Financial WMD

This is the monthly market report for February 2024.

This is all an experiment in maximum financial idiocy. The results of which are TBD.

Warren Buffett has said that derivatives are financial weapons of mass destruction. This market is fully loaded with weapons grade plutonium: 3xETFs, 0 day options, Futures-driven Bitcoin ETFs, what's not to like? This week, Fidelity became the first major investment broker to recommend portfolio asset allocation to crypto currency. No surprise, crypto currencies went bonkers on the news. The common refrain is that "there is no subprime in these markets". Crypto is now 2x subprime circa 2007. Nvidia is 2x subprime. Which means that subprime-style risk is now embedded in retirement portfolios. The creation of spot Bitcoin ETFs has fused the Ponzified Tech stock market with the Ponzified crypto market into a ~$15 trillion market cap financial WMD.

Picture a trader sitting on massive Nvidia gains in their portfolio. They don't want to sell and realize a tax gain, so instead they buy Bitcoin ETFs on margin. Investors can now use one massively overvalued Ponzi asset class as collateral to buy another. Which is why in 2024, Nvidia is 90% correlated to Bitcoin with a slight lag. Meaning one asset class vaults higher followed by the other. Generally, AI stocks have been ahead of crypto by about a week.

The net effect is that mega cap Tech and Crypto are now trading as one. You see from this chart that the Mag7 vaulted ahead of Bitcoin, but then in February Bitcoin caught up. What we also see is that in the past they have peaked at the same time however prior peaks involved far less options leverage. Traders use options to rent capital to bid up markets. However, it's a very expensive way to generate a rally, so eventually the capital runs out.

What I've noticed in these gamified markets is that they tend to peak at the end of a month. Not the same month every time, but generally they peak near the end of the month. Why is that? We don't know, however we can surmise that momentum algos are programmed to maximize monthly bonus accrual.

Here we see the Philadelphia Semiconductor Index (ETF) is once again in a rising wedge at the end of February. Prior peaks were at the end of last July and the end of December 2021.

This type of pattern creates a false sense of complacency, because the rising wedge is a low volatility pattern that can reverse very quickly. This wedge happens to be far steeper than the prior two.

Last year at this point in time the Fed was adamant that rates would remain higher for longer. Markets were in denial. Therefore, in early March the bank run began. What traders seem to have forgotten all over again is that the Fed is adamant rates will stay higher for longer. Meanwhile, regional banks have been declining since the start of the year. The difference this year of course is that the financial WMD is massively overbought. So there won't be a rotation to AI this time around.

In summary, the thing about bull markets is that as they levitate the known risks have a way of falling off of the radar. Investors tell themselves that all risk is "priced in", but of course the opposite is actually true - no risk is priced in. The greatest risk to this market is the market itself. It has been levered with derivatives and junk assets to the fullest extent possible.

So, this is an experiment in maximum idiocy and soon we will learn the results.