Let’s be crystal clear: there is no self-fueling inflation; there’s no wage/price spiral; there’s no deglobalization; there’s not a higher R star; deficit spending is not always inflationary; Fed Funds did not have to rise for this inflation to subside because it wasn’t caused by low rates; the Fed did not repress interest rates for a decade; the Fed does not control interest rates etc etc.
I’m going to officially wrap up this blog, so I wrote a series of articles last winter that expresses my worldview, which I am suggesting is the correct one. It ends with a proposal if anyone is interested in an Act 3 to your life. I’ve been waiting for a possible market inflection point to post the articles and here we are.
Is anyone concerned that in 25 years there won’t be a single job in Finance? Imagine this: the world’s financial system runs on crypto rails and there’s oracles all over providing real-time data of every transaction happening everywhere in the world simultaneously, which feeds AI trading and investing programs that have backtested every possible permutation of every possible data point in history so it knows the chain reaction of economic activity that follows every flap of every butterfly in the world and how every company, commodity, and currency will be affected. Money gets allocated and rotated based on essentially omniscient knowledge not only of the real-time data, but it’s also able to predict the probabilistic outcomes of the short and medium term future, which is a service that’s free to the public and tailored to your age or whatever risk tolerance it recommends for you after it factors in every detail of your life.
In contrast, humans have a stack of analyst reports about the subscriber demographics of Spotify to read if there’s time before lunch. I would highlight how the AI could assist creating economic or company reports of any length and with whatever minutia of detail preferred instantaneously, but human involvement would be a burden with all the strong opinions, mental stubbornness, and political biases.
In case you think I’m picking on Wall Street, in 2017 I wrote a screenplay called The Oracle about artificial intelligence taking over Hollywood with its ability to create movies from script to final cut instantaneously according to audience preferences in attendance, but thus far Hollywood has lacked the insight to recognize it, which may be a stroke of good luck. I’ll be returning to this in the proposal.
Let’s talk about markets. I think we’re pretty close to a serious drawdown, so let’s go over a couple scenarios in great detail. To sum it up in one sentence, I would put it like this: we’re not going anywhere without the bottom half. To be even more clear, and I understand this is controversial because no one wants to see it, but I don’t believe we live in a functional economy; meaning, without some combination of Fed and Treasury support, the economy would implode. I’ll save it for the articles, but this is caused by globalization, and, no, it can’t be fixed by unilateral tariffs, and, no, we aren’t deglobalizing. This is a serious problem, but there is hope.
What could eventually save us is the inevitable rollout of robots and robotaxis and a complete transformation of the entertainment industry when virtual reality evolves past its Pong stage (not to mention the most important part, which is in the articles - (now you have to read them)).
I consider the major areas of innovation to be: communication; transportation; entertainment; energy; health care; and computer processing. Throughout time in each category the innovations in the products and/or services become faster and more efficient. The question for years was how are we going to solve the budding energy problem, and now it’s obvious: the incentives of megacap tech to power AI data centers will necessitate innovations in energy that will lower the cost for all consumers and businesses, which will free up income to be spent and invested elsewhere. This will result in a huge economic boom as all the innovations in every industry become cheaper, faster, and more efficient. However, a 90s-like tech boom will require everyday consumer products and services, which are years away.
In the meantime, a lot of economic data has been deteriorating. I’m not going to list it all because there are much better sources, but all the things that happen before a recession are happening from the yield curve to the uptick in unemployment to credit card usage etc.
One of the few newsletters I read (due to lack of time) is The Transcript, which are highlights from earnings calls, and the most recent one had insights from all the credit card companies who are saying the consumer still looks pretty strong. This is the kind of thing that gives me doubt about my view of an impending drawdown, but I’ve learned the hard way I’d rather stick with my intuition and be wrong then go against it. Several things can be at play here. 1. The stock market could have just priced in the entire easing cycle so it will now sell the news of every rate cut. 2. The initial phase of rate cuts could actually help stave off the inevitable hard landing so stocks will stay elevated. 3. The soft landing view is actually correct.
Personally, I believe a soft landing is not even a possible outcome. I don’t believe anything meaningful has changed in the economy (yet) that fixes the pre-pandemic problems we had (and still have), which are simply being masked by even higher deficit spending than before. This government spending is certainly affecting specific sectors and businesses, but it’s not sustainable economic activity because it doesn’t alter the labor/regulatory differentials between doing business in the US vs overseas, and without those 20+ million middle class jobs we would have if globalization never happened, all we have are global stocks elevating a domestic stock market.
What I’m saying is forget the landing, there’s never been a takeoff of sustainable, organically driven business activity that self-fuels its own expansion broadly enough to sustain the current stock valuations. We’re still on the tarmac. Those clouds out the windows are smoke and mirrors from the deficit spending.
To be clear, my fundamental view of the non-functionality of the economy does not mean anything in the short-term about stock prices, but if my view is correct, it means Fed Funds is hundreds of basis points too high, and the Fed will not likely be proactive about lowering it before the deteriorating data becomes a reputational risk. Nothing has changed yet fundamentally. We are not in a new post-pandemic world. People are being fooled by data affected by the most stimulus directly distributed into an economy ever, which has taken way longer than anyone would have thought to run its course, so the Fed will be late as the lag effects continue to slowly deteriorate the data.
China is in a clear slowdown. So is Europe. The hard part to figure out is whether the stock market is going to start pricing that now, so let’s talk market making bots because this is where the rubber meets the road.
When you are the other side of the market dealing with contract sizes in the millions, the only way to manage size like that is to create (or allow) an onslaught of orders via FOMO and/or specs puking up their positions, otherwise you would move the market away from you. There is no better example than a breakout, so let’s use the current price structure of the SPX. Everyone in this industry is going to have a general understanding of the fundamental forces I just wrote about, and we’re all going to have different opinions on it. I’m not sure I can recall a better collision of bull and bear forces because most charts look bullish, but everything that happens before a recession is starting to happen, so what this boils down to is price action.
Whether the Fed cuts 25 or 50 is rather irrelevant because everyone will ascribe meaning to the price action in hindsight, but in terms of price patterns, the volatility we’ve seen over the past two months is how the market making bots balance their books. I’m not saying the Yen carry trade or delta hedging isn’t real because it is, but when you’re making the market by fading a nine month move higher across the equity indices, and also on the wrong side of calls and puts and VX, how do you think this is possible? The whole market can’t be hedged. It’s a net position. The only way it’s possible is for them to wait on some kind of natural event that causes fear in the Specs who are on the right side of the trade and rush to the exits, so the bots pull the liquidity and stretch the move to shake the leverage tree.
Don’t try to tell me the “Yen carry trade” causes the ES to be down 220 on a monday morning through natural forces. It’s because the bid stack is suddenly a bunch of 1 lots. I don’t need to go "conspiracy theory" on this because that’s enough, but are we auditing their trades? Are we 100% certain the market making bots aren’t also hitting the bid at times to stretch the move and keep the market tumbling lower to induce the Spec puke? I’m just saying if you were on the wrong side of everything for 9 months to the tune of millions of contracts, how would you get back onside? It’s not a charity. But let’s set aside the conspiracy part because it’s not necessary when you can accomplish the same result by just pulling the liquidity.
Along the way up they average up their positions through those mysterious blitzkrieg attacks on the bid stack when the market suddenly goes straight down for no good reason. And then when the gift of the Yen carry trade comes along they cover like mad at the lows and bid it back up. This is how they balance their books. There is no other way to do it.
So now let’s ask ourselves what is the nastiest thing that can happen? There’s two levels of nastiness here. 1. Allow the market to breakout leading into FOMC, which both causes any shorts left to puke and FOMO’s the longs as the market races up to the announcement until around 2:35-2;50 and then they start selling it down and down to put in an obvious reversal candle. Everyone will think it’s a sell the news event and a cascade of spec selling will commence. 2. (this is the nastier one) Allow the same breakout, but without the reversal on Fed day. Let the market stay pinned to the top of the screen for a couple of weeks. Everyone on Wall Street will believe the market is accepting the rate cuts and come piling in FOMO style. Then at some point in the near future either the data deteriorates and naturally causes the hard landing cascading selloff that you as the market making bots are on the right side of since you faded the breakout soft landing FOMO specs and oh my gosh there’s hardly a bid to exit into all the way down into the election for the reversal back up.
I would like to emphasize I’ve described both a natural way this could happen and a nefarious way. I’d like to think there are regulators and laws that would prevent them from selling into the hole to shake the leverage tree but would anyone really be surprised if that was actually happening? Are you there in the room? Have you programmed the algos? It doesn’t matter, though, the liquidity drying up is enough to cause the same result.
Anyway, I don’t know what will happen, but if the market puts in a reversal this week heading into an election that prevents the bulls from having much conviction due to the uncertainty, I wouldn’t assume you know where the bottom is. In fact, the base case based on the last couple elections is the bottom gets put in on election night after the uncertainty is over and the VIX unwinds, allowing unfettered buying. Maybe one way to think about it is to watch the recent low from last week (5402 on SPX). A legit breakout should not fail, and if it does fail, the price should not go through that level or we could be getting crashy with it in a cascade of selling. The level I’m looking for a bottom is 4450. Or forget the level, the time I’m looking at is election night. Is it possible too many people know this? Sure it is, but the whole idea is the bulls will not have the conviction to buy in enough size to prevent it, then they buy puts and it feeds on itself. All I'm saying is it's a vulnerable spot and I would be surprised if it's not exploited again.
One more scenario. Let’s assume there is a reversal this week and it’s weak into the election and we bottom around the election certainty, one would think Christmas season could max out consumer spending because it's irrational buying, so it makes sense earnings in January should still be decent, therefore, if the underlying recession continues to slowly spread like a virus under the surface it's reasonable that it could take until the spring to show up in earnings, which might present a very playable rally from the election lows into new highs.
Obviously, all of this is speculation. I have no idea what will happen. I’m just pointing out patterns of the past, which most people should know, and how I personally think about the legal manipulation of the bots. Price is king.
To sum up, my fundamental view is we’re heading for a hard landing. That could start very soon (like this week) or possibly take until spring. Much longer than that and I would have to do some serious reassessing. I have not scheduled time for a rethink because I don’t believe it will be necessary. To be even more clear, I don’t personally believe we made the final low of this era yet; meaning, I won’t feel satisfied (even if we have a serious selloff over the next two months into new highs in the spring) until the S&P hits the low 3s like 3150, which if that occurs I would consider it a generational low like 666 and the Fed liquidity machine will be in high gear by then, which is why gold will surprise everyone to the upside over the coming years. Remember when it was $300 and then went to $1900? Something similar to that. Over a decade, of course.
I’ll end on a few charts and a reminder that just because I got more than my fair share right over the years doesn’t mean anything about what happens next. I’ve explained my bias. It’s probably appropriate to describe me as an economic bear (until AI saves us) and a stock market bull (because the Fed and Treasury put). I’ve included the intro to my series of articles below. I wish you the best of luck, especially everyone who threw tomatoes at me last time since you obviously need the help. (ohhh bam) :)
One final comment: despite all of this potential chaos I just described, I do believe in the long-term the S&P will be 5 digits and the QQQs will be headed for 2,000, and if I knew every shake and squiggle I would own an island with a dozen supermodels, a grandma who makes great sauce, and a chimp named Coco. (That’s a callback from 10 years ago before the blog when I was just commenting on Zerohedge, so if you remember that, we’ve been together for a long time now. ) Anyway, my point is: just own great businesses in a size you can handle the volatility. Quality assets will go up over time, partly from currency debasement, and partly from being great. That’s my long-term view. I’m bullish on life.
USD weekly on a shelf. Is it a priced-in-soon-to-be-reversal or a breakdown? It won't matter to gold in the bigger picture.
Nasdaq daily. This is lagging bad now. That's not good for bulls. I'm kinda expecting a retracement back to the 15k level and then we see what the ensuing rally brings. This doesn't HAVE to happen now, it's just kinda teed up for it.
SPX weekly. If no bearish price action happens soon, keep an eye out for a head and shoulders pattern to key you into a potential large drawdown. 4450 is the level I'm looking at. We'll see.
HYG weekly. This is a positive sign for the bulls. A hard landing kinda implies this starts going down. At the moment it is not.
