Too Many Traders

Human psychology never changes.  The greed-fear cycle always repeats.  Money can be on a gold standard, it can be pure fiat, the cycle will always be there.  It was there in the 1800s, the 1900s, and now this century.  

Those trying to make easy money, a quick buck, are like ocean waves.  Usually the waves are small, and only a few are interested in riding them.  But there are times when the waves get huge and many look to ride the next big wave like the one right before it, trying to strike it rich.  You saw it in bitcoin and the stock market in 2017 and the beginning of 2018, and you are seeing it again starting in 2020 and now a full blown mania in 2021. 

Looking at the trading volumes and the speculation, as well as the nonfarm payrolls numbers, it is apparent that many people have quit their jobs and are collecting unemployment bonuses while speculating in bitcoin, NFTs, meme stocks, sports cards, call options on big cap tech and memes, etc.   Just because the federal government unemployment bonuses expire this month doesn't mean a bunch of people start looking to work.  It's hard to go back to real work when you can "make" more money more comfortably just clicking your mouse being your own boss with no obligations.  

This is what happens when the government prints so much money and gives it away through fiscal handouts, both individual and corporate.  The motivation and need to do real work diminishes, and you get a labor shortage and wages go up.  Its just supply and demand.  When the supply of labor drops, and the government does everything in its power to push demand up, it becomes harder to find workers, and you will end up with a big wage increase for blue collar and service jobs.

When companies can't find workers, because they are collecting unemployment and daytrading cryptos and meme stocks, they have to raise wages to attract new workers and raise prices to stay in business.  The result is pure inflation, which will continue to be downplayed by Pumping Powell. 

All the newly minted traders over the past 18 months is a negative for productivity.  Traders provide no economic value added.  They provide no value added for society.  I would even argue that traders are a negative for society.  They consume but produce nothing.  They add demand but provide no supply.  If tomorrow, everyone decided to become a trader, inflation would go through the roof.  Farmers would do just fine without speculators.  Investment bankers and venture capitalists would do just fine without traders.  

I know there are many that try to justify their existence as traders as saying that they provide liquidity in the capital markets, improve price discovery, and all kinds of other nonsense.  I am a trader and don't try to justify my job as anything that is a net positive for society.  I'm just trying to make a living.  The caveman of ancient times was just trying to survive, take care of himself and his family, and if he was doing very well, his tribe.  He didn't care if him killing a buffalo would negatively effect somebody else who had one less buffalo to hunt.  I'm just a caveman living with modern technology.  The money that I make comes at the expense of other traders.  The money that I lose goes to other traders.  Its just a game for big boys.  Nothing more, nothing less. 

The root of the out of control greed in this market is the Fed, of course.  Who else.  You can't blame millenials on Robin Hood.  They are just flies attracted to shit.  Its instinctual. 

The elephant in the room is Powell who is running reckless monetary policy.  Almost nobody calls him out on it because of the Rona and its variants and because now so many are invested in the stock market.  Just look at how equities are as a percentage of household wealth.  As a result, almost everyone wants it to keep going up, even as its creating the biggest bubble ever and negative consequences.  

They like Powell, because he's very dovish, and the stock market is going up.  But in the aftermath of this bubble, Powell will probably be considered the worst Fed chairman of all time when investors see how much money they've lost buying in the midst of such a huge bubble when prices for speculative play things like bitcoin, NFTs, and meme stocks crash back down as greed turns to fear. 

Its been clear for decades now that the Fed doesn't really care about inflation, even though its in its mandate.  They care about 3 things: stocks, bonds, and employment, in that order. And they will keep running loose monetary policy because that's what the masses want. 

The most likely scenario is that once the taper starts, likely at the beginning of 2022, the market begins the volatile topping process.  By the time the taper is finished, in the fall of 2022, you can expect a waterfall decline soon afterwards as the market starts to worry about the the beginning of rate hikes, and the prospects of no more fiscal stimulus after the Republicans take one or both Houses of Congress in the midterm elections.  Into that kind of waterfall decline, Powell will be frozen in his tracks and immediately kill any rate hike talk and go back to hero dovish mode with hints of restarting QE.  Basically they are stuck at ZIRP forever.  

Unlike the V bottoms in Dec. 2018 and March 2020, after the next waterfall decline, everyone will be way too deep into equities at all time high valuations.  Its going to be a much more precarious situation than 2018, than 2020, with the very high household equity allocations and lack of hedging from bonds with its super low yields.  The only way the Fed could manufacture the kind of turnaround that you saw in March 2020 is if they do unlimited QE purchases of Treasuries, MBS, corporates, and equity ETFs at monster levels of $500B+/month, at a minimum.  I wouldn't rule it out, but it would probably take at least a 30% down market before they step in with that kind of bazooka.  

Let's not look too far ahead.  12 months feels like a lifetime in the stock market.  The bubble will get bigger.  Just because I see the writing on the wall, doesn't mean there won't be buying opportunities this year.  Things will change in 2022, but still plenty of time until that hammer drops.