Has “It” Finally Arrived?

Is this week's 6% market drop the start of the Big One?
Friday, October 12, 2018, 6:54 PM

With the recent plunge in the S&P 500 of over 5%, has the long-anticipated (and long-overdue) market correction finally begun?

It’s hard to say for certain. But the systemic cracks we've been closely monitoring definitely got an awful lot wider this week.

After nearly a decade of endless market boosting, manipulation and regulatory neglect, all of the trading professionals I personally know are watching with held breath at this stage. The central banks have distorted the processes of price discovery and market structure for so many years now, that it’s difficult to know yet whether their grip on the markets has indeed failed.

But what we know for certain is that bubbles always burst. Inevitably. Each is built upon a fallacy; and when that finally becomes apparent to enough people, the mania ends.

And today, there are currently massive bubbles in stocks, bonds and real estate. Every one courtesy of the central banks (as we have written about in great detail here at over the years).

And with no Plan B in place to gracefully exit the corner they have painted themselves -- and thereby the global economy -- into, the only option available to them is to double-down on the pretense that we'd all be screwed without their stewardship. They have to do this I suppose. To admit the truth would throw the world into panic and themselves out of a job. 

Who knows what they think privately? But in public, they give us real gems like these:

Williams Says Fed Rate Hikes Helping Curb Financial Risk-Taking

U.S. interest-rate increases will help reduce risk-taking in financial markets, Federal Reserve Bank of New York President John Williams said.

"The primary driver of us raising interest rates is just the fact that the U.S. economy is doing so well in terms of our goals,” Williams said Wednesday in a reply to questions after a speech in Bali, where the annual meetings of the International Monetary Fund and World Bank are taking place. “But I would also add that the normalization of monetary policy in terms of interest rates does have an added benefit in terms of financial risks.”

"A very-low interest-rate environment for a long time does, at least in some dimension, probably add to financial risks, or risk-taking, reach for yield, things like that," he said.

"Normalization of the monetary policy, I think, has the added benefit of reducing somewhat, on the margin, some of the risk of imbalances in financial markets."


And with that, our award for “Finally closing the barn door after the horse left 8 years ago,” goes to John Williams of the US Federal Reserve.

Come on, Mr. Williams. Your historic 'very-low interest-rate environment' didn't merely lead to a slight degree of higher risk at the margins here.

Instead, it has lead to an explosion of excessive risk everywhere today, including:

  • Junk bonds trading near their most expensive prices ever
  • Covenant lite loans out the wazoo
  • The highest levels of corporate debt ever
  • The most expensive stock markets ever, by several measures
  • The highest margin debt on record
  • Real estate bubbles across the globe
  • Pensions highly exposed to the stock market

And the central banks' policy over the past decade hasn't merely been to create a “very low interest rate environment”. It has been nine long years of intense and deliberate financial repression.

The resultant risk-taking didn’t happen “in some dimension”. It happened right here on Planet Earth, in real time, and in public and private portfolios alike, across the globe.

Pensions have been monkey-hammered by this policy, forced to throw away 100 years of accumulated investment wisdom and flip from traditional allocations of 60/40 bonds-to-stocks to the opposite in a desperate chase for yield.

The mathematically-certain insolvency of much of the pension system lies on your shoulders Mr. Williams. And those of your other Fed colleagues. 

Moreover, the other malignant market responses to the Fed’s distorting policies didn’t “probably add to financial risks”. It absolutely guaranteed a future crisis -- one that will dwarf any prior.

In my assessment, the biggest crime of the Fed was the decision under Greenspan to try to eliminate the business cycle by replacing it with a credit cycle. Here’s what that looks like in chart form:

If you can't clearly spot the absurd Fed-blown asset bubbles in the above chart, you may as well stop reading here. With that kind of blindness, nothing can help you plan for what's coming next.

Now, why would central banks prefer credit cycles? Easy! They're a lot more fun. When they're expanding, everybody loves you. You get invited to Davos and people love celebrating you at parties.

Just as good, when the bubbles burst, as they always must, you get to ride to the rescue and play the role of savior. And when the dust settles, you get feted as a “hero” by the mainstream media (even though you were no better than an arsonist putting out his own fire).

Case in point:

Yes, I blame the central banks for the breakdown about to come. They are the villain to blame for their horse-whipping of stocks, bonds and real estate into dangerously over-valued asset price bubbles. Nobody else.

Former Fed chairs Greenspan, Yellen and Bernanke have to shoulder nearly all of the culpability. It remains to be seen what Powell does, but so far he seems less interested in bailing out stock market declines than his predecessors. If indeed so, he’s an enormous improvement.

Already, under Powell, for the first time in a decade, we are emerging out from underneath the miserable thumb of financial repression, the key cornerstone of which is having to accept negative real yields on saved money.  Today the rate of interest on a 3-Mo T-bill is higher than the (stated) rate of inflation. It’s also higher than the dividend yield on US equities. So savers finally have an option that doesn't unjustly punish them.

If we can thank Powell for that, then he’s already done more good than all three of his predecessors combined. And if he allows this last ill-conceived credit cycle to finally die of its own accord, he'll actually deserve that "hero" accolade. Especially because doing so will not only be the right thing to do, it will be deeply unpopular with the Powers That Be, and require an inordinate amount of courage to effect.

Heck, Trump was already gunning for Powell on Wednesday after just the first -3% decline:

“The Fed is making a mistake, they’re so tight. I think the Fed has gone crazy.”

~ Donald Trump, 10/10/18

But if Trump was concerned on Wednesday, he must have been spitting nails on Thursday as the market carnage continued:

Is this really it?

Has the worm really turned?  Is it not possible that the authorities will once again rescue these “markets” driving them ever higher in their quest for printed-up prosperity?

Again, anything is possible, but our view is that until and unless the central banks decide to reverse their QE wind-down operations the faux gains that resulted from the money flood will evaporate as well.

Our view is that things progress from “the outside in” reflecting the fact that it is always the cash strapped zombie company that fails before the AAA rated company, and it is the weaker emerging market economy that suffers before the core OECD economy.

This table of various year to date stock market returns perfectly illustrates that the “outside in” dynamic has been in place for a while.

It’s not a perfect detection mechanism certainly (Germany is down 4x more than Portugal?) but the pattern is more than directionally adequate.  The money flood has reversed and we’re seeing that in the losses that have been mainly concentrated at the periphery --  but are fast rippling into the strongest "core" markets

Time For Safety

Admittedly, we’ve been mostly out of the markets for a long while, preferring cash, gold, some core real estate holdings; while slowly building a small short position.

Our main strategy for surviving bubbles is to not get caught up in them in the first place. We've long advocated the wisdom of amassing cash, to have 'dry powder' capital to deploy at much better valuations after the bubble's bursting. In our opinion, everyone should be working on ‘buy list’ for that day.

Sadly, the expansion of the Everything Bubble has gone on for far too long as the central banks have all but destroyed true price discovery and well-informed capital allocation. Heck, most Millennial adults weren't old enough to experience the 2000 and 2008 episodes -- to them, today's Frankenmarkets are 'normal'. Most seem to have exactly zero clue of the role of the central banks have played in fostering the lion’s share of the stock and bond market gains that have occurred during their short adult lives.

The investment chat sites I lurk through to gauge the mood are awash with folks telling each other to “buy the dip” and “stand firm.”  Many are parroting the Wall Street/CNBC mantra that "This time is different!", so it’s best to just keep putting money in, staying long and fully invested.

We disagree. And we think those blindly marching to Wall Street's tune will be the first and worst victims when the next major correction hits.

Which is why we encourage everyone reading this to crash-test their portfolio with their professional financial advisor. If indeed we're entering another 2008-style correction, how will your current holdings fare? How risk-managed are your positions? Are your potential losses hedged to the downside? And once the dust settles, what's your plan for re-entering the market?

These are critical questions to be asking right now. And the time to address them may indeed be very scarce (the Dow has dropped another 100 points as I've been writing this).

If you don't have a financial advisor, or are having difficulty finding one willing to address the risks discussed here, consider scheduling a portfolio crash-test consultation (it's completely free) with the advisor Peak Prosperity endorses.

Just please, whatever you do, make sure you've taken prudent steps to prepare for a major market downturn. Don't leave your hard-earned wealth exposed, unless that's an intentional decision on your part.


The recent market sell-off was not at all unexpected by us. We began observing the first tremors at the periphery many weeks ago.

Last week, on October 5th, we sent out a market warning to our premium subscribers under the banner The Markets Are Suddenly Looking Very Sick.

Whether the central banks blink here and ride to the rescue is the big question.

While we'll have to wait and see to learn the answer, in all of our interviews with experts (e.g. Axel Merk) who know the Fed and its staffers personally, the consensus is that Powell is a different animal from his predecessors. He'll tolerate quite a lot of stock weakness before he's moved to act.  Is his line in the sand -20%?  -30%? 

Whatever it is, it’s likely a lot more than the -6% we’ve seen so far.

Further, the ECB is in a bind because it, too, are publicly committed to tapering its balance sheet expansions to zero by the end of 2018. And as the EU is also locked in a budget battle with Italy, and it would be very politically difficult for the ECB to both play dove and hawk at the same time by bailing out the markets with more QE while also not buying any more Italian government debt or helping Italian banks.

The Bank of Japan is pretty much done, too. It has recently even (gasp!) shrunk its balance sheet a few times in recent months.

China is busy fighting its own battles with slowing growth and history's largest ever-real estate bubble. It's also in very delicate trade negotiations with the US, complicated enormously recently with the revelation that the Chinese PLA had a role in inserting hardware hacks (chips) onto high tech products supplied to the US.  So the PBoC is probably not going to be in the business of doing anything dramatic in terms of balance sheet expansion right now.

Add it all up, and the “outside in” contagion we’ve been observing over the past few months seems to have finally reached the core.

In Part 2: Preparing For The 'Big One' we examine what a true market "crash" would look like.  We’ll be looking at bonds, stocks, gold, the gold miners, currencies as well as discussing potential candidates to consider for your post-crash 'buy list'.

Ready or not, developments are escalating. Be as ready as you can for what's coming.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access

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23 Comments's picture
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Why Bubbles May Not Burst

I’d like to see a refutation of the argument below, which counters bearish perspectives. A few years ago I had the opportunity to question one of the most successful economist is the world as measured by millions of text books sales, Campbell Macconnell. He said, yes, the following is possible:

"One question that has long perplexed me is about the macro-economic impact of money printing in its various forms. In short, much depends on whether money printing can counter-balance debt defaults and zombies, such that the main impact is lower productivity and growth (like Japan), and not the long delayed financial armageddon. Loans written off and marked to market, non-performing loans, bankruptcies, and the like, eliminate money, but that money can be replaced by money printing. Likewise for declining velocity of money (via Freidman’s PT = MV). Yes, with the moral hazards of cheap money, poor businesses ventures happen, but those ventures still employ people and move the economy, just inefficiently. And large efficiencies from technology countervail, so that GDP can still do OK. True, panic can undermine this long scenario, but panic gets simmered down sufficiently by central bank printing, in part because enough big and institutional investors understand the very logic I explain here. This synopsis might explain why years of predicted financial doom (as opposed to normal periodic ~20% downs in markets) have not materialized since 2008, and may not materialize for a long time, if ever. Instead, it’s more like Japan—25 more years of tepid economy, but no thundering crash.”

Federal reserve debt could go up 30x from now at near zero central bank rates, and the scenario painted here not happen. Rising rates would likely do damage after they have served the PR purpose of supporting perception of fiat currency systems, but then central banks bring them back to near zero. 

Something has to account for now 7 years of dire predictions being wrong. And remember, if you lost half your stock wealth today, you’d be back to January 2013 levels, which is about 15% above the January 2011 levels, and things would climb again. 

This site has said that the most dangerous words in investing are “this time is different.” Yet it has also said that near zero central bank rates are indeed a big new difference—never done before. Which is it? I’d say key people in big finance finally caught up to the post 1971 reality that huge debt does not matter until only its near zero interest rate can’t be paid. Total debt is largely irrelevant in a 100% fiat currency system. 

I believe this website must address this critique head on, and I hope it does. 

~Rob Laporte
[email protected]

shastatodd's picture
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Total debt is largely irrelevant in a 100% fiat currency system

and infinite growth can happen on a finite planet... smh

Mark_BC's picture
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[email protected] wrote:I’d

I’d like to see a refutation of the argument below, which counters bearish perspectives. 


"This synopsis might explain why years of predicted financial doom (as opposed to normal periodic ~20% downs in markets) have not materialized since 2008, and may not materialize for a long time, if ever."

The fiat debt-based monetary system still requires exponential growth. To keep that ballooning debt manageable in relation to the real world which cannot grow that quickly, they need to inflate it away. They then lie about inflation in order to justify low interest rates and try to convince you it is 2% when it is closer to 10%. But they need stable gold prices to hide true inflation because historically gold is seen as the canary in the coal mine of inflation. That is where the artificial gold price suppression scheme comes into play.

In addition to this, the US dollar's dominance over debt and oil depends on running a military-enforced global trade deficit.

The eastern world is not happy about those two things and they know exactly what is going on. That is why they have been quietly buying physical gold at cheap prices for a decade at least. This differential between manipulated prices and the physical market has caused a continuous gold supply deficit. We have all been hearing about this for years but and it hasn't blown up yet. But the gold imports data does support this conclusion.

When the world runs out of physical gold it will be impossible to continue the price suppression and it will blow up to much higher levels. Since gold is the antithesis to the debt based dollar, it will be impossible to hide the dollar's true value anymore and hyperinflation or other similar event will destroy the current monetary system. When easy debt dies as interest rates go up, so will marginal oil extraction like the tight oil in the US. Then oil price will spike even higher than it would from the dollar devaluation alone, and the whole delicate computer-balanced economic system will implode, taking society along with it.

davefairtex's picture
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bubbles bursting

There are some reasons I can think of.

1) unintended consequences of 0% rates.  Besides funding zombies, it also destroys savings and pensions.  The latter are more consequential; chickens haven't come home to roost yet on those, but they will, given time.  Not sure what the number is, but - the implosion of the Dallas pension system is just the first in a long series of pensions that will blow up - because they are designed for 8%, and they'll get around 3-5%, as a direct result of financial repression.  IOW, "there's no such thing as a free lunch."  The central bank 0% rates are NOT coming from nowhere - its a transfer.  0% rates are stealing income from savers & pensioners, and giving it to zombie businesses and governments.  That eventually blows up the savers and pensioners - and as this starts to happen more frequently, then at some point it will reach a critical mass of consciousness, and a wave of pensioners will run to cash out of the system, like they did in Dallas.  It will be an old-fashioned "run on the bank" but with pensions instead of savings.  This wave of fear will end up smashing confidence, and bring about a crash.

2) cycles and oil production.  At some point, the lack of investment in oil exploration will result in an oil production shortage. That's just a matter of time.  It takes 5 years to bring a conventional well online.  Shale can only provide so much.  Stop exploration for long enough, and shortages will result.  Confidence is a fragile thing.  Right now, everyone assumes we have more than enough oil.  They are talking about "peak demand."  If and when that shifts to projections of shortage, oil prices will rocket higher, that will act as a rate increase, cause the economy to drop into recession, and the almost-instant repricing of forward earnings will bring about a crash.

These are the first two things to come to mind.  They are guaranteed to happen.  All that is in question is when.

Other "black swan" events can happen too; they aren't guaranteed, but the probability of something untoward occurring in a fragile system assures something important will blow up given the passage of enough time.

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Hard physical limits

I agree Rob. A decades-long stagnant economy, and everything that entails for the world and the US, is a possibility. I dare say that would be worse for the world than Japan’s has been though. But I agree with Dave on two other possibilities. First, something may cause psychological confidence to break which would lead to a crash of some kind. Second, we may run into one of many physical limits that can’t be solved by printing money: oil shortage and price explosion, failure to deliver physical gold or silver to a major player (eg. a solar panel manufacturer who can’t get enough silver for production), a massive crop failure, a pandemic like Ebola gets loose in the developed world, etc. Then there’s always the possibility of war disrupting a multi decade stagnation.

Personally, I’d like a stagnant economy held together by money printing and all the usual shenanigans that doesn’t collapse for the next 15-20 years (my expected life time). That would be the scenario I could best cope with.  However, my intuition based on the facts I’m aware of says that scenario is unlikely to occur. I give it about a 20% chance.  I think something is going to break.

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Reality Optional Economics

The current fiat money and bubble conundrum is based on a fundamental misapprehension by most citizens of the western democracies.  They assume the government has the right to create as much money as it likes. People who do not understand that money should be a marker for real things do not become outraged that the central bank can create $1 trillion dollars(or more) whenever necessary.  If your neighbor had a printing press in his basement producing $100 bills and he was giving you some you might not be inclined to report him as a counterfeiter.  All your neighbors are benefitting and everyone else doesn't know.   So if the government claims the right to create money and citizens agree (or don't protest) we create the conditions for our predicament.  

I like Rob2disc challenge and Mark_BC response.  Mark asks if at the zero bound of interest rate it is not possible to continually create new money and extinguish old money.  Then it becomes difficult to save and people have to keep working and earning new money.  So gradually eliminate the store of value function of money and make it transactional only.  Simply eliminate the concept of saving money.  Most people don't have any money anyway and are in that very condition right now.  I heard 64% of Americans cannot come up with $1,000 for an emergency.  The government could figure that if they squeezed another 15% of the population into that unhappy condition then the vast majority of voters would be ok with a UBI and vote for eliminating the old money claims of the rich or the remaining 20% with savings.  The new value creators would be in charge.  If the government has the right to create the current money then it has the right to change it.

I am assuming that the central banks of the world are not lying to each other to maintain control of the international system.  So the numbers we are looking could be roughly accurate. ( I do not believe inflation is 2%--it is significantly higher because my utilities, college tuition, health care premiums, car insurance etc. goes up more than that.) But,  I think it possible that central banks have "off budget" money creation accounts that enable them to intervene secretly however.  They say the universe is primarily composed of "dark matter" and it may be that our financial system is composed of dark money currents running under the stated published numbers.  

But Reality bites and at some point the creditors will not "feel like" they have been paid and then we'll see who holds the whip hand.

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Brain dead thinking

1.  How can we not understand that economies are subsets of global ecologies and finite mineral resources yet?  Which are all under extreme distress.

2.  How can we not see the criminality of a financial system that destroyed that american middle class to keep asset and equity prices going up?  Record number of americans are living in their cars, 50% 24 year olds are living at home, real wages stagnent since the 70's. All this to benefit 5% of the population that quote manipulated financial statistics.

3. We are in the middle of a global financial war with extreme distress for millions of families living in "emerging market" countries. Which we dismiss with an "economic" slogan and a wave of the hand as billions are sucked out of these countries.

The real consequences to all these actions are building and the longer we supress them the more extreme the resulting explosion.  Only a small minded narcissist would delight or defend the application of makeup to the rotting corpse we call our "economy".


davefairtex's picture
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moral outrage


Two of your three points are basically moral outrage.  As I understand it, you are saying that what is happening is a morally despicable act, but that doesn't say such a thing can't continue.  We could have a debate as to what conditions bring about revolution - but my sense is, the middle class turning into the poor (which is what is happening/has already happened) won't end up with the pitchforks coming out.  I go back to "Rules for Rulers", where we see that the gang at the top, as long as the loot is properly distributed, keep the king in power.

And since we've turned into a banana republic over the past 20 years, Rules for Rulers is even more applicable than it was previously.

Witness Venezuela.  That's about as bad as it can get.  No revolution there.  Army is in complete control.

Don't get me wrong, I agree with your moral stance, but it is - regrettably - a side issue.

I totally agree with your first point: economies are subsets of global ecologies and finite resources which I believe are approaching (or at - maybe beyond) their limits.  That's what will keep "the great stagnation" from happening for the next 20 years.  Japan could get away with it during 1990-2010 because the world hadn't run into resource limits during their stagnation period - in fact, oil was super-cheap for the first 10 years of their stagnation.

Today, I claim we are at or near those limits right now in 2018, so we will see a different outcome from what we saw in Japan.  You can't print oil, and that's what wealth and surplus is almost entirely based on.  The amount of oil in 2038 will be a fraction of what it is today, and the net energy in that oil will be a fraction of what we see today also.

Here's a wildcard outcome that's not far in the future:

Perhaps VR will come to our rescue.  Today, people focus so heavily on their phones - can you imagine what facebook can do with VR?  It will utterly hypnotize everyone.  Those who are hooked might not even leave their houses anymore.  That, combined with a UBI, would fix resource consumption issues pretty nicely. Lifespans would sharply drop among the addicted.  (All that cortisol produced from the games they play would probably chop 10-15 years off the lifespan, plus the lack of movement in combination with the tasty-but-toxic processed food they can afford on UBI might be good for another 10).   It would also - in the long term - deal with population growth too.  Nobody moves out of VR = no reproduction = resource problem solved.

Today, 71% of young people cannot qualify as a recruit in the US armed forces.  The top issue: young people are just too fat.  Toxic food plus hypnotism...another reason why the pitchforks aren't coming out.  People are too fat to use them - and what's more, pitchforks are two-handed weapons.  You can't wield one effectively if you feel compelled to keep your phone in hand at all times.

And VR isn't even here yet!

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back and forth

Considering devil's advocate questions like this is very valuable.  Thanks everyone!  This debate is exactly why I support PP.

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Why can't it work "this time?"

If the question is, "what can't it be different this time?" my answer is that it's never different this time.  [Note: To provide a more complete answer, I'll pull a few charts from Part II of this report.]

At least that’s history speaking.  All throughout history it has never been different, always the same.

Bad economic decisions are always bad.  Money is just a marker for things, but it is not reality itself.  So, if you have a bad idea and it loses more markers than it makes, then it’s not a good idea.

I don’t care if the markers are conch shells or digital fantasy bits.  That’s just always how it has worked.

If the question before us is if the laws of economics have been repealed in some fundamental way, the answer has to be definitively “no.”  Either efforts produce more value than they consume, or they do not.  Imperfect though it is, the money-marker system is our way of keeping score on that front.

The gold standard was a more immediate and direct way of keeping score.  It worked pretty good.  But humans being what we are, many disliked that system because it was rather immune to cheating, hiding, stealing and lying.

Debt-based money offered far more opportunities to concentrate wealth, cheat the little people and small countries, while pushing the bills off to people as-yet-unborn.  Great system!

The problem with such a system is that it requires ever more debt.  One way to allow that is to continually drop the rates of interest.  Another way would be to allow a debt jubilee.  For a variety of reasons, most of them related to the idea that the holders of debt are the same people who both make the rules and would eat the losses in a jubilee, that’s not really in the cards.

Maybe, but not likely.

So we got this:

Yes, driving interest rates to zero allowed a lot more debt accumulation than if they had remained higher. This was true the world over and there are still $6.5 trillion of negative yielding sovereign bonds out there.

Along the way the savers and pensions got absolutely ruined by this, but that’s a different story.

At any rate, now that a 30-year regime of ever lower interest rates has drawn to a close, (which could change, but for now that’s the plan), it’s time to ask “what’s next?”

In this next lesson, we discover that debts really DO matter.  Of course they do, otherwise we have to concede that the basic economic principle of getting a return for one's effort doesn't matter.  Try telling that to a cheetah that's failing to capture any prey.   We might as well concede that perpetual motion energy machines exist without any working models to point to.

For the same reasons that Dave has articulated above I don’t consider Japan a great model here. We’re going to find out how Japan’s demographics, export challenges and 100% reliance on imported oil collide with their expansionist monetary policies at some point over the next few years. 

For now, let’s turn the fact that propping everything up has been the Federal Reserve, et al., dumping thin-air money hand over fist into the “markets” in four protracted periods over the past ten years:

All of these central banks are now publicly committed to ending QE.  They cannot change that for anything less than something major.  We can quibble over the meaning of “major” but not the fact that they are currently in word and deed dedicated to finally ending QE.

Let’s also consider that interest rates are now rising and that equities have suffered badly each time in the recent past when interest rates were hiked.

Those three red circles can be mentally lined up with the equity behaviors below.  It's only the thrid red circle that now stands apart (so far).

I really have a hard time looking at that last chart, above, and finding any explanation for why ‘this time is different.’  Looks like “more of the same” to me.  A lot more.  Didn’t work the first two times, why should it work this time?

Why did equities do so poorly?  Because they were inflated on the backs of credit bubbles.  These were not business cycles.  Credit cycles go higher and crash deeper.  At least the last two have.

So what’s possibly different about this third one?  Have “they” finally figured out how to prevent crashes and the downside of credit cycles?    Maybe.  Here we’d have to consider:

  • Behind the scenes market control via such mechanisms as providing Citadel with a Fed credit line that doesn’t have to be paid back in the event of losses or the Fed using VIX manipulation to drive market moves.
  • Coordinated central bank action at key moments (say, the SNB buying the FAANGs at key moments, the BoJ buying eMinis at others…)

But even for such things to work the world has to be somewhat stable.  There cannot be any major wars or squabbles going on.  China cannot be dumping US Treasuries and Russia cannot be waging electronic war against financial markets, let alone either running about sinking ships in the ocean or lobbing scary missiles.

Further, the price of oil cannot spike to any unreasonable levels which I will define here as over $100/bbl without causing some serious distress at the edges.

Yes, zero percent interest rates are fun and games, but they do not exist in a vacuum.  They cannot make super-expensive oil any more palatable.  They cannot fix a failed harvest or a shortage of cobalt.  They are purely a human construct as artificial as a botoxed forehead.

Has this gone on longer than I thought? You bet. I thought ‘we’ were smarter than this. What’s my big concern? That the longer this goes on the worse the eventual fall. 2000 was bad, 2008 was worse and 20?? Will be the worst of all.

Of course “they” will not admit defeat and will almost certainly try more shenanigans in the future.

Daniel Lacalle said it well in this recent piece:

If we look at the 180 most important economies in the world, only six have in their estimates of 2018, 2019 and 2020 an evident improvement of their fiscal and commercial imbalances. In other words, almost no government in the world plans to reduce the rate of debt increases. If we look at the corporate sector and families, the situation is much better, because private debt is somehow more contained -except in China- and especially in terms of solvency, compared to profits and assets.

Given that it is more than likely that central banks will continue to Japanize the economies through financial repression, these “red cards” are becoming more frequent and, in addition, there comes a point at which the saturation of monetary and debt measures stops working even as a placebo.

Governments and their central banks always start from a wrong diagnosis. They always believe that the problems of their economies are due to lack of demand and that turmoils are caused by external enemies, not by their policies.

By appointing themselves as a solution to the problems they create, they only perpetuate the imbalances, and the solution is increasingly complex

Above all, the tools that central banks and governments have always used (lowering rates, increasing liquidity and increasing spending), generate very evident diminishing returns. In the past eight years, for every $1 of GDP, there were $3 of debt created.

This week’s tantrum will probably recover because the incentive to continue inflating the risky assets is high. But we already have had several warning signs and we keep ignoring them . Even worse, episodes of volatility are being used to increase imbalances and generate further problems in the long-term.

When societies are based on incentivizing spending and debt and not saving and prudent investment, we are always going to throw ourselves into a bigger problem based on the conviction that nothing is happening. When it bursts, governments and central banks will blame anyone except themselves. And repeat.


Either things are truly different now, or they are not.  While I may be wrong, I am not confused; it's not different this time.

Grotesquely extended and deformed, yes.  But not different.



DennisC's picture
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Checked your storm drain lately?

Maybe "it" is here this time.  Glad I still have my Dow 25,000 hat, and 26,000 hat, and my black hat with my wild (hungry) garden bunny inside.  Covered my shorts and my longs and hedged on the 20,000 hat with the neighbor.  Maybe it's time to rummage through the boxes in the shed with the early 2000's headgear.  Kudos to Chris for the scary (subconcious, perhaps) clown meme in the title. 'Tis the season afterall.

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RocketDoc wrote:I think it
RocketDoc wrote:

I think it possible that central banks have "off budget" money creation accounts that enable them to intervene secretly however.  They say the universe is primarily composed of "dark matter" and it may be that our financial system is composed of dark money currents running under the stated published numbers.  

Look into the Exchange Stabilization Fund. Rob Kirby talks a lot about this. He has a lot of Youtube interviews about it too. I'm in your camp. I'm of the opinion that in this computerized era it would not be difficult at all for them to hook all the stock exchanges directly up to the ESF and control them completely digitally. I don't think this latest rout was real; the Plunge Protection Team is more than capable of handling this kind of stuff.

I don't think their challenge is in managing to keep financial markets numerically afloat indefinitely; that's easy with the ESF at their disposal. Their challenge is in retaining the financial world's relevance to and acceptance by the real world, as they keep it inflated digitally, in terms of public / international confidence and dollar purchasing power.

TechGuy's picture
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"Glad I still have my Dow

"Glad I still have my Dow 25,000 hat, and 26,000 hat, and my black hat with my wild (hungry) garden bunny inside."

Sadly I remember Goldman's Sachs Chief economist  Abby Cohen use to make wild predictions that the dow would breach 25K back in 2004-2007. At the time I thought that it pure insanity, but she was right.


FWIW: It seems to me the challenge will be the 2020's for the US (presuming a major crisis can be avoided):

1. Between 2021 and 2023 the costs for entitlements\pensions\debt will exceed all federal revenue.

2. Oil production will peak and likely experience significant declines as the top fields have used advanced oil recovery to offset production declines for decades.

3. Demographics bomb likely goes off as large numbers of boomers are retired or unable to work do to health related issues. I don't see the Millennials picking up as they don't have the skills or commitment. There are almost no millennials doing blue collar jobs (Trades: Plumbing\electrician\HVAC\, Factory, industrial) jobs.

4. Pension failures: Poor investments (ie risky investments or very low yeilds on bonds) & lack of sufficient investments. I think this will bust a lot of states\cities sending them into bankrupcy.





pat the rat's picture
pat the rat
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$ pay more attention

Pay more attention,not about China or some place far away but right here at home. With out honest numbers at are stores we are all screwed. Some stores are starting put one price on the shelf and another at the register.I have notice this at some of the stores I shop at.If this becomes the norm,then what is happening overseas will be the least of are problems.

suziegruber's picture
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Wrong Diagnosis - An Epidemic

Hi Chris,
Thanks for your detailed comment above.I love the piece in the Daniel Lacalle quote where he says that governments always start with a wrong diagnosis that the problem is due to external enemies rather than poor decision making.  At the end of the day there are real people behind all of these diagnoses and it really points out the strong human tendency to blame others rather than self-reflect.  It's self-reflection that's at the core of creating emotional resilience whether it's at the individual level or the government level.



Uncletommy's picture
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Killing the goose that laid the golden egg.

How f***ing stupid is the human species anyway? We continually ask the wrong questions while exploring the sources of our financial malaise. Chris's recap on the specifics are spot on, but only lead us away from seriously considering how we might pull that elusive rabbit-out-of-the-hat. To suppose that we have the ability to shape and predestine the human interactions of self-absorbed humans is the height of hubris. Does anyone remember the fiasco in Buffalo, mn. when 11 acres of trees were clear-cut to make room for a solar energy project :


Living within your means has no meaning to our current plight. PP's message has been and continues to be a voice in the wilderness of our own making. Heaven help us!

Snydeman's picture
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Uncletommy wrote: How
Uncletommy wrote:

How f***ing stupid is the human species anyway? 

That's a rhetorical question, right? Because my first gut response was "pretty fucking stupid, at least in the aggregate."



cmartenson's picture
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Finger pointing is self-defeating
suziegruber wrote:

Hi Chris,
Thanks for your detailed comment above.I love the piece in the Daniel Lacalle quote where he says that governments always start with a wrong diagnosis that the problem is due to external enemies rather than poor decision making.  At the end of the day there are real people behind all of these diagnoses and it really points out the strong human tendency to blame others rather than self-reflect.  It's self-reflection that's at the core of creating emotional resilience whether it's at the individual level or the government level.


This tendency is at a fever pitch in the US right now.  People are busy blaming each other for things that really did not source from those people at all.

Naturally, there are powerful players busy stoking those fires which is pretty convenient for the truly responsible parties.

Such outward blame is both externally and internally destructive.  It harms both parties equally.  No progress can be made as long as it is happening.

For example, I know people who are outraged that Exxon, et al., are "XX% responsible for greenhouse gas emissions!"  

These same peope drive to work, take holidays, and eat food that originates 1,500 miles away, and none of that outrages them in the least.  Maybe it makes them a tiny bit guilty or concerned, but not hostile or angry.  Those emotions are reserved for "other."

Well, there is no "other" in this story.  We are all in this together.  If humans can figure out, finally, that we are indeed 'one' with each other and the rest of life on this planet, there's a chance to build something lasting and regenerative.

If that majority continue to believe that it's some external threat that's the problem - Russians, Exxon, pessimists, Chinese, etc - then the true predicaments never get faced, and the true solutions never get a chance to get off the ground.

Do I point fingers?  Yes.  I continue to blame the Federal Reserve for doing really idiotic things that they should not do and that they should really know better about.  I continue to be upset that many doctors prescribe crappy drugs aimed (poorly) at symptoms while ignoring the many paths to true healing by treating causes.  I'm ripping pissed at the entire Bayer/Monstanto/Regulatory apparatus that puts profits over life.  They too should know better.

My response to each of these, besides being annoyed/angry, is to take steps to do the right thing as best I can.  I own gold to evade the Fed's reach, I research all of my own medical issues, and I eat organic as much as possible.  

All of which is to say that there's a distinction between 'finger pointing' and a healthy discernment of when another's actions are truly inappropriate and harmful and deserving of a good, solid "no!"

In the former case I am merely projecting my own unresolved internal conflicts on another, while in the latter case I am setting appropriate boundaries.  Wisdom is knowing the difference between the two.

newsbuoy's picture
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Investors can take advantage [sic]

From a recent Wells Fargo post:

Key takeaways
The recent volatility is the result of well-known concerns finally catching up to affect  the markets’ psyche— and may not be over. Thefundamental outlook for equity markets remains constructive based on a solid economy, continued earnings growth, and reasonable valuations.

What it may mean for investors
We believe that i nvestors can take advantage by adding exposure to equities, especially in our favored areas of emerging market equities, large- cap equities, and  mid-cap equities, in line with recommended allocations.'s picture
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Refutation of my Proposed Model Still Needed

Thanks folks for the feedback on my comment above (the first on this page). Continuing the conversation, I’ll try to apply my model (which is not my conviction) to key points made in some of the replies to my comment. First I declare my absolute disgust with the current financial system and its terrible consequences for so my beneath the 1%ers. But my focus here is on the mechanics that may prevent a major stock & bond market crash greater than, say, 35%—as opposed to steadily declining quality of life for most humans. 

“To keep that ballooning debt manageable in relation to the real world which cannot grow that quickly, they need to inflate it away.” Not if all that must be repaid is interest at rates near zero. 

Low supply and high price of oil could cause a recession, but a crash is avoided by money printing and near zero rates. This applies to all other causes of GDP declines. A mass psychology causing a crash is averted by the fact that large and institutional investors believe my model—there no longer exist enough small investors to cause a crash. 

I find the pension argument most compelling, in that I don’t see how my model could prevent pension failures. But perhaps the event of many pension failures does not lead to a market crash, but only to retirees living poorly.  

Regarding Chris’s remark, “Didn’t work the first two times, why should it work this time?,” my model holds the (not new) view that only until a few years after the 2008 financial crisis and resulting QE did bankers and big investors, who are possessed of conservative mindsets and institutional traditions, finally become disposed to behave as they could have since the gold standard was abolished in 1971. That is, this time they know that central banks, whether cooperating with one another or not, will print money and set rates to zero to prevent a crash.  

In summary, I haven’t seen in the above replies a refutation of the model I proposed in the first comment above. 

I’m grateful for the dialogue and illumination here and through this website.

~Rob Laporte

treebeard's picture
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Posts: 620
Loss of focus

How are we going to get "there"?  Can money printing offset debt defaults in way that allows us to avoid a "crash" in the valuation of the equity markets?  Can we turn into the Japanese zombie economy?  Interesting theory, but is it consequential?  I suppose if site were to be devoted to purely economic analysis (opps, maybe it is) and were to forget about the other E's, it would be of passing interest in a bizzare sort of way.  Can we destroy our culture and planet in a slow incremental way or will it be a series of sharp declines separated by time.  Really.  (Hey treebeard, stop with the emotions, get with the program).

I have long argued, that we should not be sitting around waiting for "markets" to rescue us.  Maybe this insanity may be able to go on for a very long time. I think many here may be wishing for a crash, despite the personal implications, for the satisfaction of our moral outrage as Dave tagged my response.  If the primary focus of our lives is how do I navigate the financial markets, then I suppose such an arguement might worth more sustained interest.  However I find such reductionist thinking repugnent, and faulty in the end.  Moral turpitude does eventually economic impacts.  And it is a wholistic thinking that yeilds the bests results.

Where do you find pitchforks and torches in that economic formula, we may be there a lot sooner than many may imagine.

dryam2000's picture
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Posts: 293
In brief......


I don’t have the time or energy to spell out a detailed rebuttal to your argument.  If you think you are on solid ground, then go ahead and ride out these mega-bubbles to the bitter end.  BTW, my understanding is that this is not an invest website & site membership dues have nothing to do with getting any type of investing advice in return.  

The world’s financial markets have morphed into outright Ponzi schemes (not simply bubbles).   The game that is now being played by most participants (governments at all levels, central banks, big banks, pensions, etc) is to obfuscate, maneuver, and jockey for position to prolong each individual Ponzi as long as possible.  Ponzi’s are awesome on the very long ride up, but at the end the heros become zeros literally overnight.  It’s a fools game trying to predict the timing of the downfall of any Ponzi.

I would caution trying to apply first order logic when looking at unstable systems that are temporarily stable.  There are so many interrelated multiorder variables involved along with diverging exponential functions.  The ultimate factor that exposes or brings down the complex systems can rarely be predicted.  I hope you find the specific logical argument on the worlds financial markets you are looking for.  I’m highly skeptical you’ll find it.  


TechGuy's picture
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Posts: 443
Re:Refutation of my Proposed Model Still Needed

"I haven’t seen in the above replies a refutation of the model I proposed in the first comment above. "

See my post above about the perfect storm that is likely to occuring i the 2020's

Money printing isn't going to solve an energy & demographic crisis. All the QE cannot print more energy or print skilled workers to replace retiring boomers.

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