Global Supernova

Global central banks have succeeded in creating a global melt-up in front of an incipient global liquidity trap. They share the same belief as investors - that only monetary policy now matters. They have become "invincible".

Step back to recap the year to date so far: In the first half of the year we had a Tech melt-up which was led by AI stocks and the "Magnificent Seven". That super bubble reached its zenith at the end of the second quarter and then it crashed spectacularly, featuring the largest volatility spike since March 2020. Subsequently, markets have recovered and have rallied into global rate cuts culminating in a double Fed rate cut last week and China shock and awe this week. That has sent global markets into what I call the supernova phase. How long it lasts depends upon positioning, however consider that most institutions get fully long for the fourth quarter which begins next week. Normally September is the worst month of the year for stocks, but as we all know October has the largest crashes - 1929, 1987, 2008. It's setting up that this year October could be another month for the record books, given the policy uncertainty ahead of the election.

In this chart of the Nasdaq we notice that in this second half Tech stocks are lagging badly. While the Dow and S&P 500 are at new all time highs, the Nasdaq is still far below the July high. We see via large cap Tech highs (bottom pane) that the number of mega caps making new highs peaked in January of this year. The problem for bulls is that Tech/growth is what's known as a "long duration" trade meaning it usually benefits the most from economic deflation and the lowering of interest rates. However, clearly that is not the case in this second half "rate cut" rally.

Nasdaq Composite, Thursday morning:

Another warning sign I mentioned in my last blog post is the lack of participation from small cap stocks. We've been told constantly in this second half that this is a broadening rotation. Here we see that through Wednesday breadth has been imploding as the S&P 500 logs new highs.

S&P 500 Thursday morning:

Then there is the fact that commodities are STILL imploding despite the fact that we've been told all this week that China is on the path to recovery. As I write on Thursday morning, global stocks are rallying but oil is crashing.

This chart shows oil as of Wednesday close:

In summary, this is a short-covering rally driven by an unquestioned belief in central bank invincibility, ahead of a global liquidity trap in which monetary policy will be rendered economically useless.

Soon the entire world will know what it's like to be China and faith in central banks will collapse at the same rate as markets.

By the end everyone will realize that printed money is NOT the secret to effortless wealth.