The Betrayal of Conventional Wisdom

I was just tryin’ to make the right mistake…

—Robbie Robertson

Wall Street suits, with no skin in the game, find it convenient to blithely project outcomes in the economy based on what “ought” to happen. “It’s time for capex,” my broker says. “…We think that some of the $1.7 trillion cash on corporate balance sheets could go toward capital expenditures this year, given the aging capital stock…We offer a screen of stocks that may benefit from increased capex…”

And, if we bother to check these guys’ error rates, we will find that they are wrong every time because the impetus for economic activity is social mood, not need. It may be counter intuitive, but you have to know if corporate America felt good about their future they would draw down that dough to modernize. If they felt really good, they would be borrowing to expand. They don’t feel optimistic. On the contrary, the cash stash reflects caution.

The collapsing market tells us that social mood is headed south. It will only get more fearful between now and the bottom of the market and the economy. “…our chief North American economist expects GDP growth to accelerate to about 3% this year, up from an estimated 1.7% growth in the first quarter,” reads the current report. Fat chance. Look for these guys and their colleagues on The Street to eat these words as the year progresses. I feel bad for their clients.

I said in my March 26 post that I felt that the bear market would resume in earnest in April. The decline is now happening in impulsive fashion. The next twenty four months will be the most difficult in the last two hundred years for investors. There are two reasons to be accepting of this outcome: 1) It won’t last long, and the values available to investors in all classes of assets will be extraordinary at the bottom. 2) The excesses in the financial system will be eliminated or significantly diminished as a result of the natural action of the market. Historically, this has been the only way the economy was purged of the self-dealing by the sociopaths that end up in power after a long bull market.

We just have to be patient.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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(Black) Swan Song

For Seneca, the Stoic sage should withdraw from public efforts
when unheeded and the state is corrupt beyond repair.
It is wiser to wait for self-destruction.


It is a tragicomic sight. Every day, now, bullish traders bid the market to a gap opening above the previous day’s close. Within minutes, the market begins to slide, and it is as though the bulls are hanging on to a chalk board by their fingernails. You can almost hear the screech of their nails as they slide down to a new low. Late in the day, they gather enough strength to launch another rally, but it stops short of the high.

The average investor probably does not notice this action. It is distinctly bearish, particularly since it is happening just below the December 31 high in the Dow Jones Industrial Average. It is typical of a wave 2 retracement, and if a new high does not come soon, the next leg down will be large and unforgiving.

My bet is for the bear market to get underway in earnest in April. Confirmation of this probability comes from the unwavering bullishness on the part of the guys with the ties. The chief investment strategist at my old firm says:

 After years of gloomy forecasts, we finally see a new year with no thunderclouds on the horizon. Growth is likely to pick up in most economies, but not enough to stoke higher inflation. All in all, the outlook appears to be more balanced and better than it has been in years.

These sentiments are echoed up and d0wn the canyons of Wall Street. We might assume that this optimism is rooted in facts, and I don’t see it. Let’s look at facts:


The so-called strength in the economy would be expected to result in strong demand for commodities, but this is not so. Commodity prices peaked around the world in 2008 and have been in a bear market ever since.

Oil has not been able to get out of its own way, despite repeated tremors in major oil producing areas, including the Middle East, Venezuela, and now Russia:

 crude oil new

You may recall that the run up in the commodity markets in the middle of the last decade was due, in part, to the tremendous debt fueled expansion of the economy in China. Here, too, we have a bear market underway:

shanghai newThe global debt hangover, declining social mood, and an already in place trend towards less consumption are the headwinds the U. S. market will contend with after the last bull climbs on board. I’m happy to fade the suits.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.


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Minding the Mind

Some people would sell out for nearly nothing and move away.
And it never failed that during the dry years the people forgot about the rich years,
and during the wet years they lost all memory of the dry years.
It was always that way.

John Steinbeck,
East of Eden

The year was 1980 and I called a client to recommend she buy United States ten year Treasury bonds yielding eight percent. ”Are they safe,” she said? ”Yes, Ma’am, these bonds are guaranteed by the full faith and credit of the United States,” I replied. She paused for a bit. Then she said, “But are they REALLY safe?” This was a cautious woman.

And she was far from alone. Fourteen years of bad markets played havoc with most investors’ psyches. Stocks had crashed, inflation was roaring, and social mood was as pessimistic as it had been since the thirties. The irony of it was that the massive liquidation of stocks during the seventies had made the market the buy of a generation. The Dow Jones Industrial Average was selling for six time earnings, bore a yield of 7% and was priced at book value–a rare circumstance. The best recommendation I could have made was that she buy blue chip stocks, but I knew she would have none of it.

Fifteen years later, my retiree clients were pissed at me for not getting them into tech stocks. By now, the market had gone up a thousand percent and my cautious, fearful clients had morphed into riverboat gamblers. Philosopher/trader, F.J. Chu is right: The history of the market is the history of forgetting.

It’s the elephant’s fault that, when it comes to investing, we will be wrong at major turns. The elephant being the Buddha’s name for the emotional side of our divided brain. In matters of uncertainty, the emotional brain is conditioned by its experience. At the top of a bull market, the elephant is bullish in the extreme and cannot be kept out of the market. A fully invested person today may listen to a bearish argument, and even nod his head in agreement. But he is not about to sell out.

The Buddha described his divided brain as the rational brain being the rider, and the emotional being the elephant. He said, ”I, the rider, can go anywhere I want–as long as the elephant wants to go there, too!”

The average investor’s elephant is ensconced in the bullish camp today. As the market starts down, the experience of seeing her account statement decline will erode this bullishness, and the bearish case will begin to cause her the anguish of Ovid’s Medea, torn between her love for Jason and her duty to her father. She laments: I am dragged along by a strange new force. Desire and reason are pulling in different directions. I see the right way and approve it, but follow the wrong.

Loss, probably quite severe, will change the elephant’s view. And when the market hits bottom, instead of getting in, the elephant will see the right  way and approve it, but follow the wrong and stay the hell out. I wish it were otherwise.



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Real Estate? Now?

The butterfly counts not months but moments,
and has time enough


In my mind, the conversation goes like this: “So, how ’bout real estate now?” I say. “Too soon for a third buyer ,” he says. He, being Fat Tony, Taleb’s mythical street smart guy from Brooklyn that makes the kind of living that provides the home in Larchmont for the wife, the former Concetta de Magglio, and private school for the two children. This he mostly does by taking the other side of trades put on by Wall Street’s best and brightest.

We would call Fat Tony a very successful skeptical empiricist. “Well, I watch things,” is all he’ll allow. But let us take up his idea about the third buyer, which, in certain transactions, he aims to be.

The real estate market was minding it’s own business when the Fed began gushing cheap money into the financial system early in the new millennium. Whatever they may have had in mind, the result was anything but pretty. The dough wound up in the banks who then used it to go on a tear to generate mortgages wherever they could so they’d have something to package and sell to yield hungry institutions and retirees.

In the end, millions of people with very questionable finances were dragged into home ownership with teaser rate mortgages they did not understand. As the teaser rates morphed much higher the crash began, putting most of the Joe six-packs out on the street. Thus the demise of the first buyers in the mania.

Now come the bottom fishers. Some of them sophisticated. These are the private capital guys, working cozily with the banks whose balance sheets are loaded with foreclosed properties. Hundreds of thousands of these houses have been acquired by outfits like Blackstone Capital and Romney’s old outfit, Bane Capital. Their move, once again, is to cynically package these properties and market them again to the bottom fishing wannabees-pension plans and retirees. Will these folks ever learn?

At last count, sixty percent of home purchases today are cash buys. If that sounds solid, it is anything but. A normal home market functions efficiently when the buyers intend to live in the homes they purchase. Bidding is sensible, homes are maintained with pride of ownership, and purchased homes go off the market for decades or more. But the cohort buying for cash is bidding up prices in the rush to acquire houses for packaging into investment trusts. The intention is to rent these properties until the market goes up so they can be sold for a profit.

What a mess this is going to be! Imagine a manager of one of these trusts that has several thousand homes around the country trying to maintain the properties and keep them rented. The private capital guys will be long out of ownership, having made their millions in fees and inflated prices levied on the trusts. The ultimate owners once again own investments that will be deteriorating from the get go, wreaking havoc on values and the very livability of  neighborhoods scattered around the nation in which these properties are located. Thus the demise of the second buyers.

At some point, maybe in 2017, after the deflationary depression bottoms, the third buyer has a chance. I suspect Fat Tony will be looking to acquire some of these properties–long since abandoned–for the highest best use of the land. Farm land, maybe? Who knows.



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Another Delusional Moment

Men are children. They must be pardoned for everything,
except malice.


A litany of ills affecting the markets commands our attention:

For the third time in less than fifteen years, investors are behaving in a fashion that historically has produced miniscule, temporary upside payoffs, followed by catastrophic endings. Of course, they do not believe it. Otherwise they would be sitting in cash.

They are definitely not in cash. In February, individual investor money market assets as a percentage of total U.S. stock market capitalization was 2.8%, an all time low. In 1982, before the Dow Jones Industrial Average went up sixteen thousand points, the figure was 17% (source:

Stock market gambling is in vogue again-day trading has come back strong. From October through January E*TRADE and TD Ameritrade have reported trading increases of 25%. This is a late-in-the-trend phenomenon, self-killing because it is really day buying, which has a limited life. A 63-year old retiree says she traded in and out of stocks about 40 times this year. “I think stocks are the only piece of the American dream that’s still working,” she said. Good luck, ma’am.

Most indicative of the end of the line for the market mania is the sudden ”flight to risk” in the form of heavy buying of exotic “Frontier” markets like Chad, Bangladesh, Bulgaria and Ukraine (!). Bad bets, all of them-last to skyrocket, first to crash, for certain.

As is typical at tops, economists are unanimously optimistic, blithely ignoring the danger signals: When Christmas sales got off to a rocky start last year, retailers panicked and went into “full battle mode” to unload merchandise. In January and February, various retail sales measures crossed into negative territory for first time since 2009. (Elliott Wave Financial Forecast, 3/7/2014).

Auto sales declined in four out of the last five months. The major auto manufactures started February with more than a hundred days supply of unsold vehicles, the most since February 2009 (EWFF, 3/7/2014).

The employment situation is worsening. The market popped a bit last Friday when the Employment Situation Report was headlined “175,000 jobs added.” Most of the gains faded as traders took a closer look: per the Household Survey, employment was +42,000 and unemployment was +223,000. Mish did his usual thorough job of parsing the report:

“Were it not for people dropping out of the labor force, the unemployment rate would be well over 9%.”

At market tops, popularity is the kiss of death: At it’s all time peak in December 1999, Microsoft was the most widely held stock in America. It was already losing ground as the market topped in March 2000. After a 70% drop in 2000, the stock had one sharp rally, a dead cat bounce, and it’s been a dog of a stock ever since:


MSFT last

So, in the here-we-go-again department, MSNBC reported in November 2013 that Apple was the most widely held stock in 401k accounts. APPL peaked the year prior and sold off 45% in a matter of months. It now badly lags the broad market, and may have completed it’s own dead cat bounce:

Apple last

Will it be a coincidence if Apple and the broad market behave abysmally for some time to come? Hardly. Wasn’t it Mark Twain that said, history doesn’t repeat, but it does rhyme? The names may change but mass behavior is constant. The most popular stocks always crash ahead of a broad market decline. This time should not be different.

If I could think of any way this would not end badly, I’d say it. I can’t.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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The Ubiquity Problem

And slime had they for mortar

—Genesis 11

When it comes, Bloomberg’s newsroom clerk will dash over to the AP newswire, pull a likely item off the tape and, because he has to write something, blame the stock market crash on whatever he grabbed. Evening newscasters will report this bullshit, and it will be wrongly consumed as fact at dinner tables across the land. The difference between causation and correlation will never be considered.

Socionomists understand that an event like a bully move by the president of Russia often  happens around major turning points in social mood, which correlates with turning points in the market. But the cause of a market collapse is the buildup of instability in the financial sytem, not any one news event.

The paradox in the financial markets is that the stability that central bankers strive for is the very thing that creates instability.

On a sunny day, the snow on a mountainside presents a picture of stability. But, beneath that serene white blanket, minute cracks are forming to weaken it. The longer it remains on the mountain, the more ubiquitous the cracks under the surface, until the snowpack reaches critical state. When this happens, researchers can predict that an avalanche will occur. They just can’t predict when the last snowflake will float down from a cloud to precipitate it.

The ubiquity of fissures in the global financial system first reached critical state in 2000. Repeated efforts by the Fed to prevent a washout to cleanse the system held the market up until 2007. The 54% crash into the lows of ’09 caused central bankers around the world to undertake a massive bailout, but nothing substantive has been done to fix things. Truth is, the only real fix is a Jubilee-like flattening of most of the unpayable debt that is choking off global economic growth. Leviticus 25-26 is good read here. A perp walk for Wall Street sociopaths would be welcome, too.

The Market
DJI mar 6
It’s late, and the players are too tired to keep the party going, not ready to go home yet. As long as this rally does not top the December 31 high, I will treat it as countertrend, laboring under the weight of massive negatives in sentiment, valuation and momentum.

The largest of the credit cycles in the financial system, the Levitican 7, 30 (28) and 50 year cycles all converge into a low in the summer of 2016. It shouldn’t take a commitment to Pascal’s Wager to avoid holding investment assets until after the lows.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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Faux Paradise Found

It’s the last day of February. The temperature is 79 degrees and a brilliant sun sails in a cloudless sky over this pristine Florida beachside village. The place is jammed. Minnesotans, Michiganders and (it seems) everyone living north of the Mason Dixon line has come to town to get a tan and escape the brutal winter. Stores on Ocean Drive are setting sales records. Hotels are at capacity. Forget about getting seated at a restaurant with less than an hour wait.

If I were a merchant, I’d be bubbling over with understandable optimism. Instead, as a trader, I’m obliged to do due diligence on the markets and the economy to establish the risk of owning investments versus hanging out in cash. Tedious work on a day like this. But I resist the temptation to grab my Kindle and walk the three blocks to the beach and veg out, in order to review my analysis and check with my colleagues to see if my bearishness on investments is off base.

Here’s what my morning work brought:

e-mail exchange with fellow trader Tom Finch:

Tom: My take on the market: We are in an Elliott C wave, the pattern is a diagonal triangle, momentum is divergent. When it is over maybe 1875 (cash S&P), we go down big. What’s yours?


Rod: The SPX breakout of the recent trading range keeps the minor, intermediate and major trend rising. How high is high? The Financial Market Cycle is in the late stage–High financial risk. Fundamentals are extreme–Over bought, Over valued and Over bullish. Technicals Marginal. Economics Borderline. (Bullish) Sentiment recent record levels. Unfavorable risk reward ratio–SPX up+/- 5-10%, down +/- 30-50%. Expect a Minsky moment soon.


Wikipedia on Minsky moment:

A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets no longer is sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values. Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. However, at this point no counterparty can be found to bid at the high asking prices previously quoted. This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash.

Tom: Thanks, I certainly agree with your risk/reward ratio. Cheers,


No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.




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The Outlook

This Tuesday evening the analysts at DecisionPoint, my technical market studies provider, posted this comment:

Our primary short-term focus is on the rising trend line drawn from this month’s low. It is very steep and not likely to be maintained much longer. Overhead resistance is just inches away, and on the thumbnail chart we can see that a rising wedge has formed. The expected resolution of the wedge is downward:
The market reversed on Wednesday and has now fallen out of the wedge. Every indication I have tells me that the last attempt at new highs has failed. The bear market has most probably resumed. If the Wave Principle forecast is correct, the next wave down will be longer and more severe than the decline from Dec 31. The major market trading cycles, from seven years out to fifty years, are all joining in a hard down phase, scheduled to bottom around mid year 2016.

It stands to be a very difficult time for anyone owning investment assets of any kind. The only thing likely to hold value is cash.

The downturn will be driven by a steep decline in social mood. The artistic community is already sussing out the vibe. This is to be expected. Pericles, leading Athenian during its golden era, would complain bitterly that his advisors were clueless-that to find out what was going on he had to go down to the agora to hear the songwriters. So it’s no surprise that today our film makers are out in front of the rest of us with this soon to be released new offering:

The dialogue at the end of trailer is high melodrama:

Noah’s wife asks, “Is this the end of everything?” Noah, replies, “The beginning. The beginning of everything.”

It’s a good thought. When we get to the lows, with the Dow Jones Industrial Average well below 1,000, most will be seeing it as the end. Better to be prepared to see it as the beginning.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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The First Rally–Phony?

And the past and the future?
Nothing but an only child with two different masks

–Billy Collins

Were I a hundred today, I could reach into my memory bag to recall that first violent rally in May, 1930. The crash the year before had been followed by a giant advance from November into April and the top song on the hit parade was, Happy Times are Here Again. Then came a swoon that recalled the October crash. And then this sharp, unrelenting few days of upness that said to investors, “Don’t worry, it’s gonna be OK”

Since I’m only seventy-five, I have to rely on Frederick Lewis Allen’s account of the period in his book, Since Yesterday. That first rally was one of eleven such events that happened between April that year and May, two years later. Each one of them convinced investors that they were right to hold on to their stocks. But each one made a lower high, and was followed by new lows. At the end of those two awful years, the Dow Jones Industrial Average had lost 89%. There are technical reasons for this kind of action in bear markets, but it should be enough to understand that the effect is to devastate an investor’s wealth.

I think we may be about mid-way through a counter trend rally. Already, the market is more overbought than it was at the December 31 top. Here’s how I think this thing might play out, projected in the 120 minute chart of the Dow Jones Industrials:

120 min Dow

Meanwhile, Wall Street analysts are more uniformly bullish than ever, Realtors in my village are declaiming the resumption of a housing boom–there is a good bit of activity now, and no one seems to be making the connection between now and 2007. If we make new highs, my analysis will be wrong, but it won’t alter the fact that we are in the end days of the Grand Supercycle Bull market that began in 1722. The point of this exercise is to remind myself not to get caught up in the false enthusiasm of the moment.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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Relief Rally Underway

“We didn’t expect the U.S. would be this weak,”

–Senior Strategist at Goldman Sachs

The Dow Jones Industrial Average plummeted 7.5% in the first 22 market days of the new year. Short term momentum oscillators got severely compressed, setting the stage for an oversold rally. The decline appears to have been an impulse wave, so odds are good that the primary direction has turned down and the rally will not make new highs.

To say the financial world got caught wrong footed is to grossly understate the case. As noted in my last several posts, there are no bears on Wall Street. This first drop has the suits vigorously defending themselves. “Since we do not see sufficient reason to change our fundamental earnings outlook and stock prices have fallen, the market still appears attractive to us,” said the Goldman Sachs strategist. Similar versions of this “analysis” can be found on the Web pages of all of the brokerage firms I’ve surveyed.

This is criminal. Wedded to their misguided stances, they will do their utmost to keep their clients in the market. The rally underway now supports their case, but if it fails to make new highs, they will be setting up their clients to suffer enormous losses over the next couple of years.

The first relief rally in a bear market sometimes retraces 90% or more of the drop. For various reasons, I doubt this will be so this time around. Here’s the daily chart of the Dow, and the retracement levels that I think may be possible prior to turning back down again:

Dow daily new

The sentiment in the stock market is rarely so one-sidedly bullish. I’m always amazed when this happens because it never fails to be wrong. This time might be different, but I wouldn’t bet on it.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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