Friday's Thoughts for 11-09-2012
We witnessed the bearish aftermath of the US Presidential Elections on Wednesday and if you haven't guessed this is just the beginning I am afraid. If this isn't a wake up call for the rest of you that have ignored the painfully signs of a financial decline in the making, then I don't know what will be.
However, 'Capitalism' is still very much alive and clearly recognizes the pitfalls of any financial system inching its way towards socialism as the US appears to be headed. This decline in the markets just didn't start on Wednesday, November 7. It has been in the making for decades and since 2008 it has just reared its ugly head. Hopefully waking up more of those who thought the past several years was just a passing fancy, but one built on an unsustainable and fragile crystalline house of cards that can not go higher.
There is much talk today of the marketplace's decline as a backlash to Obama's win. In reality it is the whole picture of declining World finances, rising unemployment and a US financial cliff that is becoming clearer to investors and traders alike. Nothing has changed. The same players that have brought us the false hope of improvement last year are coming back into town with even more debt and higher taxes for the unwary to absorb.
What [has] spooked investors is a bigger picture that recognizes the economically catastrophic implications of a second Obama term. To be clear, there is nothing Romney could have done to avoid the deflationary Depression that lies ahead. However, a Romney presidency might have at least served as a reality check, delaying the onslaught of hard times for perhaps long enough to allow Americans to put their financial houses in order before austerity hits with the force of an earthquake, as it has in Europe.
Now, with a $16+ trillion federal deficit that is growing by more than a trillion dollars per year, the nation’s descent toward insolvency can only accelerate, further widening the gap between tax revenues and outlays. Soaking the rich, even by taxing them at 100%, would not begin to arrest the decline, but just try to tell that to those who voted for Obama. Bread and circuses will be their reward, and far be it from us to predict that they will feel unsatisfied.
Many investors and traders alike are just getting over the bull run hangover and what a headache it is going to be for those that do not see the decline coming. The US stock market and the economy is constructed in a 'house of cards' that has reached unbelievable heights and the crushing weight of debt will soon send it to the basement.
A missing and troubling feature about this cyclical bull trend in equities since early 2009 is that it has lacked a bullish major economic theme. Historically, every cyclical bull market has been driven by an underlying theme that carries on from the start of the bull cycle to its eventual demise.
It's also a monetary policy that is as unsustainable as current economic growth would be without it. This is not a theme that secular bull trends are made of, history is likely to show it as no more than a bridge of artificial support that holds equity prices at unjustifiable levels as the indices mark time in-between bear market cycles.
When the next secular bull market begins, it will be based on an optimistic outlook, a new vision of the future being better than today.
(From the remarks section)
QE has really just provided liquidity, which the big players throw around attempting to generate some profits via various financial schemes.
So regardless of QE, without the government spending via massive deficits, the direct heroin fix to corporate revenues and earnings will fade away now. Which is almost certainly why corporate revenues and earnings are starting to fall now.
I myself have wondered for some amount of time, as I have mostly sat out on the current bull market, why in the world people would be buying a rally based on nothing more than the government printing presses backstopping the losses. After QE3 & Draghi's comments about the ECB, I realized that the entire rally is built on exactly that. How I could miss something that obvious is humbling.
Funny enough, it actually works too...until it doesn't. At some point the government will have to stop the spend-a-thon, and the private sector along with individuals will be unable to fill the gap. Queue the new bear market.
QE's are temporary head fakes before the third (hopefully final) downward movement in this secular Bear.
A marketplace made up of glass cards is not exactly the place I would like to have my portfolio. Personally I believe we have seen the secular top and have begun the trip down as the 'house of cards' starts to fall and collapse under the weight of increasing debt. I also think that the time to abandon this sinking ship is past and wouldn't hesitate to recommend taking a loss now to prevent a larger one later.
I think we're getting close to a secular top. At the very least, I think a cyclical pullback of 25% or more is now in play. After that, the market could go nowhere for a while, or it could embark on a longer trend downward.
If you're overweight the market, it's time to think about pulling some of that exposure in. If you're on the sidelines, I think this is one of those places where the odds of getting rewarded in proportion to the amount of risk you're taking are much too low for my blood.
Let's be clear, just in case you missed it, writes Karl Denninger, “The markets are going to blow up again – Get out”. In this compelling article he writes about some disturbing facts how certain companies are leveraging way beyond where Lehman Brothers was when they went bust. This potential bust is leading us to a real showdown between the bulls and the bears sooner rather than later.
. . . further evidence that the entirety of the market is, at present, stuffed full of alleged "positions" for which there is no capital whatsoever -- these positions are literally credit created out of thin air, and when, not if, something goes wrong, the forced liquidation will lead to widespread destruction of firms and prices exactly as occurred in 2008 -- but worse!
The time has come to tie up loose ends and sit out the coming storm that Ben Bernanke help build. If you are still long, the falling knife syndrome will certainly slice off a few fingers if you are not cognizant of the impending dangers of the deep and dark waters of this elaborate ponzi scheme that lies ahead. In fact it may be too late for some with serious long positions and will have to wait out the fall looking a paper losses and higher taxes to boot. It isn't a position I want to be in.
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Written by Gary