Echo Bubbles and Wall Street’s Depravity

Today the jobs report came in red-hot, with 528k jobs added vs. 250k expected. This sent stock futures sharply lower, because Wall Street wants the economy to be in shambles, so the Fed can “pivot” from its hawkish stance and turn the money printer back on again.

Wall Street is like the pharmaceutical industry. The pharmaceutical industry doesn’t want you healthy and cured, there’s no money in that. But they also don’t want you dead–because there’s no money in that, either. They want you somewhere in between: perpetually sick and hooked on a myriad of pills, drugs and “treatments” designed to make you a lifetime subscriber to Big Pharma. They want recurring revenue from everyone–you need this drug to survive, and anytime your supply runs out, you head to the pharmacy and get your prescription refilled. They want repeat business.

Similarly, Wall Street does not want the economy to be roaring and strong, because that leads to inflation, which leads to higher interest rates, which leads to recession. But they also don’t want the economy to be destroyed completely, for obvious reasons. They want it somewhere in between: limping along and needing constant monetary support from the Fed–low interest rates, money printing, etc.

What this white-hot jobs report shows is that the Fed’s rate hikes have not kneecapped the economy just yet, and so interest rates will have to go higher still in order to get inflation under control. This whole stock rally over the past month or so has been predicated on the idea that inflation is beaten and the Fed doesn’t have to hike rates anymore. Back to low interest rates and money printing we go!

However, the report shows that payrolls are increasing, as well as wages, which means inflation will keep increasing, which means interest rates have to keep rising.

As the Real Fly put it this morning:

The good news is the economy is doing fine. The bad news is the Fed has to destroy it.

Hence, stocks fall.

Or at least they did in the early part of the session. Now all the major indices have basically erased their losses.

NOTHING can take this market down.

Whenever you hear anyone say investors are “too bearish,” just look at the market chart literally every single day for the past month: any and all dips are bought up with ferocity. Investors still are nowhere close to being broken of their buy the dip habit. They still believe any decline in stock prices–any at all–is a great buying opportunity.

The Nasdaq has now rallied 20% since its June 21 low. The S&P 500 is up about 15% from those lows.

The overall trend, of course, is still down, and I will probably be looking to fade this rally and bet on lower stocks soon here (via PSQ and some UVXY). But do not underestimate the fact that probably 65-75% of investors are well-trained permabulls who are looking for any reason to go long. They have spent the past 13 years buying the dip and being rewarded, do not expect that learned behavior to go away quickly. They have to really get burned in order to stop wanting to buy the dip. That hasn’t happened yet.

Plus, there’s a rational reason people are so keen to buy the dip: because with inflation officially at 9% (and unofficially at like 17%), having cash just sitting in your bank account means you’re losing money. The stock market is really the only way one can hope to keep pace with inflation.

But this strategy is doomed to fail because the Fed needs to continue hiking rates. Inflation is the top priority. Usually interest rates have to be raised to above the rate of inflation in order to compel people to save rather than spend.

The Fed sees a blowout jobs report and it thinks: more jobs = more spending = more inflation. So thus we need more rate hikes to break the cycle. The economy has to be “cooled off” (or if you prefer, destroyed) in order for inflation to come down. Stop the spending and you stop the inflation. Demand destruction has not yet been achieved, which means the Fed will have to continue hiking rates.

One more thing I wanted to point out: no, this blowout jobs number does not actually mean the economy is strong. It’s not. You know it, I know it, we all know it–the economy is not strong. It hasn’t been even remotely strong since 2019.

This blowout jobs number was a complete Fugazi:

So Full-time, salaried jobs with benefits actually dropped by 71k in July, but guess what: part time jobs with no benefits and people taking on MULTIPLE jobs went up!

Obviously that’s data more consistent with a terrible economy, in which more and more people need two jobs just make ends meet, than with a booming economy. But that’s what stagflation is.

And we’re in stagflation. We have a shit economy with running inflation. The inflation is a big part of the reason the economy sucks.

And yes, the Fed knows this. They know the jobs number was only good because the economy is so bad that people have to take multiple jobs just to make ends meet. But the Fed will pretend they don’t know this so they can continually have justification to hike rates. They need to be able to point to something that gives their actions cover. They need to be able to say, “You saw the jobs report; the economy is on fire! We’ve got to continue hiking or inflation will get out of control!”

This is what they mean when they say “data-dependent”–if the data shows inflation running too hot, they will hike. Wall Street took at that as the all-clear sign, but what it was in reality was the Fed saying, “The ‘data’ will be manipulated and rigged to justify our every action.”

They are lying to us this whole time to prevent people from panicking. They are lying about everything, and people are really buying it.

“Recession? What recession? We’re not anywhere near a recession! The economy is totally fine!”

People are really buying that garbage.

As I keep saying: they will feed us lies and nonsense so that we don’t panic as they systematically dismantle the economy.

They want this to be orderly, because panic will cause mass liquidations on Wall Street, and we could see hedge funds and even banks go tits-up in that type of scenario.

The Fed is sweet talking investors as they lead them to the slaughter.

I found a good thread on twitter by @PauloMacro on “echo bubbles,” where the market reaches “max stupidity” before truly imploding:

The first countertrend rally in The Bear always take us to a max stupid point. It becomes an echo of the prior top. Cloudbear calls this the All Clear Echo.

Spoiler – This is why you are seeing HKD happen 18mths after GME/Spac madness.

HKD–look it up. It’s a Chinese stock that was up like 12,000% over the past few weeks. The stock was at 15 on July 15 and went all the way up over $2,100 a share by August 2. It had a higher market cap than Facebook.

In 2008, after Bear Stearns, we bounced into May and came within a few % of the highs. At that lower high, the relief was palpable, and I remember PMs telling me that BSC was the sacrificial lamb because they hadn’t played ball back in 1998 and didn’t bail out LTCM…

…with the other banks so the Fed punished them and let them fail – “not in the Club.” With BSC shot, the system was cleansed and the market could move on. I had that conversation at least five different times, and still recall with whom I spoke on it 14 years later!

Four months later the system fell apart, everyone was reading Irving Fisher, and people were talking about a new Great Depression.

Let’s go back farther to 2000. Most on here weren’t around then, but we all see the Nasdaq retail blowoff parabola in March 2000. What people don’t remember, because they weren’t there, is that while the Naz collapsed, Dow & SPX chopped wood for another 6mths to Sept00…

…AND YET many mania stocks went on ANOTHER incredible run just to kill the pros who didn’t take the summer off like Druck, and shorts got run TF over in 3Q00. I will give you an example but there were countless stocks like this in my fuking life back then.

Juniper Networks – JNPR. Ipo’d June 1999 at $5. Peaked at $125 in March 2000. By May it was at $60. Game over right? Wrong. Fuking WRONG. By October it was at $200. GOOD NIGHT SHORTS. 6mths later it was $25. A year later, right after 9/11, it was below $10… -95% in 1yr.

If you traded JNPR perfectly back then I call you a liar. Full stop. This stock to this day, 22 years later, still defines for me what I call the All Clear Echo and what constitutes MAX STUPID.

Back to today. Everything comes down to positioning. Too many managers are down YTD in an illiquid period for this market to suddenly buckle (without something truly horrendous hitting it).

I tend to think we need to go max stupid to complete the All Clear Echo. We almost *have* to go Max Stupid, because of the degree of recent years of excess, from centimillion dollar painting auctions to trillions thrown away in pure ponzi “bits in the sky.”

I mean, an echo of the biggest bubble in modern history itself needs to be fuking EPIC right? Am I wrong? Stands to reason no?

So what are the sorts of things we could see to achieve Max Stupid? I will throw this question out to you. I want to hear back here, but I am not looking for wild predictions for wildness’ sake. Like JNPR in 2000, it needs to TIE BACK to the bubble, something the mob gets…

…in their teeth one last time, that leaves seasoned pros shaking their heads for a few weeks or months.

He then provided a chart for JNPR to illustrate his point:

Leave a Reply