Taking Crazy PIlls

Am I taking crazy pills?  Or is the market?  It is all in on AI, believing that LLMs can do almost anything.  You even have some of the Kool Aid drinkers believing that evil AI robots could destroy humanity.  People hardly bat an eye when they hear about Jensen Huang selling $500B worth of GPU backed securities.  It thinks that Bessent is omniscient, more powerful than the bond market.  Some even think he can single handedly stop yields from going higher.  They think what he's doing is like QE.  

Let's talk about that compulsive liar/Trump puppet Bessent.  He was a struggling hedge fund manager before he became Treasury secretary.  He thinks that he can run the Treasury like he ran his hedge fund, but with unlimited ammo.  He thinks he can act like a Fed chair.  Maybe he should go look at the Federal Reserve Act, and study up on what he can and can't do.  He can't print money.  That's the Fed's job.  

His recent Treasury buyback announcement is Operation Twist lite.  Sure, at the extreme, Bessent could stop issuing Treasury bonds, and issue all Treasury bills, and that would lower long bond yields.  But that torpedoes the dollar, and make the US government even more sensitive to short term rates.  Given the huge budget deficit, it would mean that rate cuts would actually be like a fiscal tightening, and rate hikes be fiscal loosening.  The Fed would lose total control over controlling inflation through the interest rate channel.  He would turn a molehill of a problem into a mountain.  

He's messed around in the arena, and thinks that he's a gladiator.  After the USDJPY intervention, stocks rallied (had nothing to do with USDJPY move), so he probably thought he could make stocks rally again with another ham-fisted intervention.  This time, the stock market popped, but gave it all back and more the next day.  All his little stunt managed to do was weaken the dollar, make gold look even more attractive vs. Treasuries, while bond yields keep going higher.  That's absolutely the worst reaction from his operation.   

It has managed to reawaken the animal spirits of the debasement trade, everything but in Treasury bonds.  Bitcoin and gold are rocketing higher, and that may be great for Bessent, Trump, and friends to make quick profits in their brokerage accounts, but it has backfired spectacularly in the bond market.  Now foreigners will question whether investing in US dollar assets is worth it if the dollar depreciates.  Remember, foreign investors have been big buyers of US equities for the past 2 years.

We continue to see the crowd very bullish on stocks, bearish on bonds, and bullish on the economy.  BofA fund managers are very optimistic on US economy.

Hedge funds have been aggressively buying recently.  BofA and Goldman hedge fund data.

BofA client flows show a record week of tech stock buying.  2nd biggest was the week before.  Meaningful to see a weak NDX right after heavy buying.  

State Street shows equity allocations at highest since 2007.

 Google search for risk on terms have been sky rocketing since April.  

 NVDA Credit default swap spreads going up along with the stock price.  Unusual.

Stock buybacks down significantly vs. recent history.  Buyback window not much of a factor anymore.

The DBMF trend following ETF has signficantly increased its net long position in MSCI and SPX futures.  The bigger their long position, the more fuel there is to the downside when they sell on weakness.  

Nothing really notable in the COT data.  It looks like most of the NDX call punters sold, as dealers were big net sellers, undoing their hedge.  

Pokemon bubble update:  it looks like the bubble has popped.  Similar to the AI trade, the Pokemon bubble hit its peak around May/June, and has been trending lower.  As I mentioned in a previous post, Pokemon Bubble Redux, there are eerie parallels between the Pokemon bubble of the late 1990s/2000 and the dotcom bubble, and the current Pokemon bubble and AI bubble now.  These speculative bubbles tend to pop on similar timelines.

 

Pokemon price index based on TGC player traded market prices.

Based on what I see on CNBC, Twitter, wallstreetbets, Youtube, etc., you are seeing a disconnect between fund managers and retail investors.  It is confirmed by the BofA data.  Fund managers are very bullish, as they are basically closet indexers, and SPX is close to all time highs.  Hedge funds are piling into this market.  Hedge funds can't have big drawdowns, so if they are buying in August, and we get a pullback, they will either stop buying or sell what they just bought.  

On the other hand, retail investors don't seem quite as bullish anymore, after seeing the big pullback in AI stocks, and having been burned in meme stocks and assets over the past 12 months.  While they are not as enthusiastic as they were in 2024/2025, they are probably even more complacent.  Retail investors have become stock zombies, thoughtlessly buying based on muscle memory and past performance of the SPX and NDX, rather than true belief in this bull market.  Retail investors are still aggressively buying dips, even as they feel less bullish.  

Retail investors are very long the AI stocks, and are starting to lose conviction in buying single stocks.  They have been massively underperforming the indices, so they aren't in a strong position to keep buying.  In fact, their big long positions in AI stocks make them weak hands and vulnerable to puking out their position if we get a correction. You saw a hint of that in late July, but we never got a real broad market selloff to ignite real panic.  

With the Anthropic IPO coming in the fall, along with the midterm elections in early November, those are not events that investors will want to be aggressively long into.  Fund managers are likely to raise cash ahead of both events.  Retail investors are up to their eyeballs in AI hardware and semiconductors, which have been lagging since June.  Will they triple down on those holdings?  Given the waning fiscal stimulus and weak job market, I don't think they are in a strong enough financial position to do so.  We'll find out over the next 2 months.  

Holding a full short position in NDX and SPX.  Consensus is too bullish on AI and the economy.  This level of optimism and complacency are not sustainable in the long run.  Same with the continued AI spend with 2 big money losers, OpenAI and Anthropic, responsible for a lot of it.  The AI unwind will take years and few investors are prepared for it.  NVDA earnings and Jackson Hole next week, the crowd is poorly positioned for NVDA if it disappoints.  There is some fear of a hawkish Warsh at Jackson Hole, so could see a relief rally next Friday if you get a big selloff ahead of it.  If not, then I would expect a muted  reaction.