On Why I Think What I Think

Our reality-based assignment is the intelligent management of contraction.


Well, look, it was the party to end all in the late nineties, and we were so caught up in the excitement that we took it all as normal behavior. And it was. It was everything a market student would expect at a Grand Supercycle top in social mood.

With the tech sector exploding, we felt we were the fortunate souls that would participate in a new era of endless growth. The stock market was soaring, and day traders were making insane money in the markets (so they claimed). The malls were clogged with consumers, showboating as they madly shopped on credit.

If consumption was conspicuous, charitable giving was beyond magnanimous. Financed by private donations, dozens of hospitals, museums, schools and other institutions sprouted fancy new wings and facilities, all named after the benefactors, of course. Ted Turner, el maximo showoff, pledged a billion dollars to the United Nations (987 million given so far. Way to go, Ted!). Largess was everywhere. The Superzipper parents of Cindy’s private school kindergarten class asked the school-I am not making this up-if they could send Cindy to Paris for Christmas (the school said no, dammit).

The too much of it all, together with record setting stock valuations, were loud signals that the game was coming to an end. Stocks did top in March of 2000, but, as is typical of tops, the ebullience persisted for a while. Even after 9/11/2001, when Dubya said, “Don’t worry, go shopping!”, we did, allowing ourselves to be treated like children to be mollified because we still believed in Santa Claus.

But, big problems were now baked into an economy in which the shopkeepers had long since quit watching the front of the store. As stocks rolled over, the tech sector went bust, and suddenly virtually all businesses were coping with too much capacity. Years of building shopping malls and houses in cow pastures, while corporate CEOs were systematically leaching costs out their businesses (read employee incomes and benefits) for the sake of short term gains in stock prices to benefit their stock options, left the economy bloated with debt and misallocated assets. Government was now the private fiefdom of big money. Wall Street, the financial center of the country, had turned into a killing field for sociopaths intent on fleecing a gullible public.

A market student understands that tops in social mood spawn these weaknesses and, to get the system healthy, the rot must torn from its sick body. She also understands that  there is no natural will in a free society to do this because anything that is done to deal with the problems will result in somebody taking a financial hit.

Problems in the nation’s pensions systems are a case in point. Virtually every city and state in the nation has significantly underfunded pension funds. There are only two ways to fix this: raise taxes or cut benefits. Either way, somebody loses out.

Nature’s Way, as Ralph Elliott observed, is for the work to be done by a bear market, which plays out in three psychological legs: the first leg down is the Wake Up Call that tells us what we’ve got. The second is a counter trend rally, during which the desire to suspend disbelief in reality begins to give way to anger and the impulse to blame others for our difficulties. The third and final leg is the washout that sets the stage for the next real bull market.

The first leg down bottomed in March ’09. The rally since has been extremely speculative, with poor fundamentals. The advance has been driven by hedge funds, heavily leveraged, many on behalf of their pension fund clients, seeking every possible form of magic to make up for seriously underfunded pension obligations. The general tone is desperation, not elation. This is how a countertrend rally feels, even when it makes new highs in the popular averages.

While the market has risen, anger about Wall Street’s thievery and Washington’s cronyism has boiled over, along with an intense desire to blame these institutions for an economy that favors the superrich and penalizes everyone else. As yet, none of the economic or political issues the previous bull market brought about have been resolved. Cleaning out the debt, forcing change in corporate governance, and reorganizing the lives of the men and women in Washington and on Wall Street that have ramrodded our grief by sending them off into retirement, are all functions of the final, terrible washout in the market and the economy. There will be no bull market until this happens.

In short, the good times won’t arrive until the final  down wave in this Grand Supercycle bear market does its work. I think we are about to start the beast. But, then, I’ve thought this before.



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

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