Ode To Bagholders

These are the only genuine ideas,
the ideas of the shipwrecked.
All the rest is rhetoric, posturing, farce.

–Jose Ortega y Gasset

Habit dulls the imagination. After the first stock market drop a few weeks ago a friend said, “I just stay put with my stuff. It always comes back.” Well, it does come back. We have seen it, actually experienced a full recovery several times since the Cycle bull market  began in 1974. The Dow Jones Industrial Average began at 574, rose to a peak of 11,656 in 2,000, fell to 7,100 in 2003, recovered and climbed to 14,200 in 2007, fell  to a low of 6,400 in March  of 2010, and peaked this last time on October 3 at 26,916.

This recent history has left investors unprepared for what the Wave Principal indicates is now at hand. My interpretation of the price action over the past two market days is that a small retracement wave has likely completed. The prospect now is for a violent Wave 3 down in a Supercycle bear market which carries the Dow down to below 14,000 initially, to be followed by a partial recovery rally for several months, then leading to a multi year continuation of the decline which won’t reach a bottom until 2020-21, probably down around 3,000.

Yes, the market will come back, but not likely in the useful lifetime of any present investor, retired or soon to be retired. The market today is modeling the 1929-32 experience. The top in September ’29 was 392. It fell to a low of 41 in May 1932, and did not make a new high until 1956, twenty-seven years after the ’29 top. Who alive today can benefit from riding through a period like that? A period that will most certainly include a depression that will play havoc on all manner of investment assets.

This is a rare moment in the global financial history, but not without precedent. If it happens, it will be a Minsky Moment. The term came from the work of American economist Hiram Minsky. Wikipedia’s description: A Minsky moment is a sudden, major collapse of asset values which generates a credit cycle or business cycle. The rapid instability occurs because long periods of steady prosperity and investment gains encourage a diminished perception of overall market risk , which promotes the leveraged risk of investing borrowed money instead of cash.

My view is that the global financial condition today lines up perfectly with the market’s wave pattern. We should be prepared for a Minsky Moment.

Readers know that I do not give investment advice. I try to give my family and friends a look at what my studies are indicating, and what Cindy and I are doing about it. I let everyone decide for themselves what, if anything to do.

We do not own any stocks, corporate or municipal bonds. Cindy’s retirement account is invested entirely in one and two year U.S. Treasury notes. But if we did own stocks or bonds, this is what we would do:

A drop below 24,000 in the Dow Industrial Average anytime in the next few market sessions would confirm that Elliott Wave 3, the crash wave, was most probably underway. To protect our position we would immediately call our broker and instruct her to get us out of all stock and bond mutual funds by shifting into money market funds. To further liquidate any individual stocks, bonds and exchange traded funds, placing the proceeds into money market funds as well. This action would protect us from a Minsky Moment. If it happens, we will decide what to do next. If it does not come to pass, we would be able to get back in without much in the way of cost.

Here’s the thing, though. I do understand that anyone invested today will have a very difficult time doing this. It is the most human perversity that fear is the governing factor in uncertainty. Today the markets are at their most overvalued in history, but investors are not only extremely comfortable with their portfolios, they fear that if they were to get out, even for a short period, the market will run off, leaving them at the station.

I went through the bear market of 1966-1974 as a young broker. I know from personal experience the fear at the other end: in 1974, with the market losing value day in and day out, it was near impossible to buy stocks, which were becoming greater bargains by the day. The overwhelming fear, of course, was that anything we bought would go to zero the next day. What a time to be bullish!

It was out of that experience of being brutally shipwrecked that I got the idea that I should buy low and sell high.

Good luck,



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