These markets & economy are running on the back of a massive deficit spending “debt”

These markets and economy are running on the back of a massive deficit spending “debt” wave portrayed by the masses and media as necessary and needed stimulus and once consumed then what manipulative game will the FED and government introduce to prop up the economy and markets?

Speculation reigns large: another month has almost finished (will January hold a similar fate), and we see another record in margin debt! As in November & December, combined margin debt has risen 18% to $779 billion; this has happened as the SPX-500 has risen almost 15% in November & December combined. From this past March, margin debt has risen a staggering 63%; signifying a massive rise in bullish sentiment and the willingness to take on debt-leverage, which helps propel equities higher and crushes them on the way down.

Still the indexes remain just shy of their all-time highs despite the mega-warning signals that these levels of euphoria which suggests a potential nasty counter trend correction is imminent. I have been suggesting that markets are headed into a mega bubble of epic size as all of the preconditions for a mega bubble are in place. Artificially depressed financing costs of new-debt that historically has been utilized substantially to buy-back-stock and keep zombie-firms alive are at record historic lows, new participants in this market today are being drawn like moths to a flame into these giddy markets, and the combination of significant accumulated savings (stimulus induced) and low prospective returns on traditional assets have created the desire to engage in massive speculative activity! In the months ahead, investors will need to pay close attention to risks of a monetary policy reversal, massively rising equity valuations, and the rate/trend of the real post-pandemic recovery. These past 8-9 months can best be described as a period of unprecedented market “extreme optimism and pure euphoria” as I pointed out previously in my weekend write ups there was a wave of bullishness due to recent news, with now (3) Covid-19 vaccines showing promise against a backdrop of FED manipulated zero interest rates, a record fiscal deficit (debt) and an ultra-dovish es-FED-chairman Janet Yellen soon to be in charge of it all as she is Biden’s pick to run the treasury.  This likely blow-off phase is extreme euphoria, the likes of which surpasses even the dot.com bubble. As I have discussed before, the November-December rally has been driven by the mostly shorted hard-to-borrow equities, taking the SPX-500 to technical levels not seen in many-many years, similar to like we saw back to 2000. The November-December rally was clearly a massive-short covering rally as well. As the most shorted stocks were up 28.48% in November alone while the SPX-5000 was up about 11.1%.  

Already Goldman Sachs “most shorted” index of stocks is already up 15% in 2021 and more than 200% over the past year.  The Goldman Sachs Most Shorted Index’s RSI reading is now over 85, only eclipsed by June 20, 2018. Short sellers like myself have been put on the endangered species list 😊 (we have enjoyed some really decent shorts of late) and the fuel from squeezing the newbie shorts appears to be running quite low now as looking a short interest is the lowest in over 15 years for the SPX-500.

However, it is not just forced short covering that has been driving the meltup: as massive derivative action activity in the options market is purely “euphoric” a huge source of potential dislocation. As of this past week call volumes were 6x normal, and even more striking: call buying has just gone parabolic and now represents about 47% of NYSE total volume the highest level ever. While at the same time, the put/call ratio is at multi-year lows.

 

The euphoria is not just in calls, it is everywhere with 90.5% of SPX-500 stocks now trading above their 200dsma reaching an overbought level last seen in 2014. This flood into equities has pushed the forward P/E of the SPX-500 back to and above 2000 levels. This is also a function of the surge in money growth. We have seen across a wide variety of indicators this market euphoria is increasingly disconnected from fundamentals and real economic variables. With the massive disconnected between markets and the economy stretched extremely tight like a rubber-band, investors have basically gone all in stocks hoping that the largest and biggest bubble in stock history keeps inflating!

I am significantly SHORT (70%), hence I will only look to add to my existing SHORTS sparingly, I am looking to start to leg into the leveraged 3x bear-funds!  These markets and economy are running on the back of massive deficit spending “debt” portrayed by the masses and media as necessary and needed stimulus and once consumed then what manipulative game will the FED and government introduce to prop up the economy and markets.

In my opinion this extremely long in the tooth, 12+/- year long bull market since 2009 has finally matured into a fully-fledged massive bubble due to massive intervention and manipulation and almost endless liquidity. Featuring extreme overvaluation, explosive price increases (many times in zombie firms) frenzied issuance (especially the issuance / of stock at nose-bleed price levels, and nutty IPO’s) and hysterically speculative investor behavior, I believe this period / cycle will be recorded as one of the great bubbles in financial history, right along with the South Sea bubble, the bubble prior to the Great Depression of 1929, and the Dot-com bubble of 2000. 

Massive Hindenburg type bubbles are when fortunes are made (playing the proverbial “dark-side” sell/short-side) and lost (due to stubbornness of not taking profits) where old savvy investors truly prove their determination, courage, and knowledge [ "buy when you feel like the world is coming to an end...and sell when you believe there is no stopping the bull-train and extreme euphoria has gripped thew markets]! We need to position our positioning a portfolio to avoid the worst of pain that becomes inflicted by a massive bubble bursting is the hard part.

 

I warned in September of 2019 that an economic breakdown was looming, and an economic crisis is exactly what we got [I never foresaw the Covid-19 aspect though); nevertheless 2020 was a “financial disaster” for over 55% of all Americans, this is likely one of the main reasons why so many Americans were/are seriously disappointed about the size of the $600.00 “stimulus payments” in the Covid relief bill that Congress just passed because this year has truly been a “great financial disaster” for millions upon millions of working class and poor Americans.  More Americans than ever before are just barely scraping by from month to month, and $600 is just not going to go very-far at all.  We have seen that small businesses have been getting massacred by the thousands, millions of Americans are in imminent danger of being evicted from their homes [If not for the eviction forbearance Biden Administration Announces Foreclosure Moratorium and Mortgage Forbearance Deadline Extension), interestingly more than 70 million new “initial” claims for unemployment benefits have been filed since the Covid-19 pandemic first started.  The U.S. for all intents and purposes has plunged into a very nasty economic cesspool-recession and most of the country is desperately praying and hoping that the government will do more to bail them out of this contagion.

The truth is that we could not afford another 900 billion dollar “stimulus package” on top of all the other “stimulus packages” that were already passed this past year but that did not stop Congress from their give-away bailout path. We were already $27.5 trillion dollars in debt, and all of this reckless spending is putting us on a likely nasty inflation path (but those in power the elite and wealth could care less) as Biden has just announced another preliminary bailout package valued at $1.9 trillion and he expect to follow that one with another $2.0 to $2.5 trillion) nevertheless most Americans do not really care at all that we are literally destroying our economy and finances. 

Ø  Most people are in desperate need of money, and the vast majority of them want “BIG” checks from the government as soon as possible. A OnePoll survey that was just released asked Americans about the current state of their finances, and that survey discovered that a whopping 55% consider this year to be “a personal financial disaster” ...That is over half the country!

Ø  And for those that are employed, that same survey found that 62% are planning to take on a 2^nd job in 2021 in an attempt to make ends meet...that is if they can find work at all! Among employed respondents 7 in 10 say they need a significant raise at their job in order to make ends meet.

o   That number cannot possibly be correct, as America is the land of plenty for all! If you listen to the financial media cheerleading all is well and all will prosper!

Ø  Of course, there are not that many extra jobs to go around.  Already, there are millions upon millions of Americans that cannot find a “first job”. 

With so many Americans financially hurting, it should not be a surprise that millions of households are getting behind on their rent and mortgage payments! One-in-seven renters with family incomes from $35,000 to $100,000 were not current on their rent in November or December. The overwhelming majority of these renters in this income bracket almost 79% are expected to face eviction within two months. Similarly, 10.9% of U.S. homeowners with a mortgage were not current on their mortgage in November and December; and 56.1% of those homeowners expected they will be foreclosed on in the next several months. Congress of course keeps extending moratoriums on rent and mortgage payments [kicking the can down the road] and that has been financially devastating landlords like myself and mortgage holders like banks [but banks have NOT even come close to recognizing these looming loan-losses on their balance sheets JMHO). At some point the moratoriums will end, and when that happens, we are going to see a huge Tsunami wave of evictions that will be absolutely unprecedented in U.S. history (My opinion). Meanwhile, many Americans are going into the cesspool of massive debt in a desperate attempt to keep themselves afloat and in their standard of living financially! More than one-third of households with incomes between $35,000 and $100,000 have borrowed significantly from credit cards. Many debt payments will come due sooner than later burdening families that still suffer from long-term unemployment and under-employment and added health care costs related to Covid-19. This should mean rising credit default rates looming on the horizon!

Interestingly even at this juncture 2021 small business revenues are down more than 33% nationwide during the month of January; we are seeing that every day, more small businesses are closing their doors permanently.

Millions of Americans hopes, and dreams have been severely crushed, and there is nothing that our politicians can say or do that will bring those businesses back to life (they were unable to become zombies). Unfortunately, if you are one of those Americans that have lost a business or a job this past year, then that would definitely qualify as a “personal financial disaster”. And as you have seen repeatedly in my writings supported with hard data and real surveys most of the nation is deeply hurting, and the road ahead is still littered with bouncing betties (landmines) and it could get become extremely challenging for many-many Americans! In the near-term, government “stimulus bailout payments” will definitely help financially strapped and suffering Americans. A national economic meltdown has begun, and our politicians are clueless how to really attack it; they will try lots of things to mitigate the carnage, but most if not all of their “solutions” will only mitigate the contagions on a short-term temporary basis.

I read an article from the Aspen Institute; stating that approximately 12 million U.S. renters are “at least $5,850 behind in rent and utilities payments”, and the Aspen Institute is projecting that up to 40+ million folks could be facing eviction when the rent and mortgage moratoriums finally ends (and it will end). Unfortunately, there are no indications that this nightmare is going to end.  Last week, another 900,000 Americans filed new claims for unemployment benefits...while an additional 423,000 folks in 47 states filed new claims for what is called Covid-19 Pandemic Unemployment Assistance, the program created to help gig and self-employed workers who have been displaced. Prior to 2020, the all-time record for new unemployment claims in a single week was just 695,000, and that old record was set all the way back in 1982. We shattered that old record in 2020. But the real concern that many economic cheerleaders are ignoring is that at this point, the number of new claims for unemployment benefits have been above 695,000 for 45 weeks in a row (a terrible statistic). This significant unemployment crisis (does not even take into consideration the under-employed) has significantly hit working class and poorer Americans disproportionately hard.  Even FED-heads are being compelled to admit that the unemployment rate for low wage workers “is above 20%”.