Bouncing to Collapse

Nord Stream system suffers multiple ‘unprecedented’ leaks as sabotage not ruled out

“Yes, there was actually information yesterday, it came from both Gazprom and the operating company. This is very alarming news, indeed we are talking about some kind of destruction in the pipe, it is not yet clear what kind, in the Danish economic zone,” Peskov told reporters.

“…This is an issue related to the energy security of the whole continent,” Peskov told reporters, commenting on the situation around Nord Stream.

According to the Danish Energy Agency, there are three possible causes of the gas leaks.

1. A shipwreck

2. Construction defect

3. Deliberate act

“It is of course worrying that there are three incidents roughly simultaneously.”

Occam's razor says only one of those, number 3, is likely to produce multiple failures at different points along the pipeline.

Who is responsible? Russia seems the least likely since they built the pipelines. Germany would also seem unlikely, except the current government is already destroying the economy. This is only an escalation of current German policy. The United States is also a potential culprit, as are anti-Russian and anti-German countries such as Poland. Whether regional players are capable or not, I cannot say. Although China hasn't shown itself to be aggressive in geopolitics outside of the South China Sea, if they are playing a realpolitik deep game, setting the United States and Russia against each other could be a goal. There's also ecoterrorists, though this seems beyond their capabilities.

For all the losses in the stock market, investors still seem oblivious to risks. This has all the hallmarks of a bear market given the amount of time and the destruction in smaller speculative companies, but major index declines have aborted at these levels before such as in 1998, 2011 and 2018. That is to say, U.S. large cap indexes have declined on par with corrections and small panics, not a world where bond and currency markets are crashing, Europe's main energy supply has been destroyed and the global economy is tipping into a deep recession.

eugyppius: German Energy Apocalypse Update V

Prices have increased vastly across the economy, and estimates are that up to 60 percent of German households are now committing their entire monthly income to cover the rising cost of living.

It is like the 2020 lockdowns, but it never ends. Consumer spending will collapse and with it will go the rest of the economy.

As the pressure builds and the first closures begin, Germany is entering an economic recession, and there are everyday renewed cracks in the political edifice. Minister President of Saxony Michael Kretschmer (CDU) – no fringe political figure – recently remarked that Germany “cannot do without Russian gas” and acknowledged that EU sanctions are to blame for the shortage, but he stopped short of demanding that Nord Stream 2 be opened; instead, he hopes for a return to Russian gas after the Ukraine war has ended.

Ending sanctions was a good solution until the pipeline was sabotaged. There's no way out for Germany. There is no way out for the world. The NY Federal Reserve Bank's DSGE model showing a mild recession that lasts until 2024 looks like a rosy scenario.

With markets oversold, a bounce seems likely, but with a caveat. Oversold conditions produce crashes and market indicators don't include everything. It's true that markets usually price everything into the market, but there are exceptions. One is when the people are delusional. As I've put it before, either losing a main source of energy isn't a big deal or the European economy will sink into depression. I don't see an alternative. The market is priced for "not a big deal." 

This is a category of risks the Chinese like to call gray rhinos. Take China's bad debt and housing bubble. Everyone knows it's potentially a problem, but it isn't at the moment. I'd add situations such as Germany's energy situation into the mix. Everyone knows about it, but do they understand it? Many "shocks" and "black swans" are gray rhinos that people don't know about or don't understand. If China lets the yuan drop to USDCNY 8, that isn't a black swan. It's not even entirely a gray rhino because it's highly probable if current conditions continue. Yet markets would be "shocked" and "panic" if that happens.

The chart of the S&P 500 has a clear bullish foundation. The June low wasn't taken out. It looks like a potential double bottom. Markets are oversold. Bearish sentiment is widespread. A rally would give bull confidence and bears doubt because, if the market rallies on news that Germany's economy is guaranteed to collapse next year, then what won't it rally on? That will be the thinking.

I don't think this is anything except a relief rally until it gains at least another 1 percent. If it starts running towards 3800, then a more substantial rally could unfold.

All I see from bulls is very short-term oriented thinking, such as the bearish positioning among traders. I don't see them making a strong case for owning stocks here. I do see some talk from the value guys about locking in high treasury yields.

Longer term, the Western public is delusional. Their behavior during the pandemic, their slavish following of all media narratives up to an including the Ukraine war, their inability to distinguish between male and female. It is trivially easy to find social media accounts with a Ukraine emoji complaining about high energy prices and even blaming it on the right-wing, Russia or Trump voters. Smart money knows better, or does it? My suspicion is they do not. My suspicion is that even if they know better, they don't realize how many of their colleagues do not. 

There is a confidence about the world that is wholly unwarranted. The mainstream was shocked by 100 predictable elections in Sweden and Italy. Events I and others have been expecting for the past decade come to pass and many people lose their minds because their concept of the world is divorced from reality. There is a moment of intense shock when one realizes their view of the world is 180 degrees out of step with reality. This shock is going to make its way into the financial markets. If not now, then sometime over the next 12 months. The shock can also come from a continuation of current events. What if the voting public in the USA is already so lost that they vote for more of the same? What if they burn the nation down, and then blame it all on white supremacists? What if the public believes it?

Short-term, I'm waiting for the bounce in stocks to finish. I expect it'll rally another 1 percent or so this morning. That's where I'll be looking to reenter short positions. The past few days saw several rallies. All of them were caused by strong performances from BigTech stocks such as Microsoft, Apple, Amazon and Google. A different mix each day, but always BigTech. It doesn't tell direction, but these stocks are propping up the market. If they give way, the market can plunge.

BTC remains one of the charts that sums up the whole market. It rallied strongly today and hasn't broken it's long-term uptrend. The slope of the line is very steep though, rising from a current $17,800 to around $19,000 by late November.