1929, RETAIL COMPLACENCY AND SELF DECEIT. A RECAPITULATION

This article was written by the phenomenally talented acatwithcharts and edited by me.

I didn’t think this was 1929 until this past few weeks, but now it looks like that’s what this has become. The problem is that if that’s true, we might not even be done running the bubble up. Something’s got to give but I’ve also been saying that for 5-10% now, which, is symptomatic of retail delusion. Retail participation and sentiment has begun to resemble late 2017-early 2018 crypto, compounded by the further financial desperation of current world events.

COVID-19 cases are setting new highs in Texas and Florida. Arizona is parabolic and we’ll be testing the “nothing matters anymore” question pretty soon with some states needing to close again.
Outside of the US however, RIP emerging markets. Latin America is now the world’s epicenter and India’s daily cases are straight line up. There are various charts floating around Twitter showing it different ways, here for example.

"This is stunning. At the peak of speculative fervor in February, small traders bought to open 7.5 million call contracts. This week, they bought 12.1 million.Watch what people do, not what they say. They're full-bore bullish, on steroids."

Ah, right. The complacency phase. "We just needed to cool off for the next rally," despite the fundamentals getting significantly worse.

This kind of thing doesn’t happen very often, we’re talking about end cycle behavior. The behavior during the year 2000 and the beginnings of retail being able to trade over the internet is probably the closest available comparison.

This is very important to understand, either for the first time in history retail traders are getting it right....

...or parabolic call buying on the most expensive the market has been since 1929 if not ever is idiotic. Two important notes we don't have the same quality of datasets to make a clear comparison, and my back of the envelope math is that 1929 was 2x as expensive as 2000.

"I watched the food disappear off the shelves in the stores. I saw the panic spread, the people dying in Italy. I saw the giant drop of the market (yes, obviously an opportunity), but I also saw lots of other things that started coming. Fractures in our system began to appear. Supplies dwindled because they were too efficient and not stable enough. Minor changes broke companies. Travel basically halted. Now you've got major protests. Don't people see that it's not getting better, but it's a slow enough slide into a worse scenario that people are simply able to get comfortable before another drop?" -Eamon

It's worse than that, as COVID-19 first wave never ended in the US. "2-4 weeks" is the supposed lag time, while here in Texas we started reopening with cases still rising a month ago. At this point the only real argument for why we're this high up is Fed intervention, though yield curve has widened to Jan 2018 levels. These yield curve readings suggest that they are at the limits before they start having unintended consequences that erode their effect.

You have a hole in a hot air balloon, just because you're throwing money into the fire to make it hotter, it isn't making the hole any smaller.

The issue is that the bounce is still going, in percentage terms the bounce is greater than the crash. At SPX 2600-2700, you could squint, say optimistically that the same forward P/E ratios made sense because you thought we weren't going to have major COVID-19 disruptions once we reopened. I would have disagreed with that case but it could have made sense and led to quarters of compression. Valuations are now 20-40% higher than in Feb given downward revisions. It's insane.

The initial panic in 1929 saw a 50% drop in 2 months. A lot of people bought on the first bull trap one month in after it had dumped 100ish points. Where many really lost their shirts was in the 2nd month, but then there was a 50% rally over the next 6 months. Problems stemmed from the fact that the stock market was recovering, but the economy wasn't. 1929 is so crazy when you read the stories, like 2017 crypto crazy except with even more money. Ships crossing the Atlantic had brokerage offices with telegraphed stock info so people could trade on the ship. You can't make this shit up, 10x leverage was the standard amount and basically became the hot fad among the upper middle class and higher. There were few rules and the market was comically manipulated, RCA was famously pumped to absurd heights for example. It's hard to replicate 1929 because it was just so over the top. Accessible stock trading was a new experience for Americans. In the 2000 bubble, a similar situation on a smaller scale happened when the internet suddenly made electronic trading something ordinary people could do.