Circus Crashius
- MAC10
- Aug 15
- 4 min read
Record valuations, record leverage, record Tech overweight, record complacency. What could go wrong?
Now that the trade war has "officially" ended, Trump is pulling out all stops to lubricate this market to ever greater highs - both on the fiscal side via his tax cut and now on the monetary side via his constant pounding the table for rate cuts:
"But the case for cuts is growing harder to make, even as market bets for it harden like cement, and the end result might not deliver what the president truly wants."
Last September, when the Fed cut rates by 50 basis points despite inflation pressures that hadn’t been fully tamed, 10-year Treasury yields rose nearly 90 basis points over the next three months."
Begin with the fact that Trump is totally ignorant with respect to economics so he should not be attempting to take over the Federal Reserve. Trump and his economic team somehow don't understand that the Fed does not control long term interest rates. To cut rates preemptively when the economy is "booming" as he himself asserts and inflationary pressures are rising, is a recipe for Volcker-style disaster circa 1980 in which the Fed was forced to begin raising rates again, thus driving unemployment to 10%.
Nevertheless, from a short term markets perspective the net effect of Trump's relentless rate cutting campaign is to create a 1987 level of risk in which markets become over-stimulated and then crash. Here we see the Global Dow is making a new all time high this week on the prospect of imminent Trump-induced easing.
Turning to the markets:
This week's SpotGamma podcast regarding Friday (today's) monthly options expiration describes the current state of mass complacency and lays out the bull case for an impending rate cut. Kochuba asserts that monthly realized volatility (~6%) has now reached a level that has been an historical "floor" for volatility. However he then recalls the 2017 Trump era when volatility briefly dipped below 6% and asserts that it was a very boring grinding period of time for traders. He calls it the zombie market. The question on the table - is this a new market "zombie" era that we are now in? AND is an impending Fed rate cut in September a guarantee of even lower volatility between now and the September FOMC?
Kochuba asserts it could be:
So, mass complacency and collapsed volatility ahead of an impending rate cut. That is the bull case in a nutshell, therefore it falls on us to ask what could explode in the meantime?
First off, I will say that this period is NOTHING like 2017. Back in late 2016, Trump himself said that the market was in a "Big, fat, ugly" bubble at a time when the market and valuations were far lower than they are right now.
BofA now states THIS week that valuations are BEYOND Dotcom levels.
But let's say that valuations DON'T matter anymore, at least short-term, then we must turn to the market technicals to divine the level of risk inherent in these markets.
First off, there is the massive breadth divergence especially within the Nasdaq 100. This new high was attended by only 50% of Nasdaq 100 stocks above the 50 day moving average. And as we see, breadth is rolling over again. In other words, most Tech stocks have left the party:
The number of stocks making new highs this week, remains very similar to 2022 at the end of the pandemic bubble; however this time around, the index has continued to grind higher in a low volatility rising wedge that we are to believe will continue indefinitely.
This chart informs us that this algo-induced illusion can end at any minute of any day and explode with extreme dislocation. The mindless systematic shorting of volatility regardless of risk - cited by SpotGamma above - is arguably the biggest near term risk to this market. Especially on the other side of monthly options expiration next week when it will be harder for market makers to corner the market.
The 2021 meme stock mania froth has continued this week but there is tremendous complacency around that widely acknowledged level of speculation as well. Wall Street is now full on encouraging retail investors to play these pump and dump schemes:
On the topic of "bullish" rate cuts, there is now an entire generation of traders who have never lived through a real bear market. Therefore they have come to believe that rate cuts are ALWAYS good for stocks. They don't recall October 2008 when a total of 5% rate cuts PRECEDED a -55% decline in the stock market.
And, for those who were not around during the pandemic, the first (.5%) rate cut caused the stock market to go limit down. And the bottom came two weeks later amid mass margin calls.
Here we see that Trump's policies have been extremely dollar negative, so a rate cut would very likely collapse the dollar and force the Fed to Japanify the bond market via QE. Which takes some time to reach stocks.
In summary, we've never seen a president this eager to stoke market speculation and risk taking. Why that's "good" is not for me to say. History will not be on the side of complacency.
