The Most Overcrowded Bubble Market TradeEconMatters
This is the bubble of all bubble trades going on in financial markets and it is probably just about as good as it is going to get right now with a rate hike coming in two weeks. The Federal Reserve has been pretty dovish as the prior month`s economic data was pretty bad including a weak employment report. All the Fed speak was pretty dovish trying to back out of the June rate hike, but with the latest strong employment report, this locks the Fed into the June hike, and maybe 4 hikes for the year. The Bulls are so full of it, they cheer the bad employment report, as this means more dovish Fed, now they get a strong employment report, and they cheer a strong economy. Make up your mind: Is bad news good or bad for the economy and vice versa for good news?
We will narrow this most crowded trade of trades to seven stocks for the sake of simplicity, the trade probably includes about 15 to 20 in total, these are all technology stocks, supported at the core by large blue chip technology stocks in the Nasdaq, Dow and S&P 500 Indexes. This FANG PLUS 5 Trade which we will label for simplicity is heavily reliant on borrowed money which at some point will have to be paid back as many of these positive carry trades and carry trades unwind due to risk aversion, currency market turbulence, or currency policy changes from the status quo. There just isn’t that much money created out of thin air when investors have been all in for a decade, it has to come from borrowed money. And one can look squarely at the emergency low monetary base rates of the European Union, United Kingdom, Switzerland and Japan for the starting points of this borrowed money program. This is why the VIX spiking at the end of January, and the initial China Trade War escalation, and the next major selloff is such a problem for this borrowed money and specifically this overcrowded Technology Bubble Trade.
It isn’t a coincidence as the Euro weakens these technology stocks are putting in a great run, this isn`t the only carry trade funding market as there are several going on right now with such divergent Central Bank Policies occurring right now with major Trading Partners, but it is one of the dominant funding sources. A little Swiss Francs, A little Japanese Yen, some British Pounds etc and you are ready to rock and roll you some technology carry trades. These Central Bank Policies and the Resultant Market Shenanigans which have manifested themselves in the most crowded trade since the DOT COM CRASH is just crazy in that it has gone on this long and built to such degree that there is no way to even slowly prick the bubble, it all collapses in on itself, and continues to crash in multi leg down subsequent crashes like aftershocks of a Mega Earthquake.
These aren`t obscure technology companies, everyone owns these large cap technology companies in their portfolios, the collateral damage to financial markets, and global financial markets of the resultant carry unwind in this FANG PLUS 5 Trade takes down the entire global financial system. Think about that one for a moment, the Market has become so rigged, that traders figured that it would be much easier to rig the market by just concentrating on a handful of chosen high performers, that these stocks have basically become the market. This is how overcrowded this trade is, at no time in the history of financial markets have 10 stocks basically become the market, and have the entire Global Financial System on their shoulders. Yes 10 stocks versus the entire S&P 500, well how do you think that unwinds in a healthy, natural process? It doesn’t, it crashes like nothing has ever crashed before!
Thank You Central Banks for causing such excessive risk taking. Lucky for them Donald Trump is the perfect fall guy, and he sure is doing his part to get impeached and run up even more debt on an already unsustainable trend. But make no mistake this crash is caused by central banks, and they need to be held accountable for putting the financial system in such a risky, precarious place which I will call a ‘tenuous liquidity cliff’ that is on the verge of breaking, sending everything and everyone free falling. This is the Mega Earthquake, the 10 Sigma Event, the Red Swan Risk Event built up to such a degree through crazy absurd cheap money policies and record debt levels that once the train gets started down the track there is no stopping the deflationary death spiral. As bad things lead to even more bad things, excessively rich stocks at exorbitantly high prices means losses lead to more losses, margin calls lead to bigger losses, carry unwinds of a decade unravel in 3 months, firms go out of business, instruments close down shop, trading curbs are hit at the open each day for weeks, and central banks are powerless to stop the carnage and the blame game begins while the global financial system collapses. We saw a hint of this in late January, and that broke one VIX instrument, sent it out of commission, just extrapolate by a factor of 35, and you see how extreme things are right now, and everyone is asleep at the complacency wheel. Think about when over 35 instruments just break, and go out of business with all these newfangled bullshit ETF offerings of the last decade; literally over 50 products will break entirely in this coming financial market crash.
Take a look at these charts I post in this article and tell me this unwinds in a healthy fashion, and is a good sign for financial markets, and financial market stability? The clock is ticking on this time bomb! Way to go Central Banks. This is just about as good as it gets, the end is near, and the world couldn`t be more clueless. There truly is no hope for humanity!
Article by EconMatters