Into The Jackson Hole

People call me a perma-bear because I never change my narrative of inevitable implosion. Everyone always wants to know, when is inevitable?

The alternative to being a perma-bear is to be someone who changes their mind every day depending upon how the Dow closes. Recall that this entire rotation began a month ago in mid-July because the massively crowded AI trade imploded. When that happened everyone said it was time to rotate to cyclicals and the other "493" stocks in the S&P 500. That massively crowded rotation continued up until the infamous FOMC/BOJ policy collision, and then it imploded. Ever since then, the reflation trade has been outperformed once again by the ascendant deflation trade as AI stocks staged their oversold comeback rally. Then we get to this week and in the first half of the week we got softer than expected inflation readings "sealing the deal" on a September rate cut. The market soared. But today we got stronger than expected retail sales and jobless claims and once again the market soared except on the complete opposite narrative. You have to be capable of contradicting yourself every other day in order to blog in this type of market, something that apparently is no problem for the majority of pundits. In the process they are sowing mass confusion at a critical juncture of the cycle.

So, the mult-trillion dollar question is, what the hell is going on in this economy - is it weak or is it strong? And the answer is extremely obvious and therefore totally overlooked - the working class consumer is imploding under the weight of higher borrowing costs while the wealthy consumer is still benefiting from central bank sponsored asset inflation. It's a tale of two divergent economies and central banks have created this "regressive" economy that rewards the wealthy while punishing everyone else in order to bring down "inflation".

Pundits STILL haven't figured it out. Today they are pointing to Walmart as some sort of bellwether for the health of the middle class, except they got the narrative exactly wrong:

"In the Walmart US business, the company said it continued to gain share across all income cohorts, including upper-income households, due to its "value convenience proposition."

In industry parlance, this is called a "trade down" as in middle class shoppers can't afford Nordstrom anymore so they are buying clothes at Walmart while they're buying Cheerios. Now this will sound elitist - because anyone who has all their teeth is considered an elitist these days - but historically Walmart was not considered the destination for high end retail. In fact this type of "trade down" behavior historically was considered a key end of cycle indicator. Now, no one believes in the cycle anymore, so who would notice that it's ending?

And while the middle class consumer has traded down to Walmart, the working class have traded down to dumpster diving, because the dollar stores are all imploding.

"The consumer is fine"

Central bankers created this divergent disaster in response to a failed trade policy that was already killing off the middle class, so now the punditry at large are ignoring it all because they themselves have been the beneficiaries of this ongoing economic crisis. They have survivor bias and they look to themselves and their own cohort as indicators that everything is just fine.

However, as we've seen during the past month, this house of cards is starting to come unglued.

Which gets us to the casino:

The rally off of the lows from August 5th has continued unabated and this week exploded higher through today. Recall that it was two weeks ago today that the market rolled over and exploded lower.

Here we see the Tech sector has round-tripped back to the level from Thursday two weeks ago. Why? Because nothing exciting happened globally except the Olympics.

This Tech rally got bought with both hands by investors worried they missed out on Artificial Intelligence.

I have showed this chart several times on Twitter - this is the biggest % decline in the VIX in history. That's how fast and hard this retracement rally got bought.

We are now on day eight of rally mode which makes this a Black Swan event in complacency:

This is where it gets interesting.

Next week is when the Federal Reserve hosts global central bankers at their annual end of summer Jackson Hole Symposium. Upping the biblical irony for this particular meeting is the confab theme of "Reassessing the Effectiveness and Transmission of Monetary Policy".

To recap monetary policy: Central banks transmit wealth to the Cayman Islands via money printing, and they raise interest rates on over-indebted consumers. The end result is Ferrari sales at all time highs and dollar store sales imploding. It's all highly effective.

Nevertheless, one could argue that these biblically doomed central bankers can only be exceeded in their asinine hubris by the terminally hubristic punditry and investors that put their faith in them.

In summary, the market is back to overbought and we are heading into the Jackson Hole next week.

That much we know for certain.