On The Mindset Problem

It has never been my objective in these essays to call the top of a bull market. It matters not if I managed that if I didn’t have the proper frame of mind to take action well before the turn actually happens. The hardest, most mentally debilitating period lies ahead for the vast majority of investors. This little break will not disturb them. In fact, If we go up a few hundred Dow points over the next few sessions, they will relax, “knowing” that the drop was a normal “healthy” setback.

Then comes a bigger drop, one that takes the Dow down below 20,000. They will have a bit of discomfort, but their advisor will make them feel better by trotting out reasons why they should be at ease.

At about Dow 17,000 the average investor will despair. Now she begins to think about maybe selling some “when it goes back up.” It never does. Bear markets do not let investors who stayed to the end off the hook.

I’ve been making the case, based on extensive evidence to be found in The Socionomic Theory of Finance, that this top is a Grand Supercycle top that will not bottom before it sees the Dow Jones Industrial Average decline to below 3,000-about 90% lower than it is today. Most investors, totally unprepared for this, will not get out until well below 13,000, if at all.

There is no place to hide in the circumstance. All categories of assets, including real estate, commodities, stocks and bonds will be totally obliterated.

And then there’s the matter of investment income. “That’s my retirement income,” he tells me. Is now, but won’t be if we have begun a Grand Supercycle Bear Market. Stocks will crash, and then there will be a depression which makes it impossible for companies to pay dividends. By the time the dividends are no longer there the stocks will hardly be worth selling.

And bonds? Don’t get me started. On his deathbed, the Baron Von Rothschild is famously held to have said to his survivors, “Never buy bad bonds in a good market!” And, while the story is probably apocryphal, it is absolutely on target. Almost all bonds issued by anyone other than the U.S. Government will ultimately default in a depression that will come at a time when the global financial system, by any measure, is more leveraged that ever in history.

I will never tell anyone what they should to do. I will tell you what we do: we hold one and two year Treasury Notes. We do not care that the interest rate is low. Rates are going to go up significantly in the crunch, because lenders will demand ever higher rates to compensate them for default risk.

My heart goes out to anyone heavily invested in anything other that very short maturity T Notes and T Bills. Push comes to shove, and they might not be the best place to be, but it’s the best I can do for us. We will roll these forward until a bottom good enough to reinvest comes. The analysts at Elliott Wave International have been estimating that it should be here about 2021-22.

Good luck!

Rod

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