and gets super dovish and stops being a pussy.
- Fed decides to intervene with QE4 (Although I have my doubts if it would work as I think in a Dollar FOMO scenario there would be more demand for Dollars than supply of what Congress would be willing to raise the debt-ceiling to.)
- Coordinated international intervention to bring the Dollar down.
- They free Shkreli - markets moon SPX to 5000.
Submitted August 14, 2019 at 11:15AM by WillTradeBTCforPizza https://ift.tt/2YY5NbS
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