The Great Reset, Long Overdue, May Now Have Arrived

The Great Depression Was An Economic Reset

In January 2016 we were told the election of President Trump would crash financial markets but instead, we witnessed a market melt-up proving his detractors wrong. The "Great White Hope" in this case turned out to be no other than Donald Trump, the very same man who was slated to lead us to financial ruin. The path an economy takes as it moves forward is never straight but full of twist and turns, since 2008 we have gone a long way but really not moved all that far forward. If this sounds a bit bizarre think of it as driving around in circles, where you use a lot of gas but end about where you started, simply put we have not addressed the true nature of our problems or undertaken the structural reforms needed to set the economy right in coming years.

If you are bullish and see higher markets ahead it is important to question not only where growth will come from, but also it's quality, government spending that creates massive deficits has never proven a long-term solution to creating sustainable growth. In recent months stock markets have been under a bit of stress but in reality, bears have merely taken a bit of icing off the top of the cake and have not gotten into the real heart of profits rolled up as the market surged to record highs year after year. America and countries all across the globe have postponed dealing with our real issues in what constitutes a massive failure on the part of leaders and political systems everywhere. True tax reform, real healthcare reform, real Social Security and pension reform, how to balance trade while increasing global competitiveness, as well as addressing long-term sustainability have all been subverted.

During the last two and a half years central banks and countries around the world have added more fuel to the fire which has postponed the day of reckoning. This has made all of us thinking the market was about to turn south looking rather silly and underscores the fact that trying to time or predict economic events is very difficult. Those of us skeptical of these markets never imagined the size and scope of the economic fraud that would take place as central bankers colluded to obscure the natural laws of economics with Modern Monetary Theory (MMT). I like many old-school economists reject this concept of controlling the economy and see it as a form of voodoo economics destined to fail.
This has become a worldwide problem. With all the distortions from things like computer-driven trading, dishonest economic data, and stock buybacks it is only logical that at some point in time reality will re-enter the picture and set things right.

The Great Reset, Has It Begun? 

This bull market is long in the tooth by historical standards so with every market pullback as of late, we are again forced to wonder if this is the beginning of the end. Have we entered the period that may someday be referred to as "The Great Reset"? Have we started a major reset of asset valuations and if so how might this unfold? So far the market is more concerned and no panic has surfaced but some of us see this as the period where after decades of modern monetary theory the world reverts back to the tried and true. Over the years the valuations of many stocks and commodities have gotten out of hand driven higher by financial forces unleashed by monetary policy that has expanded both credit and debt to a level that a decade ago many economists would never have imagined.

The fact the numbers do not work means reality will be visiting us soon, this reset can develop in several ways and it will be interesting to watch how this unfolds as the market unravels. What will ultimately be declared the driving force behind its demise will be equally fascinating. During the bull market of the last nine years, it seemed that even bad news was good news in that markets would rally and rise indiscriminately. It often appeared that any indication things were not well was interpreted as proof the Fed and central banks across the world would soon step in to add a little fuel and give the economy a badly needed kick. When it comes to a falling market, however, the market can fall like a stone or in the case of a "realizing market" slowly grind its way downward as bone grinding action stretches on forever and a day with no respite.

Have We Ventured Into Bubbleville?

Over the years most investors have divided into two distinct camps with the bears thinking the bulls are delusional and the bulls thinking those constantly heralding the coming gloom and doom should pack it up and head home. Of course, each camp has fringe factions that vary in the degree of their convictions. Mega bulls continually point to the upside and how those not in the market will miss great opportunities, while mega bears preach caution, advise risk aversion, and warn of the coming financial Armageddon. It is easy to rationalize why those in power cannot afford to let financial markets to collapse, however, preventing such things is easier said than done. History is filled with examples where greed has guided investors down the path to Bubbleville and always they are encouraged to follow because they are told, "This time it is different." Sadly, again time will show that it's not different at all.

Often investor psychology and the behavior they display is based on recent trading patterns. In this case, many investors will react and "buy the dip". For years this reaction to each pullback has worked and garnered huge profits for many investors, but this trading strategy has the potential to cause them a fair amount of pain. Bulls trying to buy pullbacks and pick market bottoms time after time may soon find that more downside action exists. Ironically, more than once I have heard a person talk about how they plan to short this market when it tops, but the fact is they won't. It is very hard to pick a market top, but if anything they will probably assume the role of buying into a falling market and getting sucked into the vortex well before the fall has stopped.

Chart of A Bubble Market (click to enlarge)

The term "capitulation" which in market terms means to surrender or give up is often used to mark a top or bottom in markets. It is often important to ask not only who is capitulating, but why. Over the last several years it has been the bears and those who saw every morning a market ready to collapse under its own weight that have ended their day in tears. It is also these same bears with their tightly placed stop-loss orders that have paved much of the path this market has made to higher and higher levels. It will be interesting to see just how many of these beaten up souls still have enough fight inside to ride the markets lower when their time to shine does occur.

Throughout history, the world has witnessed and undergone many resets. The coming adjustment will come and it will most likely be ugly and often volatile. Market crashes generally are the result of panic and so far what we have seen is more on the level of "minor concern" resulting in a chorus of cries to buy the dip. It is only after the market blows through several more key support levels and starts making what some people view as crazy new lows that panic will set in, and by that time it will be too late for many investors to escape the carnage. As stated earlier, in recent months stock markets have been under a bit of stress but in reality, bears have merely taken a bit of icing off the top of the cake so when stocks really begin to tumble expect a ferocious stampede to the exits where the carnage will be fierce.