The Good, The Bad, & The Ugly

Authored by Sven Henrich via NorthmanTrader.com,

“Sometimes I wonder if the world is being run by smart people who are putting us on or by imbeciles who really mean it”

– Laurence Peter

After months and months of sticking to a transitory narrative despite ever rising inflation data Jay Powell finally caved yesterday and retired the word transitory. What a colossal embarrassing blunder. Once again a Fed Chair being in total denial about reality. Like Ben Bernanke in 2007 declaring subprime contained and not a threat to the economy, persistent inflation is suddenly a risk to the economy when it supposedly wasn’t all year long while the data clearly kept saying that it was.

The Fed not only got inflation wrong but by extension they got policy completely wrong and I find myself very much validated here: They’ve totally overdone it on the liquidity front as they kept printing like mad men into an inflationary environment that they denied existed. And it’s not only the Fed. Combined with the ECB both central banks have added a combined $3 trillion in liquidity just in 2021 into an inflationary environment no less. Mad. Which means they exacerbated a massive asset bubble exacerbating wealth inequality when the right policy should have been to taper sooner. And now they may be forced to slam the foot on the breaks, a point I made on CNBC today:

Glad to join @CNBCTechCheck today.
Here's part of the clip.
We never got to the charts, but I'll aim to post some additional commentary which will include some charts. https://t.co/SUOdfk3wLM

— Sven Henrich (@NorthmanTrader) December 1, 2021

What’s this all mean for markets in the here and now? Since I promised some charts let me give you the good, the bad, and the ugly.

Let’s start with the good:

Let’s recap key technical developments as the context of the market action in oh so important. In late October I highlighted the case for “Make Bears Cry” the infamous broken trend and then new highs to retest the broken trend which was first identified in late September. Bears did indeed cry as everything broke out to new highs including aggressive rallies in small caps, the $NYSE, $DJIA and $SPX and $NDX of course.

On November 16th in the NorthCast I outlined an inverse pattern on $SPX with the technical target of 4740. This target not only got hit rather precisely but it served as a key reversal pivot again off of the trend line we’ve been watching all year long:

Note how stubborn and persistently $SPX keep tagging the trend line from the underside with the final highs coming on a very pronounced negative divergence.

As the sell off ensued I highlighted in MarketWatch the September highs, i.e. the 4550 zone, as a key price zone bulls must hold to continue to be constructive for year end. This level was almost reached yesterday and has so far held as support. But watch this price zone closely in the days and weeks ahead, for should bulls lose this zone things may get a lot uglier still.

Note the same applies to $NDX:

Whereas $SPX has broken its trend in September, the $NDX trend remains intact and the index has remained incredibly resilient. As long as the trend remains intact tech is in a good position to set up for a year end rally. $NDX also remains above the September highs and as long as these previous highs hold as support the price action can be constructive as a back test. Note also how precise the trend has remained both on the resistance as well as the support side in the past year:

Now to the bad:

Note in the chart above the $VXN, the underlying volatility index, has broken out and in the lead up to the November highs it kept warning with rising volatility prices, that’s the same event we saw leading up to the February 2020 top.

We can observe a similar even more pronounced breakout in $VIX a pattern that held its uptrend throughout 2021 which I again highlighted in “Make Bears Cry”:

While bulls can hope to compress the $VIX again for a backtest into late December the genie looks very much to be out of the bottle.

Another big issue is that ever more highs in $NDX this year have come on an ever weakening cumulative advance/decline picture and in recent days in particular that indicator has completely fallen off the cliff:

This again speaks to the narrowing of leadership of a few stocks that are holding up the index. Note the advance/decline was falling off the cliff even as $NDX made new all time highs on November 22. Indeed the intermittent peak was in early November way before Omicron was even identified. To highlight the extent of the damage beneath: The average Nasdaq component has experienced a 41% drawdown in 2021, 19% on the $SPX. So while we all get the impression of a massive bull market the underlying picture is not so pretty. The everything rally which sees many stocks getting hammered.

Which brings me to the ugly.

In the lead up to the November 22 highs on $SPX and $NDX many other indices did not follow suit as tech was leading driven by a few stocks. This is precisely the same development we saw in January 2020 going into February 2020.

Indeed, the September high backtest support I mentioned in $NDX has already broken in many indices, such as the $DJIA the broader $NYSE and also small caps which just got pounded dropping 12% in just 3 weeks one of the most aggressive drops from all time highs in history:

Indeed 2 out of the 3 previous similar sizable sell offs of this magnitude from all time highs came in March 2020 and in August 2007 just as the asset bubbles began to crack.

The key issue: Trapped supply above as many traders chased the breakout and are now finding themselves under water. Note $IWM is back at February levels.

And this same trapped supply issue with failed breakouts can be observed in the $DJIA and the broader $NYSE:

What all of these charts highlight is that there has been tremendous corrective damage inflicted in individual stocks far beyond what the main indices indicate.

And unless everybody owns only $SPX and $NDX index funds and only the winning stocks it appears people have gotten hammered hard somewhere in individual stock holdings. A question arises. If everybody has piled into stocks like never before:

Why are so many unhappy?

Consumer sentiment per University of Michigan shows levels commensurate with the March 2020 crash lows. Both can’t be true. So there’s something big time amiss here. And unless all the inflows are in the winning stocks only there is pain out there that is masked by the indices.

Unhappy consumers are not happy voters and this has to be a concern for Democrats going into mid term elections next year.

And it is consumers that have been hit the hardest by rising inflation exacerbated by the Fed’s reckless printing:

Powell retiring transitory today is an admission that the Fed has been running the wrong monetary policy since at least the spring & the bottom 50% have been paying the price while the Fed has continued to bloat up the net worth of the top 1%.

And this deserves a renomination 🤦‍♂️

— Sven Henrich (@NorthmanTrader) November 30, 2021

None of this does not preclude a Santa rally from oversold conditions still, but as we saw in early 2020, massive divergences in index performances leading up to new highs are a major warning sign, and the underlying volatility components in all of these charts, including the $VIX, show breakouts suggesting the genie is out of the bottle and will make for a much more volatile 2022.

Indeed I could even point to similar monthly candle in November as we saw in January 2020:

Back then the initial news of a new virus was very much ignored and $SPX and $NDX went onto new highs while financials and small caps did not. Sound familiar?

I’m not making a crash call here, but it may serve to remind the the S&P 500, despite the recent pullback, remains above its quarterly Bollinger band and remains far disconnected from even a basic quarterly 5 EMA reconnect:

Periods of excessive printing have seen such disconnects before, but the reconnect is coming, either this quarter or likely during the next quarter.

While in all of history this Bollinger band was resistance, the liquidity excess of 2020 and 2021 has turned this Bollinger band into support. How long this historical aberration continues very much depends on artificial liquidity injections continuing. The short term good news for bulls may be also this historical fact: Since 20009 all major corrections did not manifest themselves until QE programs were ended and corrections were ended with more liquidity coming in. In this sense it may be argued that the first larger correction will not come until the Fed actually ends QE.

But then we’ve never seen such a price and valuation disconnect from the underlying economy in history while we see the Fed’s credibility suddenly very much shaken. After all it’s all about confidence.

*  *  *

For the latest public analysis please visit NorthmanTrader and the NorthCast. To subscribe to our directional market analysis please visit Services.

Tyler Durden Wed, 12/01/2021 - 17:01
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The Good, The Bad, & The Ugly

Having Abandoned TWTR, Jack Dorsey Goes All-In On Crypto, Renames 'Square'

Well that didn't take long...

Less than a week after Jack Dorsey stepped down as CEO of the angry screamfest known as Twitter, it appears he has moved all-in on crypto by renaming his other company from Square to Block.

As Dorsey says, The change to Block acknowledges the company’s growth.

It’s now clear that Square is Dorsey’s favorite child and needs all of his attention to advance the role it could play in popularizing bitcoin, the best-known cryptocurrency.

"If I were not at Square or Twitter I'd be working on bitcoin," Dorsey said at a cryptocurrency conference in Miami in June. At the time, he said “both companies have a role to play.”

As Protocol.com reports, Square has been riding the crypto wave since its Cash App added bitcoin trading almost four years ago.

By 2021, 1 million Square users were buying bitcoin for the first time on Cash App. Square announced in February that 5% of Square’s total cash was in bitcoin.

In June, Blockstream, the bitcoin mining company, announced that Square was investing $5 million in a solar-powered mining operation.

In July, Dorsey said Square was building “a new business” that would operate alongside divisions like Cash App and Tidal to build tools for developers, focused on bitcoin.

Square also helped set up the Cryptocurrency Open Patent Alliance, which aims to defend the industry against patent trolls.

Recently, Square also announced that it was developing its own hardware crypto wallet “to make bitcoin custody more mainstream.”

“Bitcoin is for everyone,” Dorsey said in a tweet. “It’s important to us to build an inclusive product.”

Despite those moves, Square remains a relative newbie in crypto. Bitcoin trading has juiced its revenue lately, but it’s going up against nimbler, faster-moving competitors like Coinbase and Robinhood.

“Jack wants all in on crypto,” Constellation Research analyst Ray Wang told Protocol. “He doesn’t want to miss the next big thing.”

“It’s early in the marketplace,” Wang said. “This space will be won by a few players. We are in 1997 for the internet.”

One challenge for Dorsey and Square is his well-known allegiance to bitcoin, which is increasingly just one cryptocurrency among many, and not the most technically sophisticated one. Wang says Square needs “to be in the middle of smart contracts,” a technology most firmly established on the Ethereum blockchain.

*  *  *

Full Statement

Square, Inc. (NYSE: SQ) announced today that it is changing its name to Block. Block will be the name for the company as a corporate entity. The Square name has become synonymous with the company’s Seller business, which provides an integrated ecosystem of commerce solutions, business software, and banking services for sellers, and this move allows the Seller business to own the Square brand it was built for.

The change to Block acknowledges the company’s growth. Since its start in 2009, the company has added Cash App, TIDAL, and TBD54566975 as businesses, and the name change creates room for further growth. Block is an overarching ecosystem of many businesses united by their purpose of economic empowerment, and serves many people—individuals, artists, fans, developers, and sellers.

“We built the Square brand for our Seller business, which is where it belongs,” said Jack Dorsey, cofounder and CEO of Block.

“Block is a new name, but our purpose of economic empowerment remains the same. No matter how we grow or change, we will continue to build tools to help increase access to the economy.”

The name change to Block distinguishes the corporate entity from its businesses, or building blocks. There will be no organizational changes, and Square, Cash App, TIDAL, and TBD54566975 will continue to maintain their respective brands. A foundational workforce, which includes teams such as Counsel, People, and Finance, will continue to help guide the ecosystem at the corporate level. As a result of the name change, Square Crypto, a separate initiative of the company dedicated to advancing Bitcoin, will change its name to Spiral.

The name has many associated meanings for the company — building blocks, neighborhood blocks and their local businesses, communities coming together at block parties full of music, a blockchain, a section of code, and obstacles to overcome.

Square, Inc. is referred to as “Block” in this press release. The legal name “Square, Inc.” is expected to be legally changed to “Block, Inc.” on or about December 10, 2021, upon satisfying all applicable legal requirements. The company’s NYSE ticker symbol “SQ” will not change at this time. Any changes in the future will be publicly disclosed. No action is needed from current stockholders. The Company’s Class A common stock will continue to be listed on NYSE and the CUSIP will not be changing.

For more information, please visit www.block.xyz or follow company news via Twitter @blocks and @blockIR. For media assets, go to www.block.xyz/mediakit. We intend to use the Block investor relations website as well as the Twitter accounts @blocks and @blockIR as means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD.

Tyler Durden Wed, 12/01/2021 - 16:45
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Having Abandoned TWTR, Jack Dorsey Goes All-In On Crypto, Renames 'Square'

Trump Social Media Venture Soars: In Talks Over $1 Billion Raise At Much Higher Valuation

Markets may be crashing, but not every stocks is getting smashed into the close and one notable outlier is blank check firm Digital World Acquisition Corp (ticker DWAC) better known as Donald Trump's new social media venture, which according to a late day report from Reuters is seeking to raise up to $1 billion in a PIPE deal by selling shares to hedge funds and family offices at several times the valuation it commanded in a deal with a blank-check acquisition firm in October.

While the original deal from September valued Trump Media at $875 million, including debt, just two months later the company is seeking to raise up to an additional $1 billion at a valuation of close to $3 billion, to reflect Digital World's share rally after Trump supporters and day traders snapped up the stock. Indicatively, DWAC's market cap closed at $1.8 billion today.

The proposed deal is the clearest indication yet that the dealmakers behind Trump Media & Technology Group - which has yet to roll out the social media app it says it is developing - are seeking to capitalize on the market euphoria around their venture, which has so far been fueled by its ambitious goals rather than a business that is up and running.

As a reminder, Digital World shares were originally valued at $10 each in the deal with Trump Media back on Sept 26. However, just weeks later, Trump Media is looking to secure a private investment in public equity (PIPE) that values DWAC shares closer to their recent price, currently hovering around $40, the sources said. It is a departure from most PIPE deals, which are typically done at $10 per share, and would result in a much greater dilution of existing Digital World investors.

Reuters sources added that Digital World shares may be valued based on a 20% discount of their 10-day, volume-weighted average price.

A few caveats: while most PIPE transactions are inked before a deal to take a company public is rolled out, it is far from certain that the companies will raise the entire $1 billion they are seeking following their deal announcement. Many Wall Street firms have snubbed the opportunity to invest, and many of the investors participating in the confidential road shows for the PIPE are hedge funds, family offices and high net-worth individuals, the sources said. Some may have decided that this is the most efficient way to buy favor with the person who according to online betting services will be the next US president.

Trump has also been personally involved. He has been calling some investors to ask them to make a commitment to the PIPE of more than $100 million, the second of the sources said. Investors attending the road show were shown a demo from the planned social media app, called TRUTH Social, which looked like a Twitter feed, the sources said.

That said, the deal also faces regulatory risk. U.S. Senator Elizabeth Warren asked Securities and Exchange Commission Chairman Gary Gensler last month to investigate the planned merger for potential violations of securities laws around disclosure. The SEC has declined to comment on whether it plans any action.

Trump Media & Technology Group and Digital World have asked investors to finalize commitments to the PIPE by the middle of December, the sources said.

In a PIPE road show attended by one of the sources, investors were asked to commit between $10 million and $20 million. Neither Trump nor Digital World executives made an appearance, and the investor presentation was led by David Boral, the president of EF Hutton, an investment bank that advised Digital World on the deal, the source said. A Trump Media & Technology Group representative was also in attendance, the source added.

TRUTH Social is scheduled for a full rollout in the first quarter of 2022, and is the first of three stages in the Trump Media & Technology Group's plans, followed by a subscription video-on-demand service called TMTG+ that will feature entertainment, news and podcasts, according to the news release.

In a slide deck on its website, the company envisions eventually competing against Amazon.com's AWS cloud service and Google Cloud.

Tyler Durden Wed, 12/01/2021 - 16:34
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Trump Social Media Venture Soars: In Talks Over $1 Billion Raise At Much Higher Valuation

The Long Cycles Have All Turned: Look Out Below

Authored by Charles Hugh Smith via OfTwoMinds blog,

But alas, humans do not possess god-like powers, they only possess hubris, and so all bubbles pop: the more extreme the bubble, the more devastating the pop.

Long cycles operate at such a glacial pace they're easily dismissed as either figments of fevered imagination or this time it's different.

But since Nature and human nature remain stubbornly grounded by the same old dynamics, cycles eventually turn and the world changes dramatically. Nobody thinks the cyclical turn is possible until it's already well underway.

Multiple long cycles are turning in unison:

1. The cycle of interest rates: down for 40+ years (last turn, 1981), now up for an unknown but consequential period of time.

2. The cycle of inflation / deflation: the 40-year period of low real-world inflation and rip-roaring speculative debt-asset inflation has ended and now an era of scarcity, real-world inflation and speculative debt-asset deflation begins.

3. The cycle of capital-labor balance: capital has dominated labor for 40+ years, siphoning $50 trillion from labor. This cycle has now turned and the rebalancing is underway: it's capital's turn to surrender gains and power.

4. The cycle of social order-disorder: as documented by historian Peter Turchin and others, social order (in Turchin's phrase, the integrative phase) holds sway for about 50 years and then it gives way to an era of social disorder (the disintegrative phase). This phase doesn't end with mild reforms nobody even notices, it ends with a rebalancing of social, political and economic power.

5. The cycle of wealth/power inequality: wealth--and the political power it buys--becomes increasingly concentrated in the hands of the few at the expense of the many. This feeds economic and political dysfunction and exploitation that must be remedied by reducing extremes of wealth-power inequality.

6. The cycle of speculative excess: those in power protect their wealth and the wealth of their cronies by instituting moral hazard, the disconnect of risk and consequence: the central state and central bank backstop and bail out the most egregious big speculators, who keep all their gains and transfer their losses to the public.

The public concludes the only way to get ahead in such a rigged financial system is to belly up to the gaming tables and gamble that the next bubble will never pop because those in power won't ever let it pop.

But alas, humans do not possess god-like powers, they only possess hubris, and so all bubbles pop: the more extreme the bubble, the more devastating the pop. The faint cries that fade to silence are: but this time it's different! and the Fed will save us! That's not how cycles work: all the god-like powers are revealed as hubris, which arouses the fatal ire of Nemesis.

*  *  *

Thank you, everyone who dropped a hard-earned coin in my begging bowl this week--you bolster my hope and refuel my spirits. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

Tyler Durden Wed, 12/01/2021 - 16:20
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The Long Cycles Have All Turned: Look Out Below

Pentagon Orders New Probe into Syria Airstrike That Killed Dozens of Civilians

By Isasbel van Brugen of Epoch Times,

Defense Secretary Lloyd Austin has ordered a new investigation into a 2019 airstrike in Syria that led to multiple civilian deaths, Pentagon press secretary John Kirby announced on Monday.

The renewed probe will be led by U.S. Army Forces commander Gen. Michael Garrett within a 90-day deadline. It aims to review “reports of investigation already conducted” while simultaneously conducting “further inquiry into the facts and circumstances” of the U.S. airstrike that killed dozens of women and children, Kirby said.

The news follows an investigation published by The New York Times earlier this month, titled “How the U.S. Hid an Airstrike That Killed Dozens of Civilians in Syria.”

Its report revealed that the March 18, 2019 airstrike on ISIS in Baghouz, Syria, was carried out by a classified American special operations unit, called Task Force 9, which was in charge of ground operations in Syria, and resulted in the deaths of as many as 70 civilians.

There were mostly women and children in the region hit by the strike, the Times reported, noting that the Baghuz strike was one of the largest civilian casualty incidents of the war against the Islamic State, but it has never been publicly acknowledged by the U.S. military.

The investigation also alleged that top officers and civilian officials attempted to downplay these figures.

The probe will cover “civilian casualties that resulted from the incident, compliance with the law of war” and “whether accountability measures would be appropriate,” Kirby said.

Garrett will also be asked to recreate the timeline of the original probe into the incident after it was “stalled and stripped of any mention of the strike,” according to the Times.

It comes after Austin earlier this month said that the U.S. military was “committed” to getting right its transparency about strikes and how they are conducted.

“The American people deserve to know that we take this issue very seriously. And that we are committed to protecting civilians and getting this right both in terms of how we execute missions on their behalf and how we talk about them afterwards,” Austin said at a press briefing on Nov. 17. “And I recognize that and I’m committed to doing this in full partnership with our military leaders.”

Kirby said on Monday that Austin decided to order a new probe after being briefed on the matter by Central Command head Gen. Kenneth McKenzie earlier this month.

Tyler Durden Tue, 11/30/2021 - 23:05
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Pentagon Orders New Probe into Syria Airstrike That Killed Dozens of Civilians