February 20: Daily Contrarian Reads

The Bear Is Coming Back—Here’s Why In 18 Salient Charts

Yet I’m calling for a coming bear market here at $SPX 2351. This market, while perhaps still going higher, is setting up not for a correction, but a major bear market. And mind you this can grind around for a while. Tops are processes and not events. And let’s be upfront: I’ve not liked the structural backdrop of markets for quite some time, but have been cognizant of its technical apex potential. The blow-off top scenario if you will. The reason why is plain: The entire global financial system is 100% dependent on central bank intervention and debt expansion and low rates. There is zero evidence that markets can organically support current assets prices anywhere in the world without any of these things. I’ve outlined my structural concerns in detail in the Market Analysis section in the past and you can read up on them there.

The Fed Has Killed Two-Way Trade And Volatility—-Case Study Of How The Market’s Internals Get Unhinged

Of course, Walczak’s strategy is not alone and if not the catalyst it is these levered options strategies that are the reflexive forced buyer that appears to be driving such self-reinforcing and seemingly incredible moves in stock markets as volatility has collapsed and the cost if funding massively levered strategies is de minimus. In a different world of considerably lower leverage, LTCM nearly blew up the world; in the new normal of as-much-leverage-as-you-can-eat, even a mid-sized fund’s positions can be the butterfly that flaps its wings and become the forced ‘ax’ in world equity markets… even if it doesn’t know it. Just how much of the last 150 S&P points are due to the liquidation of ‘Catalyst’ (and strategies like it)?

Between A Rock And A Hard Place—-The War Party Owns The Dems And Is Befuddling Trump

Now one could argue – as I have in these pages – that Trump’s ostensible reluctance to repeat the mistakes of the past gives us some degree of leverage. And it is true that, in trying to repair relations with Russia, and avoid the terrible consequences of conflict with that nuclear-armed power, the President has stuck his neck out and taken a very big political risk. Yet the fact remains that the targeting of Iran – exhibited, so far, in terms of pure bombast – represents a clear and present danger to the peace of the world. And so we are between a rock and a hard place. If the Democrats win, we get World War III with Russia: if the Republicans win, we get a reiteration of our endless “war on terrorism.”

The Triumph of Hope Over Experience

Samuel Johnson famously called second marriages, “the triumph of hope over experience.” I think this phrase is awfully fitting to investors’ relationship to risk assets over the past couple of decades. In the late-1990’s, they fell in love with the stock market. The aphrodisiac during this episode was more than just easy money to be made by day-trading. It was the prospect of a “new era” for both the economy and the financial markets. This love affair famously ended in bitter divorce after the Nasdaq destroyed all hope by declining 90% in value after the March, 2000 peak. Only a few years later investors found a new love. Real estate became their next infatuation. This was something real, something tangible that they could actually get their hands on. The allure this time was that ‘real estate prices had never fallen year-over-year on a nationwide basis.’ It was a can’t lose proposition and they fell head over heels for it. Until, of course, the unthinkable happened, prices fell and the pain of this amorous disillusionment was even greater than the fallout after the prior tryst. Once again, investors are ignoring these prior painful experiences and embracing a new hope once again. Only this time they are in love with them all. Corporate valuations, including both equity and debt, are equal to where they were at the peak of the dotcom bubble still investors have decided now is the time to pour record amounts of money into the stock market.

Like We Said—-The House GOP Has No Plan B For Tax Cuts

An uncomfortable question looms over the tax debate in Congress: What’s Plan B? Border adjustment, a pillar of House Republicans’ tax proposal, is taking a beating. Big retailers are lobbying aggressively against the concept, which would tax imports and exempt exports. Senate Republicans have expressed views ranging from skepticism to hostility. Even some House Ways and Means Republicans are wary. With Democrats sidelined, just three GOP senators could kill the House tax plan; already, more than that oppose border adjustment. Despite that daunting math, border adjustment isn’t dead, and that is partly because Republicans haven’t developed palatable alternatives that avoid huge budget deficits or prevent the corporate tax base from fleeing abroad.

Time-Stamp of Speculative Euphoria—-The Worst Excess In History

If there’s any point in U.S. stock market history, next to the market peaks of 1929 and 2000, that has deserved a time-stamp of speculative euphoria that will be bewildering in hindsight, now is that moment. Perhaps there’s room for this burning wick to shorten further, but across every effective, value-conscious, historically-informed classification method we use, the estimated downside risk of the market overwhelms its upside potential. The chart below shows monthly candlesticks for the S&P 500 Index since 1996, including the tech bubble and collapse, the Fed-induced mortgage bubble and collapse, and the speculative first half of the current, wholly uncompleted cycle. I believe the equity market now faces the likelihood of deeper losses over the completion of this cycle than any other in history, save for the collapse that followed the 1929 peak.

Wall Street’s Got The Wrong Playbook—-Be Very Afraid of the Stock Market Mania

Ever so slowly, Wall Street is being shaken from the trance of President Donald Trump’s promises of deregulation and tax reform. As this happens, an entire industry known for sharing notes and trading tips is starting to worry whether it has been working off of the wrong playbook. “When Trump’s favorability initially rose after the election, equity investor optimism was driven by an intense focus on how to position for rising interest rates and improving prospects for economic/earnings growth driven by corporate tax reform, infrastructure spending, and regulatory relief,” analysts at Credit Suisse wrote in a recent note. “But since Trump’s favorability peaked in mid-December, that optimism has been replaced by a wait and see approach among many investors, along with a healthy dose of frustration.”

The Deep State Has The Donald On Its Lunch Menu

Why? Because if Trump wants the Arab world (and Saudi Arabia in particular), to help Israel impose a settlement on the Palestinians, Trump will have to embrace Israel’s false narrative that Iran is the chief sponsor of terror in the Middle East. And, Trump equally will have to pay court to the equally false Israeli narrative of the threat of the Iranian “nuclear bomb.” He already has, at his meeting with Prime Minister Netanyahu. It has never been Iran’s non-existent “bomb” that has concerned Israeli security officials: It has been Iran’s conventional military power and even more so, its soft, revolutionary power. It is precisely this back-to-front neocon world view that has so corrupted American foreign policy: America, for decades now, has aligned itself with Saudi Arabia and Gulf States who finance, arm and support terrorist movements (such as Al Qaeda), while labeling Iran, which actually fights and defeats these “jihadists,” as the chief sponsor of terror in the Middle East. One really cannot get it more back-to-front. This is now more widely understood by the American public, yet the neocons never pull back; they never desist in trying to tie America to the Saudi Arabia-Israeli axis and to promote phobia towards Iran.

“Seriously Delinquent” Auto Loans Surge

The New York Fed, in its Household Debt and Credit Report for the fourth quarter 2016, put it this way today: “Household debt increases substantially, approaching previous peak.” It jumped by $226 billion in the quarter, or 1.8%, to the glorious level of $12.58 trillion, “only $99 billion shy of its 2008 third quarter peak.” Yes! Almost there! Keep at it! There’s nothing like loading up consumers with debt to make central bankers outright giddy. Auto loan balances in 2016 surged at the fastest pace in the 18-year history of the data series, the report said, driven by the highest originations of loans ever. Alas, what the auto industry has been dreading is now happening: Delinquencies have begun to surge.

Former SEC Chair Mary Jo White—A Case Study In Wall Street’s Corrupt “Revolving Door”

Less than two weeks after Mary Jo White was nominated to become Chair of the Securities and Exchange Commission by President Barack Obama on January 24, 2013, White filed an ethics disclosure letter advising that she would “retire” from her position representing Wall Street banks at the law firm Debevoise & Plimpton….. Yesterday it was widely reported in the business press that Mary Jo White is returning to her former law firm as a partner representing clients who face government investigations. She will also fill the newly created position of Senior Chair of the law firm…The news is also highly significant because it will mark the fourth time in four decades that Mary Jo White has spun through the revolving doors of Debevoise & Plimpton (where she represented serial law violators) to government service (prosecuting serial law violators).