Complacent but Without Bullish Conviction

The public is trying to get wise to the game.  They now know that dips on "bad news" are to be bought, not sold.  That is what has led to intraday gains after gap down opens on Friday, Monday, and Tuesday.  Mostly because of trade war headlines.  I will have to side with the CNBC Fast Money crowd on this one, which isn't common.  These tariffs are a big nothing burger.  As I have stated all along, politicians are bought and paid for by big corporations.  They don't want these tariffs, which means they won't stick, no matter how many tweets that Trump lets loose.  Even if they do get passed, they will get repealed at the first sign of economic weakness, which means they will be repealed quickly. 

What I disagree with the CNBC crowd is that this is a good risk reward market for longs.  We've already being rallying for over 2 months, close to 2800 resistance, and the low put/call ratios and the general complacency that you can see all around.  Even if investors are not wildly bullish, they are still fully invested, but without a lot of conviction.  Those are the best situations to get short, as those type of investors will be quick to push the eject button at any sign of serious trouble. 

The US government has consistently shown is an intolerance for economic pain.  Unlike EU governments, which are limited in their fiscal stimulus because of budget deficit constraints, the US government can spend and does spend like drunken sailors.  That is what is keeping the expansion going so long, even with higher interest rates and weakening emerging markets and European growth.  Trillion dollar budget deficits is a heck of a stimulus to the economy, even if it is going mostly towards those that don't need it, which are US corporations.

That is why you continue to see a divergence between equity market performance between the US and Europe/Japan.  Despite a stronger dollar, the SPX has outperformed the Eurostoxx and Nikkei.  And the gap between emerging markets and US equity valuations is getting obscene, which tells you how bad China is doing.  China basically determines the fate of the emerging markets.  And the PBOC is already getting panicky, which means there is no serious desire to deleverage. They didn't follow the US rate hike, as many expected, and now a RRR cut is just around the corner, after they did one several weeks ago.  And that is even before property prices have started going down. 

Don't buy the view that Xi Jinping wants to deleverage the economy.  He wants to deleverage only if the economy isn't negatively affected by it.  He will not deleverage and allow China's economy to weaken for long.  And there is no way China's economy can withstand any meaningful reduction in debt. 

I have read some of Steve Keen's work, an unorthodox economist, one of the few who actually understands how the economy works, which is rare.  Most economists are useless.  The economies that are the biggest ticking time bombs, based on credit growth rates and private debt/GDP ratios are the following:  China, Canada, Australia, Korea, Sweden, and Norway.  Those just happen to currently be some of the weaker economies globally. 

I view these trade war headlines as kind of a fog of war.  They serve as a distraction, a mask for what really matters:  overlevered global economies with aging populations, too much inequality, and not enough monetary dry powder.  The next downturn will be interesting to watch, as the global central banks are basically down to the weapon of  last resort:  mass buying of equities.  Unlike what many think, central banks cannot do helipcopter money without the federal government complicit in the action, as the government will be the distributor of helicopter money, the drug dealer, so to speak,  while the central bank will be the drug maker.  The rise of populism will only encourage helicopter money, to keep the masses satisfied by giving them tax cuts, rebate checks (ala George W Bush), and other handouts.  All while blowing up the budget deficit, the excess Treasuries that result which will be taken care of by Fed QE. 

We are entering the topping phase of this move, as S&P 2800 acts as strong resistance.  There was a juicy short at 2784 in after hours which I was considering hitting but thought I could get slightly higher prices to short in regular trading hours.  Europe didn't cooperate.  So I wait, and getting eager to put on a short before the bus heads downhill.  That should happen any day now.