Authored by Sven Henrich via,

No period is worse for bears than when it’s the best time to sell stocks. It’s the polar opposite of when conditions are worst for bulls, right when it’s the best time to buy as it was in January-March 2009. The exhaustion factor is enormous. It’s called capitulation as moves get stretched to the extreme even though the set-up is valid.

November’s close marked the 13th consecutive month straight up for global markets. Nothing but up with fewer and ever smaller dips in between. Deutsche Bank’s Reid illustrated the point: “We’ve never had such a run with data going back over 90yrs”. I’d say that qualifies as the worst of time for bears.

Yet we could be sitting on a generational opportunity to sell equities as it could be argued that conditions will never be better for bulls as the game of offering carrots of free money is coming to an end. Indeed it could be argued that the prospect of tax cuts is the final carrot the free money scheme has to offer. The carrot top. No more carrots.

Consider the central banking liquidity game has peaked and is dropping off:

The 2016/2017 period saw the largest amount of central bank intervention ever. Ever. Over 8 years after the financial crisis.

The slow reduction in central bank liquidity has been supplemented by record ETF inflows this year. Retail went long and continues to buy the most expensive market since 1900 according to Goldman:

Even now via @jennablan: “U.S.-based money market funds attract inflows of $33 bln in week ended nov 29, largest inflows for the year”.

And leverage has never been higher either. Via @Schuldensuehner: 

“Dow Jones Industrial closed >24k for the first time ever. Wall St record has occurred in tandem w/record margin debt. Margin debt now at $561bn, double amount of tech bubble of 2000, 47% > than in 2007”:

Retail is in and we see it in various data charts:

Via @BN:

The Rydex bull/bear allocation data shows the most bullish allocation into equities ever:

Don’t tell me it’s the most hated bull market ever. The data says otherwise.

Markets are in big time pig time mode. The prospect of imminent tax cuts keeps investor salivating and allocating cash into all time highs as markets drenched in 8 years of artificial liquidity find tax cuts to be the next carrot to push markets caps into the stratosphere:

A blow-off top perhaps setting us up us for something more sinister than a correction. What’s the biblical phrase? Forgive them for they do not know what they are doing?

Look, the tax narrative is that tax cuts will pay for themselves, that companies will hire more people as a result, and that middle class will benefit greatly from it, that GDP will swell to 4% and Trump claimed that these tax cuts will actually personally hurt himself financially. None of these things are true. Not a one. In fact everything is precisely the opposite. The math says so.

While extreme political tribalism encourages ideology over facts math is true whether you believe in it or not. And these tax cuts will add greatly to the deficits. I won’t belabor the point here as I’ve outlined my thoughts on the subject in detail in Tax Cut Scam.

The deficit will increase, many will see actual tax increases over time and/or lose benefits and the big tax cut benefits go precisely to people such as Trump and corporations already sitting on record cash positions. As far as GDP growth the FOMC doesn’t believe it either as incoming Fed Chair Powell affirmed a 2.5% GDP outlook for 2018 and many companies are on the record that they will use the extra cash for dividends and buybacks not hiring. This tax bill will exacerbate wealth inequality.

And hiring? Forget it. Structurally we’re looking at the great firing to come: 800 million people might be out of a job by 2030 because of automation

Precise numbers are to be taken with a grain of salt but it’s coming, whether you want to believe it or not.

And this perhaps is the biggest lie of the entire construct: That it’s done for the benefit of the middle class. It’s not. It’s done for wealthy donors who have threatened to cut off donations if they don’t see results. It’s big time pig time. Greed at its finest consequences be damned.

So the odds are the tax cut bill will end up passing in one form or another unless someone stands up and says they’re not voting for something that’s based on a lie.

Deficits will keep expanding before even a new recession hits. I’ve said for a long time that market levels and economic growth have been bought with debt and stimulus producing multiple expansion. See below multiple expansion in context of price and aggregate GAAP earnings:

We do not know what organic growth is without permanent intervention. That was true with the past administration and it is true with this one.

Except now we see increased in defense spending and a cutting of the revenue structure. This year’s deficit was already $666B and that’s without tax cuts. The deficit will be expanding to $900B by 2019 according to JPMorgan.

Even Janet Yellen felt compelled to comment on the debt:

“I would simply say that I am very worried about the sustainability of the U.S. debt trajectory,” Yellen said.


“It’s the type of thing that should keep people awake at night,” she added.”

Cute, especially coming from her who was a key contributor to the easy money train. The context is glaringly obvious:

But Janet Yellen is not alone in suddenly getting concerned about the sustainability of debt expansion.

Dallas Fed president Kaplan came out this week and basically highlighted many of the concerns I’ve been talking about for a long time. A shockingly rare admission of the truth. Quite a statement:

“As a central banker, I want to be vigilant to imbalances and distortions that can build as a result of accommodative monetary policy. I have argued that monetary policy accommodation is not “free” —there are costs to accommodation in the form of distortions and imbalances in consumer decisions as well as in investing, hiring and other business decisions. More specifically, experience suggests that the greater the overshoot of full employment, the more difficult it is to unwind imbalances when growth ultimately slows—as it certainly must.

When excesses ultimately need to be unwound, this can result in a sudden downward shift in demand for investment and consumer-related durable goods. There are surprisingly few historical examples of “soft landings” in cases where employment has risen above its maximum sustainable level.

It is of course possible that “this time will be different,” but as I assess the condition of the U.S. economy, I am carefully monitoring evidence that might suggest growing risks of real imbalances, which could threaten the sustainability of the current economic expansion. For example, the headline unemployment rate has fallen by 70 basis points over the past year, nearly matching the average rate of decline over the prior seven years of the expansion. If this rate of decline continues, this will further tighten labor market conditions and would likely add to excesses and imbalances accumulating in the economy.

Excesses can also manifest themselves in financial imbalances. While I would prefer to rely primarily on macroprudential policy tools to manage financial imbalances, I am nevertheless monitoring various measures of potential financial excess. I monitor these and other market measures because I am aware that, as excesses build, we are more vulnerable to reversals which have the potential to cause a rapid tightening in financial conditions, which in turn, can lead to a slowing in economic activity. Examples of potential excesses might include:

  • The U.S. stock market capitalization now stands at approximately 135 percent of GDP, the highest since 1999/2000.[3]Correspondingly, commercial real estate cap rates and valuation measures of debt and other markets appear notably extended.
  • Measures of stock market volatility are historically low.[4] We have now gone 12 months without a 3 percent correction in the U.S. market.[5] This is extraordinarily unusual.
  • While household debt to GDP has improved over the past eight years, corporate debt is now at record highs.[6] I am not overly concerned about current levels of corporate debt because, importantly, financial sector leverage has declined substantially since the Great Recession. However, U.S. government debt now stands at approximately 75 percent of GDP,[7] and the present value of unfunded entitlements now stands at approximately $49 trillion.[8] In my view, the projected path of U.S. government debt to GDP is unlikely to be sustainable—and has been made to appear more manageable due to today’s historically low interest rates.
  • Debt and equity securities trading volumes have markedly declined over the past several years. For example, NYSE equity trading volume on average for 2017 is down 51 percent from 2007 levels, while the NYSE market cap has increased 28 percent over the same time period.[9] I would also note that margin debt is now at record-high levels.[10] In the event of a sell-off, high levels of margin debt can encourage additional selling, which could, in turn, lead to a more rapid tightening of financial conditions. Sufficient market trading liquidity is key to managing the resulting increased volume. I am cognizant that lower trading volumes may be due, in part, to low levels of market volatility and may also be due to regulations such as the Volcker rule.”

So he’s watching markets closely and looking at some of the very same trends and factors we are.

In essence he is affirming one of the key cornerstones of the bear case: We are late in the cycle and low unemployment is not sustainable:

Again:  “There are surprisingly few historical examples of “soft landings” in cases where employment has risen above its maximum sustainable level”.

And neither is the debt build up and he knows it just like Yellen: “In my view, the projected path of U.S. government debt to GDP is unlikely to be sustainable —and has been made to appear more manageable due to today’s historically low interest rates”.

The chart above outlines the argument I’ve been making for a long time. This hyper bull market has not only been enabled by low rates but is the end product. Low rates enabled unprecedented debt expansion. And without low rates it can’t be sustained.

In this context then the concern is what happens if the 10 year were to rise above its 30 year trend line. Note the 2 most recent market tops came at a time when the 10 year was approaching its upper trend line. It is doing so again now.

And it’s doing it in context of a flattening yield curve:

The Fed is paying attention and it’s very concerned:

“Federal Reserve Bank of St. Louis President James Bullard on Friday warned that more rate increases by the central bank would raise the risk the U.S. economy could fall into recession.”

The key question: How sensitive is the entire construct to rising rates in context of record debt. The macro charts I keep tracking suggest stress building underneath.

And so the question then becomes not if it unwinds, but when and from where.

Morgan Stanley came out this week and raised its own concerns:

“An unprecedented central bank unwind… We think there is way too much complacency regarding what is a notable and growing shift in central bank policy globally. Remember, monetary policy has been massive in this cycle, and extremely supportive for credit markets. The Fed is now tightening in an untested way, through the balance sheet, while also pushing rates near restrictive territory. Markets expect a seamless unwind. We do not.

…with markets late cycle, and very dependent on ultra-easy liquidity… It is not a coincidence that fundamental problems are becoming more apparent in one sector after the next, as the Fed withdraws liquidity. In fact, we see late-cycle risks popping up all over the place, and as is often the case near a top, these risks are mistakenly (we think) being rationalized as purely ‘idiosyncratic’ problems. Defaults should remain low in 2018, but that is expected. Credit markets anticipate defaults one year ahead of time, and we think a cycle turn is closer than many believe.

…and valuations very rich: Spreads are near all-time tights, adjusting for the quality deterioration in the indices over time. Yes, the technicals have been strong, but that may change as the Fed’s balance sheet shrinks faster. We note, a recession is not necessary to see negative excess returns, especially in the second half of a cycle, and particularly late in a Fed tightening cycle. Credit markets have not experienced three straight years of positive excess returns in over 20 years.

More than anything else, we firmly believe that central banks have been THE driver of credit in this cycle, stimulating markets like never before. Now they are attempting to tighten in a completely untested way, and yet credit is pricing in a seamless unwind. At the least, we expect a bumpier 2018, with a tougher setup anyway we slice it. Growth will decelerate, while the Fed continues tightening into a low-inflation environment, driving a completely flat yield curve (per our rates forecasts). Additionally, the year is beginning with booming confidence, as hopes for tax cuts rise, thus the bar to positively surprise is high, while “Goldilocks” is firmly in the price across most risk assets.

We would not rule out the scenario in which financial conditions could tighten materially next year as the Fed withdraws stimulus in this unprecedented way, especially if growth expectations decline at the same time, pushing us from late cycle to end of cycle (though not our economists’ base case). And for those expecting the Fed to come to the rescue any time volatility picks up, remember that, with the balance sheet now effectively set on “auto-pilot,” reversing course, in our view, is a last resort.”

You may note how these comments compliment the concerns Kaplan is raising himself. All of this fits with the larger macro analysis I’ve been outlining all year.

There is a reason the Fed has been oh so careful in tinkering and hand wringing. There’s a reason the ECB and the BOJ keep printing. They all know the construct is fragile and they are all worried. They actually say so:

From the recent FOMC minutes: “They worried that a sharp reversal in asset prices could have damaging effects on the economy.”

That’s it. Asset prices are now so elevated that a correction is viewed as a clear and present danger to the global economy. It’s actually all quite simple and obvious. They’ve created a monster and are worried about pissing it off. So the entire construct is held up by low rates and there is a moment where the balance breaks. But we don’t know the when and the where although as my previous chart showed $SPX just hit its 1987 trend line this week which could make any further advances rather challenging or perhaps mark a key pivot.

Here’s the closer view:

Note this tag is coming in context of a $VIX that keeps pinging its upper trend line as it did again this week:

The monthly view via Mella:

These charts continue to signal that volatility will eventually break higher and perhaps violently so.

Now in context of $TNX and the $SPX I’ve created a ratio chart looking at the interplay between $SPX and $TNX:

Note that since the 2009 lows a trend line established itself and it was broken in 2016. Indeed in 2017 it rejected trying to recapture the trend line. Furthermore we can observe a potential right shoulder building. With a significant lower high. Why is that? Well because despite $SPX printing new highs $TNX is not printing new lows. So if $TNX breaks higher it will take massive higher market gains to avoid a break lower in the ratio. This pattern is massive and it would accelerate to the downside if markets broke lower with yields rising. In essence the scenario that Kaplan and Morgan Stanley expressed concerns about.

Bottomline: The macro analysis of the entire construct remains spot on. Central banks have created the TINA effect (there is no alternative) asset prices have become amplified via multiple expansion in lieu of any other investment alternatives and now with the prospect of tax cuts all sellers have disappeared. For now.

Markets have proven they can rally with the loosest financial conditions in this cycle along with continued M1 money supply expansion:

They have yet to prove they can do without.

But after tax cuts there are no more carrots to dangle in front of markets hence we’re finding ourselves in an environment of an imminent carrot top.

The watershed moment will come when people want to sell. How will markets handle a situation with sellers suddenly appearing? Nobody knows. But clearly the Fed is worried about it.

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dasein211 rosiescenario Sun, 12/03/2017 - 12:23 Permalink

As long as the govt keeps spending it won’t matter. Whether it’s military, welfare. Any hint of a downturn means the printers are put into action. They can cut taxes all they want. What they can’t EVER cut is spending. Period. THE US GOVERNMENT IS THE BIGGEST SPENDER PERIOD!!! The plebs know this. Only a lack of government spending can ever lead to a downturn now. They’ll buy stocks, bonds, shit investments. Whatever they need. The only way to fight it is to CHANGE WHAT MONEY IS!!

In reply to by rosiescenario

jeff montanye dasein211 Sun, 12/03/2017 - 12:34 Permalink

well one could always say more government spending would have prevented a downturn but in an era of fifteen or so trillion dollars of negative yield sovereign debt and near historical lows in long term interest rates generally, not to mention highs in schiller p.e.'s in the stock market, one could get an "anti wealth" effect from declines in asset values without too much trouble. certainly changing what money is, from debt based to free government issuance (and a free gold market), is a good idea.

In reply to by dasein211

MonetaryApostate jeff montanye Sun, 12/03/2017 - 12:53 Permalink

QE Infinity is the only thing on the menu, the gov will spend until we are all living in Zimbabwe economics, & even if you saved /made $5,000,000, that's OK, they'll just print 1.933 trillion new $50 bills, like every other new bill...Fake money, fake debt, fake value, fake news, fake investments, fake markets, fake history, yes, fake everything!

In reply to by jeff montanye

The Real Tony IH8OBAMA Sun, 12/03/2017 - 13:37 Permalink

You sort of got it right. Now read this because everyone soon will know this line: "Bitcoin can't crash in price unless the stock market crashes first" I'm all in on Litecoin and out of stocks unless they regress to fair market valuations that being DOW 4,500 S&P at the 400 level and the NASDAQ at the 1,000 level. I've said all along as long as the DOW is above the 10,000 mark money will flow like water into Bitcoin.

In reply to by IH8OBAMA

Clock Crasher Sun, 12/03/2017 - 12:30 Permalink

dump truck reverse drive siren Beep* Beep* Beep*The carrige slowly tilts upward.  Hydraulic engine noises*The tail gate breaks free just a crack. The contents come flooding out as carrige tilt becomes to steep to contain the contents. A mountain of popcorn pours fourth. Buckle up boys 2018 is going to be epic. Bitcoin melt down.Gold, silver, miners show signs of life and complete their multi year base.Equities form multi quater topping pattern in preperation for full blown 2019 market meltdown. 

ebworthen Clock Crasher Sun, 12/03/2017 - 12:51 Permalink

No such thing as markets or money anymore. All those tax mules looking at their perceived wealth in their "portfolios".It's cotton candy.  Don't the retail crowd remember 2008-2009?  The bubble?  Apparently not."Investing" in stocks is flushing money down the toilet.TPTB will rake your chips off the green felt, again.The everything bubble = eventual debt jubilee.$21 Trillion = unpayable = default.

In reply to by Clock Crasher

Consuelo Clock Crasher Sun, 12/03/2017 - 13:44 Permalink

  Not that I necessarily disagree, but...Nearly the exact same was scheduled for: 2012, 2014, 2016, 2017 and 2018.I have often likened the U.S. economy as an automobile EGR system - with the BoJ and ECB playing O2 sensor and catalytic converter.   The 'scheme' is completely sealed.   Out the other end comes power to move the machine forward, with nary a sign of pollution...  

In reply to by Clock Crasher

jeff montanye Sun, 12/03/2017 - 12:42 Permalink

this tax law change continues the work of the bushobama administration in directing income and wealth to the richest tenth of one percent (…).the new law repeals the estate tax and reduces the capital gains tax making it easier for the richest families to pass capital down the dynasty without ever paying taxes.  you all know that upon death all assets assume the tax cost basis of the date of death making their sale capital gains tax free, right?  then selling some thus taxfree assets, buying taxfree municipal or state bonds for income needs, retaining the remaining capital for subsequent distribution at death, again taxfree, capturing some of the taxfree appreciation, purchasing taxfree bonds for income needs, . . . .beats the shit out of working for a living.

two hoots Sun, 12/03/2017 - 12:38 Permalink

There are no charts or 'splain'n that makes any sense of our current economic structure as this is newly created ground and the US/World econmomy has never been here to compare.    How many shoe stores, car tires, underwear can the global population support?  How many dollars can it support?  We don't know but for now it seems to be working?  When and what will distrupt it all...who knows?   War with NK couldn't help so Trump has to weigh that with the other stuff in his pile of concerns, along with adding of additional debt for that cause.  Hard to make any sense out of all the articles posted here.  There are so many guesses, someone will get it right, out of chance, and be the new economic guru that all watch and follow.....for a while.   

two hoots Clock Crasher Sun, 12/03/2017 - 15:03 Permalink

Boomers, like their parents, are savers.   Many will die not touching it (there may be emergencies in heaven/hell or a corn field if you come back as a rabbit), but yes, there come a time when must withdraw a %.   they will likely just put that in a CD/MM or local bank, don't need it, won't spend it...that's how they built it.  The buyers will be there for a bit then........which means the selling boomers, FIFO, will be the winners out of that pile.   Kids will likely inherit much.....and blow it on stupid stuff and the world goes round and round no matter who's riding on it.

In reply to by Clock Crasher

Clock Crasher Sun, 12/03/2017 - 12:37 Permalink

For those who don't think a stock market crash is no longer possible.  Let me remind you what is more likely is that the cartel wants all of the wealth.  Not some.  There will be a market implosion at which time the real money printing will begin.  Americans who did not invest in value/commodities (meaning 99.99% of the country) will be forced to sell their equity at 10-30 cents on the dollar to bid for that months rent and alpo.   

Consuelo FreeShitter Sun, 12/03/2017 - 13:50 Permalink

  Nah...  Horse meat balls.   Trust me.   I don't even know if they're manufactured anymore - used to be one of, if not the most expensive dog food out there in the 70's.    And you know what - it smelled delicious.    The taste though...    Always wondered how something which smelled so enticing, could taste so - ughh...

In reply to by FreeShitter

Number 9 Sun, 12/03/2017 - 12:44 Permalink

fake markets, fake silver eagles, fake gold bars, fake .gov data, fake news, fake humans in washington, fake climate change, fake enemies, fake moon landings, fake gas chambers, fake shootings and bombings, fake republicans and fake anti fascists that are fvkin commies... is there any hope?

TeethVillage88s Number 9 Sun, 12/03/2017 - 13:04 Permalink

Fake Sex Scandals omit many rich, powerful, elites, Lolita Expresses, Slave Markets in Syria and Libya, Slaves in Saudi Arabia, Weapons Sales in Dubai with sex on the side, Royal Privileges...

What is the Nature of Power.

Money, Wealth, Status, Titles, Lands, Access, Group Affiliation, Networks, WTO Membership, Central Bank Affiliation, Diplomat Status, work for Federal or National Govt, Cheap Labor Force, English Speaking Labor Force, Access to Mercenaries.

Being Chosen as State Capitalist Corporation or Executive there of... like in High Tech, or like TBTF Bank, Bailout type Corporation, ... be part of the Police State or Telecom.

In reply to by Number 9

Don Sunset Sun, 12/03/2017 - 13:12 Permalink

Another approach is to keep bubbling up the markets and crashing them.  Each time they wring out much of what the "investors" put in.  I believe that this is what is going on.  There is more hope with this approach because others have a chance to get in and get out before the huge crashes.  If the markets just go straight up, there is no hope to get anything at entry level prices.  A huge crash is coming.However, all of these failed governement policies leave the political and social environments in very bad shape.  Who can trust a blatantly manipulated ponzi stock market that has no free price discovery?  For that reason alone, I think this sytem as we knew it can not ever return and be trusted.

The Real Tony Don Sunset Sun, 12/03/2017 - 13:47 Permalink

The last thing the central bankers want to do is buy up and own the market. When they own everything, everyone leaves and they have no one left to sell to. They can't make anything trading shares amoungst themselves. This is a bitter lesson that Japan will soon learn. The market has to crash before the central bankers own everything.

In reply to by Don Sunset

Bemused Observer Don Sunset Sun, 12/03/2017 - 14:18 Permalink

And you can't get price discovery in a market after years of funneling 'free money' into it. What IS the monetary value of something that is 'free'? I would argue that it is zero. And apparently interest rates agree with me, as they sit near historic lows. How can something be given a price in worthless currency?And in recent months, the only challenger to fiat has been Bitcoin...another 'currency' that is proving difficult to nail down as to value. Cryto is all over the map, and thus is useless for establishing a market price for anything.Investor sentiment is the only thing holding markets up at the moment. The GOP had better be sure that their tax plan doesn't end up screwing a large number of 'regular taxpayers'. I don't think they really understand the nature of this 'make or break' moment. I think they believe they are being clever, and will get away with another 'fleecing' of the taxpayers this time, as they have done in the past, and keep the game going.Honestly? They are probably right. However, the taxpayers are not their biggest worry here, they've been on a downward trajectory for years now, and have become acclimated to it. Joe Sixpack is unlikely to take to the streets over the further nibbling-away of services, he won't call his Congressman because the trash collection is reduced to bi-monthly collection, he won't even complain after they say fuck it and eliminate it altogether, and tell him to take his trash to a dump. It's the investor class, the ones who make up 'the markets'. The taxpayers may indeed be a pitifully stupid bunch, but the investors are NOT. And they do not want to lose any money. If this tax plan turns out to be a mess, it is the investors who will punish them this time, as most understand this is the endgame. They will begin to pull their money, and crash those markets. A lot of portfolio's will be wiped out, and heads will start to roll.And when the taxpayers lose their shirts for the 3rd time in less than 30 years, THAT'S when they'll have to worry about those taxpayers. Of course, this will be after the Wall Street casino-crowd have finished with them, and I'm not sure how much will be left for the taxpayers to take vengeance on. A lot of very wealthy people are gonna be PISSED, and they aren't as easy to manipulate as Joe Six-pack is, and they will demand their pound of flesh to compensate for their lost fortunes.

In reply to by Don Sunset

Captain Nemo d… Sun, 12/03/2017 - 13:06 Permalink

"Yet we could be sitting on a generational opportunity to sell equities as it could be argued""Could" always makes everything alright. It happens, you're a prophet. It doesn't, well you never committed to it.

warsev Sun, 12/03/2017 - 13:25 Permalink

I'll get shot down in flames for this for sure! But here goes:Tax cuts should come after a balanced budget. Not before. This cut will increase the debt by *only* $1,500,000,000,000 ($1.5T) in the next ten years. And that's the most favorable propaganda. That's $1.5T that the gov is borrowing from my and your children, grandchildren and great-grandchildren. Regardless of the fairness between current demographic groups, it's unfair to all future generations.Balance the budget first. Then go for tax cuts.

DeathMerchant warsev Sun, 12/03/2017 - 16:02 Permalink

Sounds like you've come up with a way to appease all of the people who will have their entitlements ended when the budget is  balanced.  Either that or you're a Russian/Chinese agent who wants to see the elimination of the US military. One of those two things, some combination or both would be necessary to balance the budget.

In reply to by warsev

Anon2017 warsev Sun, 12/03/2017 - 16:30 Permalink

I don't think the five Catholic men on the US Supreme Court back in 2010 were thinking about fairness when they decided the Citizens United case. They were more concerned about the rights of corporations and the investor class. They gave the billionaires on the Forbes 400 list enough rope to hang themselves, figuratively, if not literally. Republican politicians who successfully ran on a platform of family values in the past two decades were probably not thinking about your family. Now it's time to pay the piper. The chickens have come home to roost.    

In reply to by warsev