End Days

The only way to have friends is to throw everything out the window, to keep your door unlocked, and never to know where you will be sleeping at night.
You will tell me there are few people mad enough to act like this. Well then, they shouldn’t complain about not having any friends. They don’t want any. 

—Joubert

While waiting to buy the market again, it falls on us, through the accident of our birth dates, to suffer through the tear down of the nation’s most precariously leveraged financial markets since the nineteen twenties. My grandparents went through that one. If you’re my age, so did yours.

Periods such as the one we are about to go through happen infrequently enough as to catch most investors by surprise. The required antecedent is the mindless piling on of debt in the service of accumulating wealth. Owners of all asset classes, eventually, have little in the way of equity, and lots in the way of debt.

Elliott Wave analysis indicates a high probability turning point is at hand. Social mood will be turning back down along with the market, and leveraged assets should go down hard, hurting investors who hold these assets, whether they themselves are leveraged or not. There is enormous leverage in the stock market, mostly on the part of hedge funds. Investors in hedge funds are about to find out that hedge funds are one of Wall Street’s favorite legal scams. They have remained popular, despite ample evidence that hedge fund managers are the only ones that make money:

In his book, The Hedge Fund Mirage, Simon Lack points out “in 2008, the hedge fund industry lost more money than all the profits it had generated in the prior ten years.” When he adjusts for hedge funds that have gone bust, thereby “wiping out investors entirely,” Lack finds that “they have lost an incredible $308 billion since 1998, while managers have walked away with $324 billion.” (EWFF, Aug 3, 2013).

Real estate had its first leg down in the 2007-’09 period. Much is being made about the recovery in that market to date. Well, OK, there has been a bounce, but only to the levels of previous recession bottoms:
Housing Starts

The weak recovery in housing starts is not surprising, given the overhang of homes in which the owners are upside down on their mortgages. Some 50,000 homes in Nevada are empty, having been abandoned by their owners, while, according to The Las Vegas Journal, 74,000 homeowners are more than 30 days late on their mortgage payments. The National Review reports that, nationally, the federal bailout for troubled homeowners has provided 1.2 million mortgage modifications and, so far, 308,000 have re-defaulted. Another 88,000 are presently at risk of doing the same. Boy, was that a dumb idea, sure to exacerbate the severity of the next leg down in real estate!

It used to be a given that a college degree was an asset that almost guaranteed long term employment with good income. Every Spring, in years past, representatives from Fortune 500 companies would descend on college campuses to snap up any graduate that could fog a mirror. Most of the recruits ended up on a career path to a middle management job with a comfortable retirement if they stuck around for thirty years. This is no longer true. Technology and globalization have all but eliminated average career opportunities for average employees. Yet the myth persists and, at precisely the wrong time, student borrowing for college has exploded:
student loans

The total amount of student debt is right at $1 trillion. Reuters reported in March that banks wrote off $3 billion in the first two months of 2013. So, 3 % is written down in just two months. Expect student debt to be a big contributor to the deflation directly ahead.

Far and away the most important asset to the vast majority of Americans is a secure source of income for retirement. Herein lies the biggest problem. Most workers in the private sector are relying on a 401k to do the job. Most 401k owners are heavily invested in the stock market, which will be very bad for the next few years.

Public sector employees, on the other hand, expect to get defined benefit pensions based on their income and years of service. It is increasingly apparent that politicians have promised more than they can deliver. The primary reason that state and local governments are in financial trouble is their unfunded pension liabilities. This is what brought Detroit into bankruptcy. It is only the start. A Pew research study recently reported that of 61 cities that have significantly underfunded pension liabilities, 58 are in worse shape than Detroit was prior to declaring itself insolvent.

Municipal bonds come under pressure, too. A municipality’s direct obligation bonds are behind pensioners for revenues. In short, there is virtually no place to hide from the deflation ahead.

N. N. Taleb coined the term “Black Swan” for an event that has three characteristics: It is generally held to be so improbable as to be ignored for contingency planning. It has a major impact when it does occur. And, after it occurs, everyone has, ex post facto, a logical explanation for it.

Looks to me like a Grand Supercycle bear market directly ahead is a Black Swan in the making.

Cheers,

Rod

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

 

 

 

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