This Might Be A Big One

Back in early 2020, I was looking for a pullback in the market before a possible melt-up, based on the idea that the Fed's repo intervention in September 2019 was like the intervention in 1999 for Y2K. Instead, it turns out coronavirus was like the Y2K and it has enabled a bull market extension beyond belief. It's not a precise one-to-one, but not because coronavirus is more serious than Y2K. It's because the Fed briefly goosed a speculative bubble in 1999 at the tailend of an economic expansion. This time the Fed ignited an incredible bubble with a collapsing global economy as the backdrop. It's hard to fathom how big the coming decline will be, adjusted for inflation or not.

Back to February 2020: I was surprised the market kept rising despite the obvious spread of coronavirus. I had a put on Tesla that I bought in late January 2020. I wouldn't buy another put on Tesla until October 2021. I currently have no puts on Tesla, but I have a lot on XLY. I had been looking at palladium for a macro top signal: Palladium's Pendulum: A Third Top in Time and Price? Here is a post from February 27 when palladium was still rising. The overall market had actually topped, but Palladium Scoffs at Coronavirus. Here is a post I made on February 25: Market Correction: Done or Ready to Run? I was lightening up a bit after an initial drop because the market still looked strong in the face of coronavirus news. Instead, it would go on to meltdown.

The point is, I wasn't alone in looking for a pullback that was based on macro and/or technicals and sentiment, and none of us predicted coronavirus as a trigger. I know some traders were talking about an echo of Volmageddon. Something far worse happened, but many (myself included sometimes) retcon the coronavirus pandemic as the reason for it instead of looking at the excessive bullishness that preceded it. Back then, I shorted too early thinking the coronavirus would be the trigger, lost money, and thought about throwing in the towel. The market must be incredibly strong to rise with coronavirus spreading. Back then, my options account was approaching the red line. I didn't have much capital left and I wasn't going to add any more.

Now history is repeating. I was expecting a market downturn that has nothing to do with the latest omicron bullshit. I was heavily short XLE in October and added XLY in November. To give an idea of my thinking and expectation, I was using weekly energy options. I went very heavily into XLE weekly puts as time went on because I was expecting the move. As time went on and the signals didn't reverse, I kept repeating the trade. At times I thought giving up. As in February 2020, I started greatly doubting myself and wondered if the next move was a spike higher. The week prior to Thanksgiving I posted this after I took a big (in terms of contracts) put position in XLE: Energy Symmetry. I decided to buy a bunch of $57 puts on Tuesday when they were trading below 10 cents. I sold when XLE fell below $55 into expiry, a better than 20x gain on that additional position. That one position made up for all of my losses and then some in the prior weeks. As a capital outlay, it wasn't a big position. I went big into XLE weekly puts again (expiring on November 24) because I was looking at Energy Symmetry Again.

The types of trades I have on now are once in a blue moon trades when I believe the market is very wrong. When options are very cheap and I think VIX is going to Moon. Similar to when I bet on Trump winning...which reminds me...my XLE trade is now my single best percenage gain trade ever because it beat my trading on the election results in 2016 (when I sold Trump at a profit and YOLO'd the account on Hillary winning the popular vote when her contracts were under 10 cents): Why Trump Won and Why So Few Expected It.

I did talk about my UUP idea because currency tends to be less volatile and it was cheap, with enough time to play out: Gamblers Anonymous Trade for Q4 2021. Full disclosure: I started shifting into the January calls. I'm not sure about Friday's move, when USD dumped along with stocks. I might exit the trade if the dollar looks like it will correlate with stocks and, importantly, there's only two weeks to expiry so those December calls are going to expire worthless without an upside pop fast. I still like the greenback structurally and right now, I'm thinking my next forex target may be long USDKRW or USDCNY...more on that later if it develops.

Is This The Big One

A couple weeks earlier, bears were confessing their losses and doubt over at Slope. Here was my Twetch commemorating it:

I too had taken a pummeling. I have been selling off jr mining positions to raise capital for shorting XLE. It was brutal and demoralizing, but I believed in the trade I wasn't going to retreat until the market told me I was wrong. I wasn't trying to get back my losses, I had a deep conviction that my call was correct, that this is why I learned charting, of why I learned about options and futures, why I was doing all of this so I could maximize my gains in the next bear market. All my small gains and losses in the interim were practice for the main event.

This post is running long, but I want to lay everything out because ultimately we are all responsible for our financial decisions, and I want to give full context for why I believe the markets are entering a period of great turmoil. First, I could be early again. The market could melt-up into next year. I do not own a crystal ball. I won't give up on my macro thesis easily, but I could close all my trades tomorrow if the market behaves very different from my expectation.

All that said, here's my basic sense of it. One, coronavirus is bullshit. It's a distraction. There's a political and economic disaster unfolding because of societal responses, but doing nothing would have been the smarter move. Between the central banks and stimulus on one side and government lockdowns and vaccine passports on the other, this is the greatest policy alligator jaws in history. One hand is driving financial assets skyward, while the other hand sledgehammers the economy's foundation. Almost every policy is destructive. There will be a supposed boom caused by a transition away from carbon energy...but the whole process is expensive and makes energy more expensive to boot. There's no transition, it'll be a never-ending decline unless countries go big on nuclear power. (I still hold my uranium longs.) Coronavirus is a sideshow that is providing justification to push these crazy policies to extremes. Layer on the credit bubble that was never fully popped in 2008, the Eurozone still hasn't fixed its banks the way the Anglos/Irish/Iceland did, China has blown an epic credit bubble whose consequences still lie ahead.

OK you say, that's all well and good, but "the Fed." You have me there. The Fed bailed things out in March 2020...or did they? Maybe people realized their insane panic was overdone and markets were due for a bounce? Maybe the stimulus had more to do with it than the Fed? Maybe not, you can believe in the Fed if you want for this exercise, but I believe that is hazardous to your health. When we're "not fighting" the Fed, we're betting on the herd following the Fed. It has worked for 40 years. The Fed can't actually do anything when push comes to shove though. And I think the pushing and shoving is about to begin. To steelman the inflation argument, I'm going to grant you that the Fed will directly buy stocks in the next bear market or panic. They're going to buy ES or SPY or something. Stocks are going to experience a vertical rebound. What's going to happen to the U.S. dollar? Tank? OK, then bond yields are going to rise right? No? The Fed will buy all bonds out to 30-year too? Corporate bonds? Junk bonds? OK, they will buy the whole market. What does that leave the market? The crypto guys are excited. But how about crude oil? Natural gas? Wheat? Gold? If all the speculative activity unleased in $100+ trillion global bond and equity markets gets funneled into the far smaller commodities markets...that's going to cause economy-crippling inflation. Many predict this and it's perfectly logical. I have no beef with this forecast in its construction, only with the probability of it happening and the timing. I don't think the Federal Reserve will do it.

I don't think it will be politically acceptable. Buying stocks directly will trigger a populist revolt. More technically, I predict that before the above scenario can really get going, oil will quickly outperform the S&P 500 Index, maybe within days or weeks. A political revolt will begin seemingly overnight, a bond market panic, a currency market panic, and society will fast forward to the end of the inflation. The March 2020 intervention worked because oil fell below $10 per barrel, people were genuinely panicked and they didn't know what to expect. High inflation usually proceeds like the boiling frog analogy because the public has political and financial tools for stopping the inflation. People have to believe it works for it to continue. The Fed has no more leash for inflation now, not that I see. The public knows how it works. As I sometimes exaggerate, if the Fed tries to repeat what they did in March 2020 or goes bigger, I will YOLO my account on crude oil. I don't think I'm alone in having this trade idea stored away in the back of my mind. Traders, speculators and investors will front-run the inflation next time, bypassing stocks like Tesla for crude, copper, gold and silver. If crude oil makes a new 52-week high before the S&P 500, let alone a new all-time high, there will be riots at the headquarters of the Federal Reserve.

To summarize and bring this to a conclusion: if we eliminate the outlier outcomes of total deflationary or hyperinflationary collapse, the most likely scenario involves some type of inflationary policy that kills financial assets. The bond vigilantes will return, or maybe they will return in the form of crude vigilantes. The market will do thet opposite of what the central banks want, forcing the central banks to stop. If the economy goes down the tubes, the Fed and USG will save it, and they will sacrifice the stock and bond markets if necessary. In relative terms, which allows for high inflation, stocks are at a point that won't be reached again for a generation. Maybe our lifetimes. Since I believe all speculation will be hit, crypto should also collapse. It's possible everything including gold collapses the moment the Fed signals no more inflationay policy. That, ironically, may be what allows them to unleash what will become hyperrinflation.

Below is the DJIA, S&P 500 twice, once zoomed in, the Dow divided by the 30-year bond price and palladium with the Nasdaq. It all looks primed for a big correction at least. I don't really give advice here, but I have an overwhelming moral sense of obligation to tell anyone who will listen: the time for caution is now. Do not solely take my word for it. It's better if you consider various sources. If you read sources that I do not read and do not link to, and they are saying things similar to me, that's a very good sign that something big is coming. When 2008 was coming, I noticed traders such as Tim Knight and macro guys like Mish Shedlock were starting to sound alike, that gave me confidence that the turn was coming. Even though I think coronavirus stuff could be a factor short-term, it's a minor factor. Ignore it and focus on the core macro trends. Check a wide variety of sources. This post should not be interpreted as advice to panic tomorrow, rather I think a macro turn is happening and unlike in March 2020, the stock market won't be saved. A long bear market like the early 2000s one is what I expect, or if inflation stays high, maybe something like the 1973 bear market. Biden's poll numbers line up with that analog...