GDP 4.9% Higher Than Expected
$2T US deficits Help MEGA8 Updates
This mornings number was better than expected but when you look under the hood, we know that this 4.9% GDP is nothing more than a reflection of US government deficit spending. This Zerohedge chart puts things into perspective and we do not think anyone should be celebrating a $2T fiscal deficit:
The US government competes directly with the private sector but only reallocates resources and distorts private inputs, as the money it spends is taken from somewhere (someone) else. Basically you only need to understand that if the US government spends $6T and only takes in $4T in revenue (taxation) well voila there is your $2T deficit and perpetual deficits means exponential debt accumulation and in today’s regime change from ZIRP to Higher Rates Forever one can only imagine the train wreck ahead.
We believe we are on the precipice of a massive psychological sea change by which decades of lower and lower rates can no longer mask the debt for goods and services fiat fractional reserve currency game anymore. We listened to Jeff Gundlach’s speech at the Grants Observer conference and it is a must watch for everyone. The link can be found here, Jeff Gundlach/Grants Observer
Let’s look at 2 of Jeff’s charts showcasing the US Governments Interest Expense in relationship to both GDP and overall Government Revenue. This first chart shows the CBO Baseline in white, (always optimistic) and the reality of where rates will potentially be and its pretty staggering:
This next chart is truly alarming and if Jeff is right we could potentially see 40% or greater in Interest Expenses vs overall % of Tax Revenue:
Why does this all matter? Because the time for US government can kicking is OVER! Let us repeat, its over, despite what Chamath Palihapitiya says about the fact that US debt can go to 2x and 3x of GDP and it won’t matter, he is wrong it does matter. Why do we think it matters? Because the rest of the world will not accept our inflation, they will boycott his system and then the wars begin. We believe we can already see that with the BRIC coalition that has taken hold now and will no doubt accelerate their cooperation the more the United States fails to address these fiscal irresponsibility.
This is a massive change in both economic and monetary fundamental processes from what we have been used to since 1982. The fiscal response to Covid was not a response just for Covid, but underscores the propensity for the US Government to spend without bounds and nobody should be surprised at inflation when you dish out trillions of dollars. The higher rate environment clearly exposes that the investing world places a higher amount of risk upon the US treasury and their debt than they have prior and inflation has to be tamed both in reality and expectation. If prices are expected to rise then the consumer will begin to anticipate this and inflation becomes much harder to control which is why higher rates are absolutely necessary to control this sentiment. So the low rate or expectations for future low rates are truly unfounded at this point and we believe the FRB knows this and has desperately tried to convey this.
Ok onto the markets where we continue to see the markets deteriorate. We saw META earnings yesterday and as we noted the $315 level was huge for the market makers and it put a halt to any post market rally. META is down 3.6% today:
Another stock we are watching closely is Nvidia, the chart set up is down right nasty:
Overall we believe the Nasdaq is at the beginning of a major correction and it has been in a downward channel since July but we are reaching a level that will see some buyers bottom picking. Remember we are in a range until we aren’t and right now we would suspect buyers will be stepping in around the 14k marker. The only question is will it last or will the pressure flow be enough to break out of this trend channel and start a new leg lower:
Another chart we are watching is the Dax Futures which are also trading on the 38.2% Fib Retrace support:
Ok remember we have Amazon earnings after the close today, when we look at Amazon options for expiration tomorrow and using the $120 at the money strike for the straddle costs about $9 so that is an implied breakeven move of 7.5%. Open interest in the puts sits at 45k from the 120-115 strike prices. As far as the calls go from 125 to 135 strikes we have 132k in Open Interest. So a lot of bets this stock will rise. The sweet spot for the market makers is a close > $115 tomorrow so from current prices a move of 4.1% with a preference for a close > $120 and not above $125.
Ok onto our trackers starting with yesterday’s overall settlements:
As far as our Futures Positions Sentiment no changes:
The MEGA8s were crushed yesterday with the exception of Microsoft as we noted we were covering the 365C option on the close to reset the option for next weeks Friday expiration, the tracker is now short the 358C:
When we look at the overall chart of the group the top is in for us and will not be negated unless this group breaks back above 2100:
Overall they are below their $11.3T market cap supports:
Apple is the first one of the bunch to go negative in market cap since we started tracking this group on May 10th:
Ok that is it, we hope you enjoyed today’s note, please think about supporting our work so we can continue to bring you information and data as we interpret it. We honestly believe the next decade will look nothing like the past and that many are not prepared for the economic environment that seems to be forming. We have spoken at length how the world investing community has been conditioned by decades of debt money supporting inefficient and overspending governments and that time is now ending. The world is changing rapidly economically and geopolitically and we believe we can assist in navigating this so you can adapt and make necessary changes in your own lives.