WARNING: Trees Don't Grow to the Sky
This is the entire article that I posted today to straightlinelogic, and can also be accessed by clicking the link above. It is in addition to my regular weekly article, "Jump, Frog, Jump," that I also posted to Galt's Gulch.
Straightlinelogic is not an investment newsletter, but it looks occasionally at financial markets. When the frogs expire (see previous article, “Jump, Frog, Jump!” Click <Previous below), they will take financial markets, notably equity markets, with them. Weakening economic fundamentals around the world is perhaps the primary reason to be leery of equity markets, but there are other good reasons. Sentiment measures of bullishness have reached multi-decade extremes, and in the perverse way that markets work, euphoria over the biggest IPO in history and the “Yes” vote in Scotland may serve as the perfect bull market exclamation point. Investors and speculators, emboldened by faith in the omniscience and omnipotence of central banks and their promotion of rising stock averages, are convinced that markets cannot go down. Bull markets since 2009 have not been propelled by strong economic growth, but rather by unprecedented government debt and central bank monetization of that debt. Markets have been rigged, a point straightlinelogic will return to next week in a review of David Stockman’s The Great Deformation, The Corruption of Capitalism in America. If governments could permanently rig markets they would do so; rigged markets stay rigged until they become unrigged.
Given that world debt is 42 percent greater than it was before the financial crisis of 2008-2009, when this bull goes, it will be an even more fearsome and epochal crash. Such a crash is entirely foreseeable, notwithstanding what most economists and seers will say after it happens. Timing it, on the other hand, is problematic. Skeptics would be right to point out that straightlinelogic has issued similar warnings in the past, of which markets have taken no heed. That is a hazard of prognostication. However, the bigger the market turn, the more obvious it is to analysts who know what to look for, and inevitably they will be early (the bigger the market turn, the earlier they will be). It is impossible to say exactly when mass irrationality will end, but preservation of capital demands the attempt. Robert Prechter’s Elliot Wave Theorist issued a short warning Friday: “THIS IS IT,” predicting that next week, “U.S. stock averages should begin their biggest decline ever.” Like straightlinelogic, Prechter has been wrong before, but those who heeded his warnings before the equity crash of 2000-2001, and the housing and financial crashes of 2007-2009, made out a lot better than those who didn’t, even if they got out “too early.”
A precautionary word to the wise—straightlinelogic’s readers—should be sufficient.
Straightlinelogic is not an investment newsletter, but it looks occasionally at financial markets. When the frogs expire (see previous article, “Jump, Frog, Jump!” Click <Previous below), they will take financial markets, notably equity markets, with them. Weakening economic fundamentals around the world is perhaps the primary reason to be leery of equity markets, but there are other good reasons. Sentiment measures of bullishness have reached multi-decade extremes, and in the perverse way that markets work, euphoria over the biggest IPO in history and the “Yes” vote in Scotland may serve as the perfect bull market exclamation point. Investors and speculators, emboldened by faith in the omniscience and omnipotence of central banks and their promotion of rising stock averages, are convinced that markets cannot go down. Bull markets since 2009 have not been propelled by strong economic growth, but rather by unprecedented government debt and central bank monetization of that debt. Markets have been rigged, a point straightlinelogic will return to next week in a review of David Stockman’s The Great Deformation, The Corruption of Capitalism in America. If governments could permanently rig markets they would do so; rigged markets stay rigged until they become unrigged.
Given that world debt is 42 percent greater than it was before the financial crisis of 2008-2009, when this bull goes, it will be an even more fearsome and epochal crash. Such a crash is entirely foreseeable, notwithstanding what most economists and seers will say after it happens. Timing it, on the other hand, is problematic. Skeptics would be right to point out that straightlinelogic has issued similar warnings in the past, of which markets have taken no heed. That is a hazard of prognostication. However, the bigger the market turn, the more obvious it is to analysts who know what to look for, and inevitably they will be early (the bigger the market turn, the earlier they will be). It is impossible to say exactly when mass irrationality will end, but preservation of capital demands the attempt. Robert Prechter’s Elliot Wave Theorist issued a short warning Friday: “THIS IS IT,” predicting that next week, “U.S. stock averages should begin their biggest decline ever.” Like straightlinelogic, Prechter has been wrong before, but those who heeded his warnings before the equity crash of 2000-2001, and the housing and financial crashes of 2007-2009, made out a lot better than those who didn’t, even if they got out “too early.”
A precautionary word to the wise—straightlinelogic’s readers—should be sufficient.
So does grass.
The sky begins at ground level.