Bubble in Galilee

…these are days of lasers in the jungle,
lasers in the jungle somewhere,
staccato signals of constant information,
a loose affiliation of millionaires and billionaires and

—Paul Simon, The Boy in the Bubble

Capitalism sucks. It purports to be a system for organizing economic activity that requires the collaboration of capital and labor, promising to be the petri  dish for innovation and creativity, and the birthplace of wealth creation. It functions best in a political environment that fosters individual initiative.

Ultimately, it’s a giant monopoly game where a few clever players end up with all the property and use their extraordinary wealth to buy politicians who skew governance to favor the few.

The good times last long enough for greed to get out of hand, resulting in an economy bloated with debt and a growing population of economically marginalized citizens. The end game is collapse, wealth destruction, and poverty all around.

The cycle has a long history, as is evident in this excerpt from Reza Asian’s Zealot: The Life and Times of Jesus of Nazareth:

…Capernaum was the ideal place for Jesus to launch his ministry, as it perfectly reflected the calamitous changes wrought by the new Galilean economy under Antipas’s rule. The seaside village of some fifteen hundred mostly farmers and fishermen, known for its temperate climate and its fertile soil, would become Jesus’ base of operations throughout the first year of his mission in Galilee. The entire village stretched along a wide expanse of the seacoast, allowing the cool air to nurture all manner of plants and trees. Clumps of lush littoral vegetation thrived along the vast coastline throughout the year, while thickets of walnut and pine, fig and olive trees dotted the low-lying hills inland. The true gift of  Capernaum was the magnificent sea itself, which teemed with an array of fish that had nourished and sustained the population for centuries.

By the time Jesus set up his ministry there, however, Capernaum’s economy had become almost wholly centered on serving the needs of the new cities that had cropped up around it, especially the new capital, Tiberius, which lay just a few kilometers to the south. Food production had increased exponentially, and with it the standard of living for those farmers and fishermen who had the capacity to purchase more cultivatable land or to buy more boats and nets. But, as in the rest of Galilee, the profits of this increase in the means of production disproportionately benefitted the large landowners and moneylenders (bankers) who resided outside of Capernaum: the wealthy priests in Judea and the new urban elite in Sepphoris and Tiberias. The majority of Capernaum’s residents had been left behind by the new Galilean economy. It would be these people whom Jesus would specifically target–those who found themselves cast to the fringes of society, whose lives had been disrupted by the rapid social and economic shifts taking place throughout Galilee…

Economic crashes vary in severity. The greater the debt in the system, the greater the inequality of the wealth and income distribution, the worse the breakdown. There is the real question of survival in the big ones.

The crash dead ahead looks to be the worst yet. I hope we make it through OK, because capitalism sucks, but it beats any other kind of economy dreamed up by man.



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Financial Planning: the Narrative Fallacy

No event is unique, nothing is enacted but once…;
every event has been enacted is enacted, and will be enacted
perpetually; the same individuals have appeared, appear,
and will appear at every turn of the circle.

–Henri-Charles Puech

The single most egregious flaw in conventional financial planning is the failure to take important capital market cycles into consideration. Every culture, save what passes for culture on Wall Street, understands the cyclical nature of human behavior. Societies, and the financial systems that facilitate them, emerge, grow, and flourish. Then they denigrate, decay, and crash. Afterwards, they start back up again if there is anything worth saving from the collapse. There are times to be fully invested and times when the prospect of significant losses require holding cash.

The Chief Financial Strategist at the brokerage where we keep money market accounts tells clients they need exposure to risk. They do not. They need exposure to opportunity when there is such a thing, and protection from excessive risk when asset prices, like now, are overvalued in historical terms with the global economy burdened with excessive debt.

A sense of history is required to identify the progression of the cycle from an important low to a top and back again. There are a number of ways to ascertain the relative position of markets within the cycle. For me, the Elliot Wave Principal is the most useful because it notes that the phenomenon of cycles has two properties: 1) The very long term trend is up, but when a major cycle tops the ensuing losses are catastrophic, and 2) The overall pattern is fractal, that is, there are cycles within cycles-they occur in time durations as short as minutes and as long as centuries

For financial planning purposes, the two largest cycles must be accounted for: Supercycle, and Grand Supercycle. When either one of these is topping, investors should sharply curtail their investment holdings and hold cash until the cycles bottom again.

DJIA 1930 to now

 Above is the chart of the Dow Jones Industrial Average from 1890 to the present. A Supercycle topped in 1929 and the DJIA lost 89% of its value. It took twenty seven years for the average to regain the level of that top, but the losses were even greater as many of the companies in the average went bankrupt and were replaced by others. Since then, the market has experienced three upward moves and two retracements. These lesser cycles, called Cycles, rose out of the bottom in 1932, topped in 1937 and bottomed in 1942, rose from there, topped in 1966 and bottomed in 1974, rose from there and are now in a third topping area. Three Cycles bring on a Supercycle top. In the present instance, it is also the third Supercycle since the British market lows in 1722, the start of a Grand Supercycle. This top, then, is a Grand Supercycle top, an event none of us has any experience with.

For those interested in how the Elliott Wave Principle operates, I recommend getting in touch with the folks at Elliott Wave International (www.elliottwave.com). When a cycle tops, it retraces back to the level of the fourth wave of the cycle of one lesser dimension. This is why the forecast is that the market will ultimately fall to the level of the 1929 peak, which was 390. Yes, three nine-o, one hell of a drop. Impossible to grasp, much less believe unless you put some time into studying the Wave Principle.

I was discussing this with a long time reader recently. She said, “Well, nothing is certain.” It was a fair response, but she did allow that, despite her very reasonable skepticism, her family’s investment position is eighty percent in cash equivalents. Bravo!

In a vain attempt to put lipstick on this pig, I will say that the species is bound to survive a Grand Supercycle crash, even though most people won’t know what hit ’em. Forewarned is better.



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

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A Perilous Denial

It is difficult to get a man to understand something,
when his salary depends on his not understanding it

–Upton Sinclair

Charley Merrill closed down the firm in 1928 and recommended that clients sell their stocks. Statesman-like, for sure, but brokers, managers, partners and back office clerks took an unasked for vacation until he re-opened Merrill Lynch in 1933. There is no question today of a voluntary closing of Merrill Lynch, or any other securities firm that I’m aware of. It would certainly be catastrophic for thousands of employees, but it might be a lot easier than the pain in store for the industry and its clients for the balance of this decade.

Yesterday, the Fed did what the market had hoped for by not raising rates, and the response was a twenty minute rally to complete the corrective advance underway since the recent lows-followed by a full retracement of the day’s action and a negative close. As I write this, the futures are down hugely in pre-opening action and the global markets are in a free fall. The idea that the Central Banks of the developing world could stay the long overdue correction of the excesses in debt creation by creating ever more debt has been a Chimera, shortly to be discredited by everyone but bankers and brokers.

Long time readers of this blog know that I do not make recommendations. I write these pieces to frame reality for myself. So, this is what I’m telling myself this morning:

Over the balance of this decade, losses of as much as 90% will be seen in the following asset classes:

U.S. Stocks
European Nation Stocks
Asian Nation Stocks
Emerging Nation Stocks
Corporate Bonds
Municipal Bonds
Commercial Paper
Sovereign Debt
Commercial Real Estate
Residential Real Estate
Iron Ore
Scrap Metal
Almost any tradable asset

What am I holding? Cash.

I won’t mind being wrong. I won’t mind at all. But I don’t expect to be wrong.



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

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The Cheerleaders

We’re all just walking each other home


Nassim Taleb, author, seminal thinker, and developer of theories that are likely to endure in the field of uncertainty, never reads newspapers or listens to  commentary on current affairs. He holds it is always wrong.

I agree with Taleb. But I do follow news commentary precisely because, at inflection points in the cycle of human behavior, its wrongness consistently confirms my outlook for significant change. At these moments, when all measures of valuation in markets are at extremes, and social mood is at one end or the other of the spectrum, pundits will invariably argue for a continuation of the trend in force.

Typically, after the first big crack in a long advance, commentators rush in to dismiss the drop as an aberration and insist that investors hold their positions. No exception now. The Dow Jones Industrial Average has fallen 19% from its all time high in May to the recent low, and these are some of the headlines:

Don’t freak, Buy Because Stock Carnage Never Lasts
–August 24, 2015, USA Today

The No-Stress Way To Survive A Stormy Market
Stay chill. Market downturns happen. Pay as little attention as Necessary. –August 15, 2015, Time

The Single Most Important Piece Of Advice During A Stock market Crash: Don’t Sell
–August 25, 2015, Vox.com

Worried About The Stock Market? Whatever You Do, Don’t Sell
Here’s what you need to know: Don’t sell. Let me try that again, with greater emphasis: Do. Not. Sell.
–August 25, 2015, fivethirtyeight.com

With a little background checking, a reader can find plenty of reason to disregard this kind of foolishness. The writers are most apt to be inexperienced and way out of their league.

What is more disturbing is that Wall Street Strategists, who ought to know better, are on the same track. The Chief Investment Officer of the firm where we keep our money market accounts, issued a report on August 27 that said in part, “We maintain our positive outlook on equities…” I honestly do not know whether he is being disingenuous or just asleep at the switch. I think it’s the latter:

Asleep at the switch: a term from 19th century American railroading, when it was the trainman’s duty to switch cars from one track to another by means of manually operated levers. Should he fail to do so, trains would collide.

In common usage, similarly disastrous results are implied.


 I believe we have entered the period in which no asset class stands up to the onslaught of a Grand Supercycle Bear Market. There will be rallies, violent ones along the way, but there will be no new highs in the markets in our lifetimes.



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

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Avoidable Risk

I’m always thinking about losing money as opposed
to making money. Don’t focus on making money,
focus on protecting what you have

–Paul Tudor Jones, Master Trader
(a guy who has made and kept
over four billion dollars in the market)

I lost half a house one afternoon in 1986. I was shorting naked put options, an insane strategy in which you can make a little money if you’re right and lose a ton if you’re wrong. It’s the sort of thing you do when you are dead solid certain of the future. It takes a few of these boneheaded decisions to make you realize that betting on the future is always a wrong thing to do.

The above may sound silly but, the truth is, you do not know what is going to happen next. All you know, if you’re paying attention, is what has already happened. For me, the right way to make investment decisions is to look over your shoulder. What was the last extreme?

The stock market is not a venue where utilitarian decisions hold forth. The super market is: I love steak, but at $20.09 a pound, I can eat hamburger some of the time. If, on the other hand, steak was a stock, the crowd would be hating it at a buck a pound and break down the doors to get it at a hundred bucks. Take a look at the volume on Apple as it went up the chart:

Apple Computer
AAPL volume

The driver for this behavior is fear of missing out. The notable thing about the fear is that it comes in to play well along in the stock’s move. There will be another time when fear brings the volume in. This will be toward the end to a crash in the stock, when fear of loss has the crowd piling out. Most times, the mass liquidation, also called capitulation, happens at the bottom. Logical? Of course: The crowd is always late to the party and late to give up.

This behavior is an immutable part of the human condition: we need confirmation in matters of uncertainty, so we don’t get on to a good thing until we see confirmation in the rise the stock, then we clamber aboard. Likewise, once we buy, it takes a lot of convincing to get us to sell, so we wait until we are almost wiped out to unload.

Obviously, the way to win is to go against the crowd. It starts by waiting until the entire market has been liquidated. That did not happen at the lows in 2009. That’s why we stayed in cash.

Looking over my shoulder, then, I see that the last extreme in the market has been overvaluation, so I won’t invest until the capital market cycle turns down in a bear market that ends in capitulation and a complete high volume liquidation by the crowd. After that, one brief rally (dead cat bounce), followed by a long drifting down to a low where there is no public interest in the market, despite the fact that steak can be had for pennies. The risk will be gone with the departed investors and the cycle can begin all over again.

Action in the market this past week is highly suggestive of my notion that the bear market that will destroy values on the way down to a buy point is now underway. The public is still fully invested. Their advisors are telling them to hold on. Comments like these are spewing forth from brokers across the land:

“In this environment, we advise investors to remain patient, stick with high-quality issues, and take advantage of this bout of volatility to rebalance portfolios in line with their goals.” (Merrill Lynch, 8/21/15)

Comments like these should be prosecutable as crimes against humanity. The global economy is free-falling into depression and bankers and brokers are offering smarmy palliatives instead of the only reasonable advice there is at a time like this: Get the fuck out!



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



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Primer on Gambling

So what happens next? Well, it’s not like the sellside (bankers and brokers) is very useful in actually providing actionable advice when something not in the script happens…

–Zero Hedge 8/12/15

Then again, considering all of these strategists were 101% confident the 10Y would have a 3% before a 1% handle, feel free to ignore everything they just said.

–ZH 8/12/15

Your financial advisors don’t know squat. They tell you this up front. Anytime they make a recommendation, they hand you a prospectus that says, “Past performance is no guarantee of future results.” When the bottom falls out and you are losing your life savings they will say, “We did not see this coming.” They never tell you to sell. You are one hundred percent on your own, other than the fact that they will commiserate with you as you go broke.

A guy with a tie reads my blog. “I don’t think you’re right,” he says. How come? “Earnings are good,” he tells me. Jesus. Earnings are always good at tops. They will be lousy at the bottom when it’s time to buy.

If you are planning on retiring with any money at all in your 401k, you better understand that you’re a gambler and your one job is to avoid being a sucker in uncertainty. Puggy Pearson, two-time world poker champion said, “Ain’t only three things to gambling: knowing the 60/40 end of a proposition, money management, and knowing yourself.”

Start with the odds in the market. Puggy would be sitting on his hands here. How much can you make when the market is at the highest valuation in history in relation to earnings. You don’t know the answer? Find out, sucker. Your advisor is not gonna volunteer this information.

Proper money management says you reduce your exposure as values get to upper extremes and, no matter what the market does, you hang on to cash until the cycle turns in your favor. You don’t know when this will happen. Nobody does, but that doesn’t mean you should willingly get run over by the locomotive of the Lord.

The toughest thing for a  gambler is self knowledge. Look at your history. How did you feel in March of 2009? That’s when you should have bought, you know. How do you feel now? Comfortable with your fully invested portfolio going up every week? That’s a warning to check the valuation and sentiment numbers. Or put protective stops under your positions. Make yourself liquidate when prices drop below your stops.

Understand this: you will never willingly do what you should do in the market. You will hate selling when you are making money and you will have a hell of a time getting yourself to buy when the world is coming to a catastrophic end. Everyone feels like this. If you can’t overcome yourself and do the right thing when it seems wrong, you have no business gambling.

That might be the first decision if you don’t want to be a sucker.





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In Plain View

There is superstition, writing on the wall
…in letters ten feet tall

–Stevie Wonder

If the market cracks big time (as you and I expect), every frickin’ economist on Wall Street will say, Nobody saw this coming! Really. When surveyed this past June, every single guy with a tie was incomprehensibly bullish. It’s ’07 redux.

My seven year old granddaughter could take one look at these charts and tell me a crisis was coming:

Debt: State and Local Government

Of Two Minds oneTax Receipts: State and Local Government

Of two minds two

Expenditures: State and Local Government

Of two minds three

Median Household Income in the U.S.

Of two minds four

Here’s how Charles Hugh-Smith (www.oftwominds.com) sorts it out:

  1. The bond market may choke if state and local governments try to “borrow our way to prosperity” as they did in the 2000s.
  2. If state and local taxes keep soaring while wages stagnate and household income declines, households will have less cash to spend on consumption.
  3. Declining consumer spending = recession.
  4. In recessions, sales and income taxes decline as households spending drops. This will crimp state and local tax revenues.
  5. This sets up an unvirtuous cycle: state and local governments will have to raise taxes to maintain their trend of higher spending. Higher taxes reduce household spending, which reduces income and sales tax revenues. In response, state and local governments raise taxes again. This further suppresses disposable income and consumption. In other words, raising taxes offers diminishing returns.

At some point, local government revenues will decline despite tax increases and the bond market will raise the premium on local government debt in response to the rising risks.

When borrowing becomes prohibitive (or impossible) and raising taxes no longer generates more revenues, state and local governments will have to cut expenditures. Given their many contractual obligations, these cuts will slice very quickly into sinews and bone.

If this doesn’t strike you a crisis, please check back in a few years. It is easily foreseeable, but very inconvenient. As a result, it too will be a crisis that “nobody saw coming.”

The frightening thing is that those clueless Brooks Bros. suits advise your advisors and your advisors advise you. Good luck!




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On Black Swans And Other Phenomena

Black Swan: A highly improbable event with three principle characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable than is was.

–N.N. Taleb

It would have been late ’72 that I had a cocktail conversation with an old salt who’d been a broker the thirties. I was bullish. “I don’t know,” he said, “I think there’s speculation.”

Didn’t mean a thing to me. There’s always speculation. That’s what we do, I thought. But he was talking about something else, a mindless, cautionless, plunging-a mania that I couldn’t see because I was naively caught up in it myself.

A mania is not necessarily a hair-on-fire compulsion to get-into-the-market-before-it soars experience, although it certainly can be that. It can also be a moment when there is unanimity of opinion. No fear, no second thoughts, just a wide-spread agreement that being fully invested in a market that is outrageously overpriced is the proper thing to do., and calmness prevails.

We have this calmness now, despite growing evidence that the economic support for the stock market is eroding.

A number of issues back, I compared investors’ calmness to mountain snowpack:

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, scientists 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.

My view is that we have reached critical state in the markets one more time. My old salt friend recalled an earlier one. “Who could have predicted it: the London pepper market cracked in ’29. It brought the whole thing down!” Today, we name these “unpredictable” catalysts Black Swans.

It is not the last snowflake, but the underlying condition that creates the highly impactful event. We are primed for one now. No telling what it will be, but afterwards, we’ll all say, “Of course! It was obvious!”

August 11, 2015: The Chinese did an extraordinary currency devaluation overnight, signaling panic. Something we may, after the fact, name a Black Swan.



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To make profits and buy a BMW,
it would be a good idea to, first, survive.

–N.N. Taleb

My blog got an extraordinary number of hits a day or so ago. They were directed from another blog in which the authors cited the study I referenced in my essay titled  A Reader Offers Help.

The object of the study was to refute the work of a number of bearish market analysts. The authors claimed that the bears don’t know what they are talking about because the market has not yet gone down. Pretty silly. If a fire fighter tells you that conditions in your home town are dangerously vulnerable to wildfires, do you dismiss him as a dope because there has not yet been a fire?

The heart of the problem is the confusion about the nature of market forecasts. Properly given, a market forecast should give the investor an idea about the risk vs. reward in the market, stated in terms of probabilities. If a recommendation for action is given, a stop loss should also be recommended in the event that the forecast doesn’t yield results right away.

Robert Prechter’s forecasts were cited in the study for failing to produce the market decline he forecasted. Here is a review of Prechter’s analysis and recommendations:

Since March of 2000, he has held that the market was vulnerable to collapse. His recommendation for investors has been to avoid risk by holding cash. On four occasions since 2000 Prechter recommended shorting the S&P futures for aggressive traders. The market dropped immediately after he made the recommendations. On three occasions, the market halted it’s drop prior to completing a five wave pattern indicating continuation, and started back up. In each instance, the original protective stop loss had been moved down so that the trades were closed out with no loss. The fourth trade was different: Prechter recommended a short in the fall of ’07 when the S&P was at 1537. He closed out the trade in February of ’09 at 735 for a profit of 802 points. A single contract in the S&P futures would have made $40,100. The margin posted to carry the trade would have been $5,000, yielding a return of 800% in two years.

Throughout the period, conditions in the financial markets were not unlike the situation in the Western States of the nation: high risk of conflagration. So, the call for investors was to remain in cash until the financial weather improved.

It is no surprise to me that the authors of the article damning bearish analysts are mutual fund salesmen who argue that timing the market doesn’t work and that remaining fully invested at all times is the proper strategy. The fact that so many investors complacently buy the idea is confirming of my notion that the market is topping.

I believe that the primary goal in investing is to avoid being a sucker in uncertainty. What is known is that when markets get massively overdone like today, there will be a severe bear market. The uncertainty is when. These guys are putting their customers in jeopardy at a time when conditions are as risky as they’ve ever been. It cannot end well.



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

Posted in On Markets | Comments Off on Suckerville

What now for the Essayist?

Dénouement: n. the outcome or resolution
of a doubtful series of occurrences

En route to losing my job as chief  expector* of calamity, I’m reminded of nineteen seventy-two, another top like this one. Sixty-six had been the first time the Dow Industrials touched 1,000. After a setback it rallied back in sixty-eight before slipping off again. Then, in seventy-two, with the economy starting to get flaky, a final trip to a thousand before a bear market that would hold the Average well under that level for the next eleven years.

I was in my fourth year as a broker in ’72. Most of my clients were small business owners with a few bucks to speculate in stocks. I had them loaded with four or five big movers in the over-the-counter market (NASDAQ, now), and on margin. Our expectations, along with everyone else in the industry, were seriously high.

Top tick that year came right at the end of the year, and from January 1973 to August ’74 the blood ran in the streets. Meeting margin calls was grim, but the most painful thing was experiencing the destruction of our bullish convictions. Some of those stocks went to zero, but we just couldn’t give up. At some point, some time in 1974 we said, Sell now? We’re already down 80%!

After that, it was a long while before I could recommend stocks. I was paralyzed with fear in the fall of 1974, the best time to be buying. It was the beginning of a practical education in the art of making money in the market.

Today I use edges for making investment decisions. An edge is a combination of variables that, when present, tells the investor that one thing is more likely to happen than another. It is a probabilistic approach, the only sane way to deal with uncertainty.

The variables that matter to me today are just like they were in ’72: Lopsidedly bullish sentiment among investors, complacency in the face of a weakening economy, economists unanimously expecting the economy to accelerate, the highest valuations on record for stocks, with most of the gains in the S&P 500 Index this year accounted for by four big names: Apple, Amazon, Google, and Facebook, while more stocks are making new 52 week lows than highs. Meanwhile, both of the other Dow Averages, the Transportations and Utilities, are already headed down, diverging from the Industrials.

My edge today is to remain on the sidelines. If that is right, my long effort to argue the case for being in cash ends here. The next time I’ll have a compelling edge will be when, like 1974, all of the variables have reversed: The public has lost all its money and hates stocks, economists are predicting continued decline in the economy, and stocks are selling for the lowest prices and valuations in a hundred years. That’s when I’ll suggest that getting out of cash and into stocks is the thing to do. Not that anyone will believe me.

There won’t be much to discuss on the way to the buying edge, but I might post this chart, updating the “You are here” spot as it slides on down:

You are here



*Expector: dude who has been expecting something for a hell of a long time

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


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