This inaugural article establishes where we are and where we're going. My second article will detail how to still profit amidst the continuing whipsaw volatility still to come - with transparency, but without unusual risk. Then, we'll start having fun.
P.S. I perfectly called the 2008 crash 14 hours in advance - and can prove it. Luckiest call ever, but still. Might be worth reading this call then, as it is far punchier (didn't think that was possible). Thanks.
Summary: Learn to Let Go of That you Most Fear to Lose
Obama’s right about era of irresponsibility. BUT it’s not dogma. It’s a HUGE credit bubble – that's NOT over. From “irrational exuberance” inaction, into Y2K overheat, flowing into housing, and now into federal debt. Asset class is larger with each incarnation. A bubble of this magnitude and duration WILL end in US dollar collapse - the largest global asset. We are merely in the eye of the hurricane. Don’t mistake cyclical "rebound" for structural bull. No long-only asset will save you now.
Double Top from Hades
I'm well versed across methodologies. Therefore, I'm not a technician, but it does has its uses. Don't stop reading as this article is more than technical. The majority of our careers - certainly the memory of most investors - has existed in a bubble called a double top reversal pattern. Undertstand it to know what comes next.
Usually, double tops are intermediate-term cyclical patterns. However, this one is structural stretching 12 years! Think about that - and why. We are now merely experiencing the end of a reaction rally (and a fairly insignificant one at that). Feels good short-term, but it is actually just the inflection point of true ruin.
What's Yo Dream?
Bull case arguments boil down to (1) economic rebound and (2) irrelevance of unemployment/consumer deleveraging. Great! I’ll make it even more compelling. Here’s the S&P500 since the 1950s (log chart to see long-term trend better). Trend looks well established and stocks currently a screaming buy, huh?
Whoopsie! Here’s the Dow Jones Industrial average since the 1930s (again, log). Notice the distinct pop out since 1997 and the double top? FYI - you can repeat this exercise as far back as you want; you won't a more "encouraging" chart. Still feeling good about the recent “1/3 loss” market rebound?
Bear Market Breakout or Target Practice?
The 2007-09 “crash” has been shorter and less painful than most others. Interestingly, though, it is well correlated. The next leg of the bear will potentially result in an additional -50% taking a year or more - incidentally also the implication of the top double reversal pattern. Such a decline would take S&P500 to about 400 and the Dow to about 4,000. Ouch.
Decline is not destined, but are you feelin’ lucky?
Nothing MUST happen, but often does despite ourselves - often over a longer period than expected as everyone hates taking medicine. To “avoid worse than death,” US government is monetizing the credit bubble as (taxpayers’) debt - both borrowed directly and Fed-printed. Sound familiar? It is: Japan 1990s.
Here are optimistic projections for annual US federal deficits (not including state and local red ink) and the Fed Reserve’s own borrowing:
Deficits so big, it makes a century’s borrowing look flatline:
The (Boogy) Man who Wasn't There
Problem is, deflation never happened. Super-inflation is on the way.
Unsurprisingly, bond bubble is bursting off all-time yield lows.
And rising bond yields (and unemployment) are not going to help housing – which remains 20% overvalued and eerily correlated with 1990s bull/early 2000’s bear stock market valuation history.
And so the problem keeps worsening until eventually it can do so no more: no more taxes possible, no more borrowing possible, no more assets available. Game over. Currency breaks. FYI – I am NOT calling for the currency to drop now. Flight to perceived safety amidst panic remains a powerful drive – until perceptions change. All the same, keep up on the state of US Dollar short futures trading.
Moral of the Story
We are merely in the eye of the hurricane. Don’t mistake cyclical "rebound" for structural bull. You haven't seen anything like what's coming. No long-only asset will save you now. And this ruin’s volatility will floor you.
This inaugural article has now established where we are and where we're going. My second article will detail how still profit amidst the whipsaw volatility still to come with transparency, but without unusual risk. Then, we'll start having fun. Good luck to us all.
Disclosure: No positions...yet.
ANDREW G. WHITE, CFA
Registered Investment Advisor
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