The Death of a Monster
We have all seen those classic monster movies, where the beast just keeps coming no matter what you throw at it. Seemingly unstoppable in its pursuit of the hero or its own path of destruction for which its motives likely remain a mystery.
However eventually the Monster is brought low by some means or another, be it ingenious breakthrough or act of extreme bravery and sacrifice or both.
One thing's for certain though, it doesn’t die easy whether it goes out with a literal bang in a cataclysmic explosion or thrashing and howling destroying all around.
It fights to hang on for every second, it fights to stay alive in spite of all who seek its destruction. But it finally succumbs to the obvious and that was the plot of the movie itself, that the monster was always going to die in the end anyway.
The monster that is the topic of this article is a true behemoth in scale and scope that threatens all our lives and future prosperity and security for ourselves and that of our children.
We are to some degree all of us complicit in helping grow and feed this beast and it has its claws into everything as it drags us all kicking and screaming towards its gaping maw.
The monster has many dutiful helpers and faithful servants some in positions of power and government who feed it willingly via Deficit spending, Stimulus, QE, etc
The monster also has millions of slaves of the lower orders fundamentally decent people who whether misguided, ignorant or via desperate necessity are also so burdened with forever feeding the beast’s never ending appetite.
The Monsters name is DEBT and its potential for growth and appetite for consumption are seemingly limitless.
Its potential to destroy all we hold dear is also equally limitless.
There is a false narrative at work today and it is completely at odds with logic, reason and empirical evidence.
The narrative is, that everything is OK the economy is the strongest ever and debt is not a problem.
This is a lie.
It is obvious to anybody who cares to look that you cannot continue to borrow from the future with no intention or even the means of ever paying it back without inevitably suffering severe consequences.
Here are 4 quotes from a former well known Fed chair.
“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” Alan Greenspan
“Look, I'm very much in favor of tax cuts, but not with borrowed money. And the problem that we've gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day that proves disastrous.” Alan Greenspan
“It's only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony.” Alan Greenspan
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.” Alan Greenspan
I am not a big fan of Mr Greenspan and believe that it was the initial interference with interest rates by this man post the tech bubble bursting when he was Fed chair (namely keeping them too low for too long), is what helped to blow up the real estate bubble that resulted in the 2008 financial crisis.
However I find these quotes to be very telling so lets break them down a little.
The first quote I think most people realise is a statement of fact the US will never officially default on its debts it will always choose the printing press over the honesty of a default.
So if there is no default and the only means to pay the debt is to just print money, what does history teach us happens 100% of the time a country engages in this? The answer is hyperinflation, so the long term plan in dealing with the national debt and all debt in the US economy will be to simply inflate it away. To essentially default via currency devaluation.
The second quote confirms that a measure such as tax cuts in the given example must not be funded by debt as it will result in disaster.
So funding should come from savings, profits, and capital investment and not deficit spending.
The third quote I think can be applied to the current situation in the stock market specifically that the Fed pivot on policy in December is the primary attempt to prevent the inevitable decline and therefore simply will have proven in hindsight to have only prolonged or maybe even worsened the agony to come.
The fourth and final quote is that an individual's personal wealth and savings are entirely at the mercy of the value of the fiat currency those assets are denominated in. Inflation will consume all you hope to save and the only hedge against it on both a global and individual level is GOLD the only historically recognized store of value and inflationary hegde.
So we have an ex Fed Chair’s opinion seemingly at odds with current fiscal policy and actually to some degree at odds with his own policies in the past.
I happen to think he is right on all these four points.
We are on an unsustainable course and the very tools that the central bankers use to try and stave off the very thing that must happen actually only leads to make it so much worse when it inevitable does, it literally feeds the monster.
The tools are the cutting of interest rates as Mr Greenspan did for too long after the tech bubble burst 2000/01 and the printing of money to purchase toxic assets and provide liquidity for financial markets as Ben Bernanke did in 2008 and Janet Yellen continued with during her tenure.
Mr Powell at first appeared to be different pressing on with QT (quantitative tightening) while simultaneously raising interest rates. Things were on “autopilot” to use his words. He was keeping his cards close to his chest and maybe just maybe he had a flush or perhaps a couple of cards hidden up his sleeve. Some means to somehow make the seemingly impossible task of normalising interest rates and the FED’s balance sheet simultaneously a reality.
That is until the markets plummeted in December and Mr Powell and the FED had to show their hand and as suspected they had nothing. They folded at the first sign of trouble and threw down their cards. Since that day the FED is little more than the markets bitch.
The only hand available to them is the same one that put us in this mess in the first place, cutting rates and more fiscal stimulus (feeding the monster) that is where they are going to end up and it will be the last time they try it because this time it wont work.
The president of the United States wants us to believe the current economy is the “best ever in history” (his actual words) but why would the best economy ever, require an annual deficit of $1.2 Trillion to keep it afloat?
Why would it show signs of slowing and struggling with an interest rate of just 2.25%?
Why would it not even manage to achieve nominal GDP growth of 3% on average for the past decade? Its because it is not a strong economy at all, it is a hoax a scam a ponzi scheme.
A strong economy is one built on productivity, capital investment and savings, a strong economy produces surplus not deficits.
The US economy is not built on production and savings it is built on borrowing and consumption it is literally built on feeding the Monster. Credit card debt, bank loans, student loans, Auto loans, mortgages, social programs, entitlements so and so on.
This is why the President must continually point to stock market performance to back up his ridiculous claim as it is the only indicator of economic performance that lends any support to this false narrative.
But the stock market is just an enormous asset bubble one that I think has already been pricked and I believe the FED’s pivot on policy is conformation of that fact.
If the FED is going to resort to serving up more food for the monster at the heart of the US economy then it will be a falling stock market that provides the motivation to do so.
It was after all the downturn in December that brought about the pivot in the first place.
But as our buddy Al pointed out earlier any attempt to save the market simply prolongs the agony.
Although it is the US I am focused on, this situation is not by any means unique to them, this thing is global with the same fiscal policy is being practiced almost everywhere.
China serves the same monster and feeds it willingly as it continues to ramp up stimulus to save their slowing economy and prop up their markets and it will likely continue to work, at least for a little while longer.
The Eurozone is guilty of the same act but can’t brag anywhere near the growth of China or the US and 10 years of recovery has resulted in no recovery at all. Interest rates are still near or at record lows, deficits continue to expand and debt continues to grow.
Jim Rickards defines a depression as a “sustained period of depressed economic growth below the mean”.
By that definition the US and the Eurozone have spent more than 10 years in a depression consistently failing to achieve the historical mean for GDP growth which is 3% for the US and well it doesn’t matter for the Eurozone really as growth is so poor it is barely worth talking about.
Then we have the ultimate model of all global fiscal cock ups and that is Japan. A country that is in a 30+ year bear market. A country with a debt to GDP ratio of 250%. A country whose government owns 40% of the nations stock and bond market. Its holdings in these markets now account for over 100% of GDP. A country with negative interest rates and real negative yields on government treasuries. Out of Japan's total annual tax take 25% alone goes on interest payments servicing its massive national debt. Its citizens taxes fund the central banks ponzi scheme. As the percentage of tax revenues to be spent on interest payments increases year over year and the population ages and costs associated with that fact increase, Japan is heading for total economic collapse. Eventually due to spiralling deficits an ageing demographic and no growth it will reach a point when the total tax take in its entirety is not enough to pay the interest on its astronomic debt but Japan will implode long before it gets to that point. But hey at least the trains run on time so, yay!
But I digress, Japan's fate is another story.
So if it is a falling stock market that will likely bring on the next stage of this process in the US and summon in another round of stimulus, let's stop and take a closer look at the stock market and examine this current rally along with the long term picture.
The rally started on the 26th of December 2018 as a result of the US Federal Reserve’s pivot on policy and has pretty much gone straight up since.
However none of the fundamental conditions causing the sell off in the first place have gone away.
In fact we have continued to receive worsening economic data since the rally started.
Growth is slowing, industrial production is down, consumer confidence is falling, GDP is down, job creation is down with a real outlier for the NFP in January of 20,000 revised only slightly up to 33,000.
Trade negotiation rhetoric has continued endlessly with no resolution, Brexit debacle has continued throughout this period. Not to mention all the structural fiscal problems with the economy which have continued to worsen with record trade deficits and budget deficits
And any damage the prior interest rate rises were causing the economy are still doing so as these things have a significant time lag.
So why has the market rallied? Well as I pointed out in a previous article on my blog last month Investors have been net sellers of equities not buyers this whole time and still are.
Foreign holdings in US stocks have also been in decline this whole time and for most of last year.
Domestic purchases have come from record high stock buybacks and inflow into ETFs.
Hindsight is of course 20/20 and looking back I stated shorting the market too early and mis read the technical setup and wave structure after the December correction. But things become much clearer over time.
This is now my prefered count and technical setup for the US stock market.
Key= Main wave count BLUE
Impulsive sub wave & zig zag YELLOW
Corrective sub wave RED (lower case)
Long term trend correction RED (capitals)
The graph starts with the top of wave 1 which was in impulse wave into wave 2 a corrective a,b,c wave. Then impulse into wave 3 topping in January 2018 then a corrective a,b,c for wave 4 and the last impulse into wave 5.
This was followed by the x,y,z zig zag to put in the December low 2018.
With the long term impulse wave 1-5 (in blue) completed for the 10 year up trend. A correction to that long term trend is now underway with the giant A,B,C (in red).
A retracement to prior wave 1 top would be perfectly normal and result in around about a 30% decline before an upside correction. The market could then fall much deeper.
We could be putting in a double top to conclude the last move to the upside but with the shift in sentiment back to extreme overconfidence a blow off top for the B wave could see the price continue to move higher for a while.
I also have an alternative count to this one with the bottom of the w,x,y being wave 4 for the main wave count, this would suggest either the position of the B wave would be a slightly truncated 5th and final wave or a potential move a little higher to complete the pattern.
Technical analysis is after all just probabilities but the market does move in waves and those waves do follow patterns but it is only hindsight will prove which count was correct.
There have been some interesting developments in the markets lately with patterns forming in other assets which seem to suggest that a big move is coming overall.
Take a look at GOLD.
Here we can see a bullish cup and handle pattern.
This can also so be combined with another bullish pattern over the longer term.
An inverse head and shoulders.
Very similar setups can be seen in Silver as well.
Another chart we should all be looking at is the VIX. Volatility continues to be suppressed but as the market tops out a surge in volatility is highly likely and could well signal a reversal.
We can see that the VIX is right at long term support and that a spike could occur at any moment and is going to for sure, but how soon?
Well there are signs of divergence between price and the RSI and this could be a signal that a spike is in the making.
It is possible that the VIX could continue to move lower in the short term but it won't take much for volatility to return to this overbought market.
Multiple factors seem to be coming together simultaneously and it is my belief that the market is topping out and that whether you are bullish or bearish for the coming years a technical re test of at least the December lows is still likely.
There is one more indicator to point to that momentum might be about to shift and that is market sentiment itself. More and more analysts are calling for a melt up now and confidence has returned to the market as sentiment has become much more bullish and the worries of last December now seem far away. This in itself is a contrarian indicator and gives me the sense that we have definitely come too far too fast.
The greed and fear index from CNN business supports this contrarian view.
It appears that everyone is getting drunk again and have already forgotten just how quickly things can turn around.
We can see this with the level of contempt for any bearish thesis (such as my own) no one wants to face the possibility that the party may already be over.
So if a market decline is the very thing that will bring on the next wave of fiscal stimulus (the process that only feeds the monster) then we may not be waiting much longer.
I think that we are in the process of witnessing not just the end of what has been a very long economic expansion (one fueled by low interest rates and QE) and the inevitable garden variety recession to follow. But something much bigger, the end of a much longer monetary/debt cycle that began over half a century ago during the cold war when the US first started to really ramp up deficit spending and said goodbye to the prospect of fiscal surplus, genuine economic growth and any sense of monetary responsibility.
During that time we have seen the US go from being on a gold standard established in 1944 at Bretton Woods to an entirely FIAT system, and due to the dollar reserve standard the whole world is on that same fiat system.
We have seen it go from the world's greatest creditor nation to the world's greatest debtor nation.
From a nation of production and savings running annual trades surpluses to a nation of debt and consumption running record trade deficits.
This artificially maintained system cannot not survive over the long term and we will as history has proven throughout thousands of years of monetary history have to pay for our borrowing of future prosperity to spend now.
In 2000 the tech bubble popped and the central bankers artificially suppressed interest rates and blew up the real estate bubble.
In 2008 that real estate bubble popped and central bankers managed to blow up the bubble again, this time with 0% interest rates for 8 years! Printing trillions of dollars to buy toxic assets and multiple stimulus packages, this has blown up the everything bubble.
In 2019 the everything bubble pops? The Fed balance sheet has not been normalised and neither have interest rates so there is no way out this time.
Therefore the third time is not going to prove the charm, this time it is going to be three strikes and you're out.
I have been dubbed Mr Doom by those who either don't understand or just don't want to hear anything other than good news.
But it is not all doom and gloom with the end of this debt based system a return to real value is finally possible a system where we don't steal from our children's futures to pay for our wants today but a system backed by something other than thin air and my bet is on gold and silver. The one asset proven by history as the on really money in existence.
With the technology of our modern age new forms of currency are coming into existence in the form of Crypto, which allows individuals to transact with one another on a peer to peer basis. An exchange of value that cuts out the parasites of the fiat system and gives us the opportunity to find value for ourselves away from the debt of the global fiat system.
The death of this monster will not be pleasant, it will not go down easy, but its death will prove to be the best thing that ever happened for the global economy and probably the best thing for humanity in a very long time.
Take care everyone.
All views expressed in this article are that of the author and not to be considered financial advice.