Wednesday, December 19, 2018

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.


  1. Recency bias taught everyone that only fools sell downtrends. If the markets fall 50%, what is it? A buying opportunity (SPX/DJIA in 2002 and 2009.) If they fall 80%, it's still a buying opportunity (NDX 2002.)

    This means that the essential component of a truly massive decline (90%, 95%, even 98%), a Pavlovian refusal to capitulate, is in place.

    Don't look for the bears to profit, however. Direct shorts' maximum gain is 100% (the asset borrowed and sold declines to $0) but the risk is mathematically infinite. The most convenient way to "short" today is via highly leveraged options/futures or via inverse index funds. Mathematically this is suicide: A market can fall 80% (from 100 to 20), rally 150% (20 to 50), fall 80% (50 to 10), rally 150% (10 to 25) and fall 80% (25 to 5) and while that market has fallen 95% in total, the net effect on a percentage-move basis is 80-150+80-150+80 = a loss of 60 for the bearish fund. The timing is too critical for bears to win when the math is so stacked against them.

    Since 1981 all assets have more-or-less rallied together as investor demand for debt securities drove prices higher (and yields lower) despite a willingness on the part of debtors (gov't, corps, individuals) to issue a virtual OCEAN of IOU's. Intangible assets do not obey econ101 supply/demand price models. Rising prices during bull runs INCREASE the quantity demanded by buyers and the supply thus offered...until the mass psychology fueling the bull market wanes. We're treated to industry-scale rationalizations for what is always nothing more than an Extraordinary Popular Delusion, a fad (and nothing more.)

    If "all the same market" rallies in debt, equity, land and commodities have in fact begun reversing the last 40-50 years of behavior, then the Greatest Credit Bubble in history is set to deflate into the deepest deflationary depression EVER. Imagine how many jobs today exist because of debt-enabled-demand from government, corporations and individuals? A credit-collapse will destroy ability and willingness to lend and borrow, knocking down ALL those dominoes and taking with them their contribution to GDP and tax receipts.

    Modern economies cannot be run on banknote cash. Nothing that credit-manufacturing entities (The banks, the Fed, etc.) will do will stop the evaporation of credit and the monetary wealth represented by the Ocean of Bonds now in existence, until the mob psychology of contraction has run its course, too. It will look like a shortage of money (liquidity) and there's no alternative. All roads lead to a decline in wealth never witnessed. Get the popcorn ready, this has been a long time coming.

    1. "Mathematically this is suicide: A market can fall 80% (from 100 to 20), rally 150% (20 to 50), fall 80% (50 to 10), rally 150% (10 to 25) and fall 80% (25 to 5) and while that market has fallen 95% in total, the net effect on a percentage-move basis is 80-150+80-150+80 = a loss of 60 for the bearish fund. The timing is too critical for bears to win when the math is so stacked against them."

      Been in the mkt since 82. Suffered the Bear of dot com but recovered quickly with in 2 yrs. Anticipated housing bubble bust prior to 2008. So not only I suffered NO loss but earned significant profit. I had used leveraged ETFs +options +Bear MFunds to achieve that!

      Then came the March of '09 followed by TARP (700B), 3 QES, Stimulus, twist, ZRP + suspension of Mkt to Mkt accounting standard. I never encountered an investing environment like this surreal mkt in my life time! Didn't compute with my rational brain and logic. All the investment acumen I learned went out the window or stood on it's head! I nearly lost 60% or more of my profit gained during '07-'09, for the next 8 yrs. B/c I failed the grasp the importance of QE or the ZRP! But I never lost my shirt. My profit declined from 1200% to 600%!

      Mind you the FED had NEVER bought MBSs in it's entire history, prior to March of '09! Nor there was any previous study or evidence of QE on the Economy. It was just 'hypothetical' from the seat of pant' decision by the policy makers. Barnake couldn't even explain what QE actually does? He said cannot explain in theory but works in reality'?!!

      With bears losing 60% is a bit ingenious! I am a retired medical professional+ MBA exposure. learned along the way re my option trading technique/rights/wrongs. Same with using leveraged inverse ETFs. I also use Bear MFunds. One has to be right re the TREND ans TIMING! Also one should be prepared for sudden whiplash/spikes after a severe decline. So my trade most of the time consisted pairing both long/short ETFS (calls/puts, Bear vs BULL funds) with dominance of shorting over long with variable hedges. I am (retired+10yrs) I go with 70-80% cash. 15-20% short and 5-10% long. It may stretch a bit by 5% long/short
      Main thing I am flexible, not wedded to one style. I adopted swing trading (position trading - NOT day trading) with adequate hedges. So far working fine. So slowly recovering my lost profits and have every confidence that better days are ahead for me in the 'down cycle of the SURREAL bull slow slipping into secular bear. Time frame I don't know. Last Bear lasted 18 months. This I suspect will be a bit longer with many spikes/bull traps along the way.

      The DEBT situation is one of the worst in human history, all over the world unlike housing bubble bust in 2008! The global debt increased in some cases/countries to 2-3 fold since '09. The global debt increased from 165 T to 250 Trillions. The corporate debt from 4.1 T to over 6 T in 10 yrs. House hold debt. auto debt, student debt, you name it all, at record levels unlike any time in human history! All macro factors are NEGATIVE in the near future. DEBT deflation and deleveraging is more likely. the vested interests will definitely try to delay it but will fail just in 2000 & 2008! There may be stagflation but unlikely inflation until debt overhang is addressed. I pity the younger generations!

    2. Add on to my previous comment:

      If Fed had NOT come out all the tools (TARP+3 QES+ ZRP++) the mkts would not have spiked back! Just look at the S&P chart(>330%) and the 3 QEs+ECB+BOE stimuli) This whole 'set up' is SURREAL and arteficial!

      Do they have tools to repeat again, against this leaking 'everything' 3rd largest of the 21 st century? Hardly!

  2. Please consider the possibility that all this may not result in the deflation many people expect. The surge in government debt in many ways has been a transfer of debt from the individual to the public where many people controlling such matters feel it is more benign. Government debt is no more than paper promises and includes holdings in currencies, bonds, future income based on a pension payout, and much, much more.

    At some point collapsing debt and dropping faith in fiat currency will intersect taking us to an interesting place. I contend slow growth coupled with a lack of really good options as to where people can safely store their wealth will drive the value of real and tangible assets through the roof. The following article argues that this will result in a wave of inflation.

    https://When Debts Collapse In Default-part-three.html

  3. Assume that the metrics are fraudulent and that we are living in Hyman Minsky's Late Stage Ponzi Capitalism whereby the fundamentals of Classical Economics are unequivocally thrown out-the-door. The Great Financial Crisis was backstopped by the Federal Reserve to the tune of multiple trillions that have rendered USD competitively weak in light of the fact that the entire world cannot realistically all run to one side of the Reserve Currency Titanic USD when the entirety of Emerging Market speculators repatriate their speculative investments back to USD for safe haven.

    The model of contemporary Central Banking is evidencing unsustainability as we write here.

    It will blow up entirely by March 2019 if not sooner given the faulty engineering & incompetent architecture.

    Liquidity will theoretically dry up completely once contagion sets in, and we are ripe for that scenario right now.

    How much more time will the current superstructure hold for before a six sigma event takes part of the architecture down.