All But Over

Don’t think. It’s the best
advice I can give you.

—from Isaac,
by Ray McManus

This will be my last essay on stocks for the remainder of the Grand Supercycle bull market. The preferred scenario is for the correction underway since the August 7 high to hold above 20,800 in the Dow Jones Industrial Average, and then stage the final advance to plus or minus 23,000. However, ratio analysis of the wave pattern, together with numerous time/price relationships, point to August 7, 2017 as an ideal date for the top.

A decline significantly below 20,800 increases the odds that the intraday high of 21, 179 was the ultimate peak, but either way, I don’t see any value in more discussion about the vulnerability of stocks. My next post on markets will be when the major averages have made five waves down of intermediate degree, indicating that a multiyear bear market is underway.

I do want to make some observations on the general mood of country and, based on the work of Gustave Le Bon (The Crowd, A Study of the Popular Mind, pub. 1895), suggest what this implies for the future.

The stagnation of middle class income, together with increasing control of the U. S. Congress by the nation’s oligarchy has been underway long enough–over forty years, by some measures–to get the attention of the country at large. Anger built up slowly at first,  but exploded in the last five years. Le Bon held that anger of this type eventually pushes individuals into irrational thinking. Discouraged and exasperated about a system that works against them, they subconsciously associate themselves with others who have similar issues, eventually becoming a crowd.

A crowd of deeply pissed off people does two things: casts blame for their difficulties on other groups, and seeks out would-be leaders who promise to tear the system down and fix it for them. A demagogue then comes to the fore and plays the crowd with populist rhetoric that is powerfully convincing and irresistible, given the dysfunction of the times.

Trump’s followers will deny this, but it is my opinion that they’ve been sold a bill of goods. I believe we have a demagogue in the White House now, and the outlook is either for the man to succeed as a fascist authoritarian, or for the nation to undergo a constitutional crisis.

The very existence of the person of Donald J. Trump is an affront to human decency. He is a narcissistic bully with the remorselessness of a sociopath. As a business CEO, his success is based on lying, cheating, stealing, and seriously hurting other people. He is illiterate and incurious. He is a canny ignoramus. He is a lowlife, cowardly misogynist. His multiple character defects are a matter of public record and easily accessible. Yet, he was elected President of the United States of America. What have we become?

Eight months into his presidency, Trump’s incompetence becomes more apparent by the day. But, desperate for change, thirty to forty million citizens cling to the hope that this morally reprehensible person can make their lives better. They flock to his campaign stops to have their resentments stoked by his outrageous populist  pronouncements. The man who would be the architect of the vision for a great nation makes policy out of those statements that draw the loudest cheers from the worst elements of his base, usually the ones with the most mean spirited intent. What, indeed, have we become?

We have become a kakistocracy, the Greek term for a country that deliberately chooses to be governed by its worst person.

America has devolved socially to dystopia. The endgame is total collapse. May God save us from ourselves. See you on the other side, sisters and brothers. After the fall, we can rebuild the Temple together.

Cheers,

Rod

 

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When Words Fail Me

There is always an abundance of stupid stuff going on at big market tops. This one is a stunner:

The VIX is a sentiment indicator that shows the implied volatility ahead. Low volatility is associated with rising markets and high volatility happens in crashing periods.

This chart displays the biggest speculative bet ever that the market will be stable, that is to say, gently rise, giving investors a super comfortable ride. This is an extremely crowded trade, which means that, with few if any speculators taking the other side, the market is primed for a very big crash. Now stare at the VIX itself:

The insanity of this situation is that the first chart is telling us that there is an unprecedented bet that the market will go up, causing the VIX to go down. This while all market metrics are screaming crash dead ahead. Note what happened from 2007 to 2009. Being short back then was disastrous and, this is the part that should interest anyone who owns stocks today: unwinding this short position puts enormous pressure on the stock market proper, making a bad thing horrific for anyone owning stocks or stock mutual funds.

Pretty dumb, don’t you think? Believe me, I’ve seen this before. It’s gonna be awful when it happens, and I don’t think it will be much longer.

One more thing: It should be clear to all by now that the United States of America is now a kakistocracy. I cannot imagine that this is bullish.

Cheers,

Rod

 

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Smoke Signals

We love because it’s the only true adventure

—Nikki Giovanni

We got back from the mountains last night and I charted the daily
Dow Jones Industrials. We look to have completed an ending diagonal triangle with a throw over:

Last time I saw this was August 1987. Shortly afterwards, the market turned down sharply, paused, rallied into September, and then crashed 32% in a day in October.

The overall condition of the U.S. Stock market is more vulnerable today by far than in ’87. It looks to me like a strong bet that the Grand Super Cycle bull market will top within the next 90 days.

Cheers,

Rod

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On Nature’s Way

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one.  The commonest kind of trouble is that it is nearly reasonable, but not quite.  Life is not an illogicality; yet it is a trap for logicians.  It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.

G. K. Chesterton

–You lied, she tells me.

–Did not, I say.

–Did So–You said Billy was coming to play.”

–He’s coming, dang it! He just hasn’t gotten here yet.

Little sisters can be so tiresome. Less so, now that I’ve grown up, are readers that grouse about me predicting a catastrophe that never seems to come. Said catastrophe, a bear market of Grand Supercycle degree, is an event that will follow a Grand Supercycle bull Market that began in 1784, and is tracing out the fifth and final wave. It is the timing of the top that creates the uncertainty. Tops can and do take their sweet time coming to conclusion. The certainty is that, when the characteristics of a top are present, a severe crash is going to be the outcome.

On March 6, 2014, I wrote:

On a sunny day, the snowpack 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.

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. 

The recovery since March of ’09 has been weak, and now, even before the U. S. stock market has made its final top, the economic data is rolling over. Locally, what looks like a healthy crowd of tourists in town is deceptive. They are not spending money, my merchant neighbor tells me. It’s a very small sample, but I don’t have to look far to find corroborating evidence.

The key is to be prepared. The market studies I employ have given several forecasts that have led to partial playouts of the no-place-to-hide-from calamity that is in the works. The topping pattern once again looks to be in its late stages. I think we should expect this one to be the one that leads to an epic collapse in the value of all assets other than cash.

After the top is in, sometime this year, buy-and-hold will cease to be a viable investment strategy for decades to come. My hope is that my friends and family will not be unprepared.

Cheers,

Chicken Little

 

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On What Infuences My Thinking

Decision Making In Uncertainty

 Two Paradigms: Mechanist and Socionomic

The Mechanist Paradigm: Action is followed by reaction.

Most financial analysts, economists, historians, sociologists and futurists believe that society works the same way. They typically say, Because so-and-so has happened, it will cause such-and-such to happen. (The Socionomic Theory of Finance, page 3)

The Socionomic Paradigm: A context-specific paradigm, limited to the domain of human social systems in contexts of uncertainty. (STF, page 621)

I suggest that serious thinkers of all disciplines are unwitting mechanists when facing uncertainty, assuming that their belief in a trend’s continuation is based solely on the facts at hand without any other influence. I believe there is compelling evidence that any decision or conclusion made on a matter for which there is uncertainty is made contextually, and the result is that decisions and conclusions are bound to be different when the context in which the matter is being considered is different, even if the facts appear to be the same.

The mechanist paradigm of decision making in uncertainty is a myth. The socionomist can show, in an extensive cataloguing of past decisions, that decisions made in uncertainty are heavily influenced by the underlying mood and pattern of the social system to which the decision makers belong.

The consequence is that the mechanist makes serious and costly mistakes at important points in the pattern. The mechanist, which is almost everybody, will be overly expansive and optimistic late in the pattern’s rising period, and overly negative at the optimal time, when the risk is minimal owing to the massive liquidation of investments and the failure of plans made before the collapse. The irony is that mechanists never take this into account when looking at their failures, pointing instead to other external causes to rationalize their losses.

The bad rap given to socionomics: mechanists ask two questions about the future: What is going to make a socionomist’s forecast happen (exogenous causation), and when is it going to happen (timing). Mechanists will be skeptical about the notion that the cause is endogenous (mood and the pattern of the particular social system-The United States of America, for example), and quick to dismiss the theory when the forecast, which was made probabilistically, does not happen “right on schedule.”

Why I like socionomics: I have studied the theory as it has evolved, and seen it in action over the last thirty-five years, with the result that the ebb and flow of markets, the behavior of individuals and the evolving economic and political direction of the nation has not surprised me or caught me unawares.

Socionomics is best at anticipating the conditions which create high risk in markets, followed by conditions that present the greatest opportunity. The socionomically-informed market participant desires first to avoid getting caught unawares when risk is high. Sidestepping a big crash makes it much easier to buck the pessimistic crowd when it’s time to step in and buy.

Socionomics had its beginnings in a method for forecasting stock market direction developed by Ralph Elliott in the 1930s. Elliott called his discovery Nature’s Law. Robert Prechter and A. J. Frost, using all of Elliott’s published material and their own observations, refined the method and published the definitive text, Elliott Wave Principle, in 1978. Prechter continued his observations, linking the pattern of the market to his further observations that there were changes in social mood that adhered to the pattern of the waves in the markets. Ultimately, he posited that social mood, abetted by the unconscious herding instinct, was the driving force in the pattern of the Wave in the markets. The result was a hypothesis, which he named Socionomics in his 1999 book, The Wave Principle of Human Social Behavior and the New Science of Socionomics.

Over the years, Prechter has presented the hypothesis in many academic settings, including the London School of Economics. The hypothesis garnered the interest of a number of social scientists, many of whom have contributed to the theory’s application. The Socionomic Theory of Finance, was published in January of 2017.

I continue to study socionomics and to arrange my affairs in order to be in sync with the probabilistic expectations of the theory. I find that socionomics is the way to understand the ebb and flow of man’s history. I see socionomics in Homer, The Bible, Western History and in my everyday conversations with friends and neighbors.

One of the big problems I’ve been contemplating is whether I’ve done a disservice to my family and friends in writing these essays, which purport to save the reader from the disaster of an expected economic crash. Lao Tzu held that we gain wisdom, the ability to make good decisions, by first making bad decisions. Should I not let nature take its course and allow everyone to experience what the markets have in store for the millions of people who are not prepared?

I don’t know. But then, I’m not so presumptuous as to think that what I have to say is the last word to my readers. I’m sure you’ll figure it out.

Cheers,

Rod

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Antifragility: Nature’s Cure For Dystopia

I try not to finagle God.
Some days go better than others,
especially during elections years.
I ask that God’s will be done,
and I mostly sort of mean it.

—Anne Lamott

To survive, natural systems have to periodically get their asses kicked. Without predators, deer will overpopulate, grow weak as a species, and perish for lack of enough food. Lucky for them, there are coyotes in the neighborhood to thin the herd. N. N. Taleb’s term for the phenomenon is Antifragility, a property of things that benefit from disorder.

Democracy combined with free markets is a formidable, and I would say natural system for societies to organize around to survive and thrive. But the solid values that inhere to it suffer over time as they devolve to what Pirsig called Static Values, a flawed body of concepts held to be state of the art for the system which, eventually, serve an ever smaller cohort of elites at the expense of the majority.

When such a state is reached, Pirsig’s observation is that a Dynamic Value will be introduced to force change. In the absence of coyotes, the disenfranchised sector of a democracy takes matters in their own hands, self-introducing the dynamic value. Revolution ensues. It is sometimes violent. It always brings about radical change. That is what this country has  underway now.

A good friend reads my essays and refers to me as Mr. Apocalypse because he thinks I’m forecasting bad times. Forecasting? The fuck’s he think we have right now?

Household debt, at $12.73 trillion, is above the$12.68 trillion in 2008, when the economy was growing at nearly 3%, three times today’s GDP growth. The ’07-’09 Great Recession stands to have been the warmup for the depression we are now in and placidly ignoring.

The June jobs report out today revealed a loss of 367,000 full time jobs, offset by a gain of 133,000 part time jobs. The unemployment rate is reported as 4.3%, but average income is lower on an inflation adjusted basis than it was in 1973 because so much of the labor force is involved in part time work.

Meanwhile, 608,000 more Americans exited the labor force last month. A total of 94,983,000 souls in this country have given up on getting a decent job.

Globally, unfunded pensions are about to surpass $300 trillion, and that’s not counting $100 trillion in US government unfunded liabilities (Mauldin Economics).

The laundry list of  economic ills besetting the global economies is the worst in my memory.

The analysis I base my observations on is forecasting profound disruption in the financial system, the economy and in politics, forcing an epic reset. Much of the debt outstanding today will default. Lenders will go under, pensioners will lose both principal and income, unemployment will soar, tax revenues will collapse, and, other than to say it will be radical, I have no way to imagine the politics of the nation at the bottom of the depression.

However, the same analysis indicates the nation will benefit from the disruption,  fully recover, and be much better off than it is today. We are coming to an end of a Grand Supercycle Third Wave up. The Fourth Wave will be the down wave, the Antifragility wave, which will collapse of all the excesses that have built up in the system in the same way as the down wave of  the 1930s. After that, it’s a new world with a fresh start for all, albeit from a lot lower base than we presently have.

Timing for the final stock market top is unclear. Best bet is still for one more short decline to complete a sideways consolidation that has been in force since late February. A lesser possibility is that the new highs right now will continue into the final high later in the year.

Can’t say that I’m looking forward to the immediate future, but I expect my grandkids will have a better time of it when they grow up.

Have a nice weekend.

Rod

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Correlations That Count

But small stalks in the sun
speak a harder truth—
everything unwilling to change will die,
everything that changes only dies a little

–Ray McManus, from Red Dirt Jesus

Feeling comfy with a 401k full of stocks? Might do to chew on this piece of information: The Vix (Volatility Index), commonly called the fear index, measures the expectations of traders for volatility in the market over the next thirty days. The higher the number, the greater the fear of loss. The importance to investors is this: Extreme high numbers come at buying opportunities, when nobody wants to have anything to do with stocks. And, with supreme illogicality, low numbers come when the worst thing to do is to hang on to a portfolio of stocks.

This is such a time. The Vix just dropped below 10 for the first time since the last market top in 2007. See below:

Of course, anything can happen, including a lower number on the Vix and new highs in the market. In fact, that is what I’m expecting. But the Wave count strongly indicates that, after the top is in, the ensuing bear market will be more severe, fall much further, and last longer than the ’07-’09 crash.

What to do? You decide, friend.

Rod

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Mood Trumps Trump

Did you know that stars only look brilliant
because we tell them to? That clouds are
the sky’s way of hiding the shame of its accent?

—Ray McManus

You read the news, carefully, I hope. I stare at charts to get a handle on what’s happening. Here is what I see:

I. Business is loaded with debt

II. But, suddenly, lending has fallen off the cliff, usually a precursor to a crash in the economy

III. This, right at the time investors are once again all in with stocks

The papers are full of “reasons” why the market has to go up from here. The wonky fact is that social mood drives prices in a pattern that conforms to the Elliott Wave Pattern in the market. Best bet is that there remain a few more squiggles and a new high in the Dow Jones Industrial Average and then it’s over and a bear market of generational severity ensues in the global financial system. Social mood will be down for decades and, after much loss, the papers will have “reasons” for it all.

Social mood is the unconscious herding instinct, very hard to buck. A colleague of mine, an old timer like me, says “I see what you see, Rod, but I don’t believe you!” That’s cognitive dissonance. He remains long the market (fully invested). I’m in cash, not short yet, but any day, now…

Cheers,

Rod

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On This Holy Week

A Sweet Lady Departs

Tuesday, April 11, 2017 at 6:50 pm Mary Constance Commagere Roth passed away after a short illness. Her legacy was to bring Maridel, David, Jack and Martha into the world and to be the nurturing influence that made them marvelous people and wonderful parents. One couldn’t ask for more. May her soul rest in peace. She will be missed.

This Easter Sunday I’ll stuff plastic eggs with cash and strew them about the back yard again. Connie’s mother started this tradition over fifty years ago. A third generation will be out on the lawn for the hunt this year.

Did I know that the Easter bunny and egg hunts are not some random marketing idea invented by Cadbury Chocolates? I did not. Maybe you knew that the Roman Christians attending the Council of Nicaea in 325 decided to hold Easter, the feast of the Resurrection, on the same date as the feast of fertility to make it easier to attract the celebrating pagans. Hence, bunny rabbits and eggs to signify fertility and new life.

Considering the Soul

Joseph Joubert wrote:

Soul.–It is a lit vapor that burns without consuming itself.
Our body is its lantern.

The flame of this vapor is not only light but feeling.

I think the soul is that ineffable aspect of humanity that offers the most promise for intuitively guiding me to a better life. Love-thinking about and caring about others more than I think about and care about myself nurtures this soul. I’m reminded that the way to do this is to be kind.

The Dalai Lama said:

Be kind whenever possible.
It is always possible.

Happy Easter! I send my love to my friends and family,

Rod

 

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High Confidence, High Risk

Sauve qui peut!

I used to read The Economist Magazine. Great reporting, written in prose that brought out the Anglophile in me, made me feel smart. Too bad it didn’t help me with what I most wanted, which was to know what to do about investing.

Even the best journalists are subject to the influence of social mood, and when mood is at extremes, they can’t help but “forecast,”  meaning, extrapolate the situation of the moment, either really good or really bad, out into the future. Stare at the chart of the Dow Jones Industrials below. Note the Economist’s magazine cover and comments just before the lows of 2009, and those of the current issue:

                                   

 

Obviously, the right thing to have done in the fall of “08, when the Economist saw only disaster was to have bought heavily.

The call by the analysts at Elliott Wave International was to cover short positions. Today’s Economist forecast is for a great advance. The March issue of the Elliot Wave Financial Forecast calls for a further decline over the short term, followed by an advance to the final highs later in the year. After that, a bear market of Grand Supercycle dimension. Nothing like this has been experienced by anyone alive. It promises to be more severe than the Great Depression of the thirties. Not something to take lightly.

The Elliott Wave Principle is the most valid method of analyzing markets I’ve found in my fifty years in the market. It is based on pattern and the math of nature: the Fibonacci series. Support for the analysis can be found in measures of investor sentiment, valuation of the market, and momentum. At extremes, they signal a change in direction. This is one of those times.

Valuation is very high, momentum has been slowing for some time, as volume declines and fewer stocks continue to advance.

Sentiment is positively off the charts, everything you would expect to see at major tops. Individual investors, investment advisors and large speculators are betting the house. The commercials, major professional firms that tend to be right, have their biggest short positions on in years. You could look it up, people. What side do you want to be on??

Right frigging here is when anyone with money in the stock market ought to haul themselves off to a mountain top to do some serious navel gazing. If this is you, take it as understood that you’re in bad company. Best bet is that you’ve got six months or less to the end of a bull market that’s 143 years old, due any moment to begin a long, painful journey to ruin.

I don’t give specific investment advice. I do specifically advise you re-read the March EWFF and make up your own mind.

Traders are calling the run up since the election the Trump trade. In hindsight, it will have been the Chump trade.

Cheers,

Rod

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