Max Stupid → Max Pain
The Year is Not Over: Will equities derisk and degross as bonds get sloppy on a possible US Liz Truss Moment?
As someone with a bit of a reputation as a permabear (heck see my avatar), one would be tempted to think I am bearish all day long. This is simply not the case, and for those who have been following me over the past few years on Twitter and this year on Substack, I think you know how to tell the difference by now when I am simply being cynical but going along with things versus when I am acutely flailing my arms in the air. Over the past few weeks since Thanksgiving it’s been decidedly the latter. During that time I have discussed:
The similarities of the current market to the echo rally of the “Nifty Fifty” in 1970-72 as the market narrows;
The dangers reappearing of a Liz Truss Moment in the US which may not wait for Trump’s proposals before forcing the incoming administration to change tacks and take tax cuts off the table;
The mechanics of substitution in the most speculative corners of the market weighing on the momentum of retail profits, particularly in bitcoin; and
The Financial Nihilism of the current speculative fervor which has more of a cynical “fuk it, let’s gamble” flavor of a last leveraged hurrah than conventional euphoria.
Today I will pile onto my list of recent concerns with a different look at the seasonality that has captured the zeitgeist. I also would suggest that while 98% of the market seems to be comfortable riding out the next several weeks and maintaining risk into early 2025 as famed bears like David Rosenberg throw in the towel, the other 2% — the more skeptical, balanced investors who have not been swept away in the recent rally — seem to have ended up in same place; namely, that while risks to equities are acute, the tape is impossible to bet against and better to wait for Q1 as:
Institutions blindly following Goldman’s Scott Rubner incessant trumpeting of bullish seasonality into mid-January on everything from classic Santa momentum to reflexive vol compression/dispersion/plunging correlation, corporate buybacks, and vol control fund chasing;
Retail traders who have outperformed the Nasdaq for the first time in over a decade are riding enormous momentum and delaying sales to avoid incurring capital gains taxes, and
The giant JPM Whale collar with the upper call strike of ~6055 seems near-guaranteed to pin the S&P 500 at 6055 on December 31st as dealers find themselves persistently long large amounts of gamma which suppresses index volatility and reflexively positively reinforces dispersion and collapses correlation (note the Whale putspread ~5450 x 4600, we will come back to this later).
For those who missed my prior discussions of Election Year 4 seasonality, I would encourage you to have a read here and here. Given how strongly this seasonality drove the whole year’s massive performance, it is only fitting we close 2024 with a final look. Jumping right in…