Is It Time for the Wizard to be Laid Bare?

Crucial Economic Illusions About to Crash

by Rick Ackerman, Rick’s Picks

There are at least a dozen good reasons why the stock market should be falling apart, but we shouldn’t lose sight of the fact that the inevitable short squeeze will try its hardest to shift those reasons to the backs of our minds. For now, though, the bull market’s wrenching seizures feel as right as rain. The mood has been predictably festive in the Rick’s Picks chat room, where the the Dow Industrials’ 1018 point loss for the week elicited enthusiastic cries on Friday for more blood. As for the losers – clueless portfolio managers who have grown grotesquely fat over the last six years on Fed stimulus rather than from any particular knack for picking winners – it couldn’t be happening to a more deserving bunch.

Eliades’ Prescient Call

It’s not as though the bulls weren’t warned. Our friend Peter Eliades, for one, had predicted early in 2014 that the NYSE daily advance/decline line would make a “generational” top sometime between March 30 and May 3 of this year. This is looking like the stock-market call of the decade, since the actual top, based on a 33-year cycle, occurred in the last week of April. Check out Peter’s report from last January if you want to see how one of the most gifted forecasters in the business thinks. Others we follow who saw major trouble brewing include Bob Hoye, Alan Newman, Walter Murphy, Martin Armstrong, Michael Belkin – and of course Doug Behnfield, the smartest financial adviser we know.

As for Rick’s Picks, we’d concluded a while back that the bull was not likely to survive until October, the consensus month for a crash among permabears. We posted as follows on August 9:

“Last week ended with a flurry of buying Friday afternoon, but the rally was unpersuasive from a technical standpoint. I am on a hair-trigger alert now (see today’s E-Mini S&P tout) for signs that the widely expected October Crash may be starting in August.”

And so, evidently, it has.

No Real Fear…Yet

Even so, we doubt that Friday’s 531-point selloff in the Dow will trigger a Black Monday like the one that occurred on October 19, 1987. We had a front-row seat for that one because we were making markets in the trading pits of the Pacific Stock Exchange at the time. The Dow had fallen 108 points that Friday – a plunge more severe than anyone born after 1929 had ever witnessed. Traders and investors were shell-shocked, and the collapse was on everyone’s minds over the weekend.

This one is making headlines in Saturday editions, to be sure, but the fear factor is nowhere near what it was in 1987. The selloff was being attributed to concerns over falling oil prices and the economic slowdown in China. Undercutting this argument, however, is that both of these factors have been blatantly obvious for some time.

Of course, the economically ignorant hacks who write about the markets will always need to find a comfortable explanation when shares plummet. You’d think they would know better by now. For it is not the news or even major economic events that cause stocks to rise and fall; rather, it is the other way around: the cyclical ups and downs of stocks color our perceptions of the news. Thus, last week’s avalanche was no more ’caused’ by China’s slowdown and falling oil prices than the 1929 Crash was caused by news about the progress on Capitol Hill of the Smoot-Hawley tariffs.

Wizard Laid Bare

Now, if stocks continue to fall, it will darken our thinking about the events of the world. With the major stock indexes hovering near record highs for most of the year, it was easy for us to believe that America would continue to muddle along economically. This, despite the fact that Social Security and Medicare are hurtling toward bankruptcy and that the unfunded liabilities for these programs, together with public-employee retirement and healthcare obligations, easily exceeds $150 trillion. Baby boomers have little saved for retirement, and the millennials tasked with supporting them in their old age are barely making ends meet.

And yet, with stocks trading within easy distance of record highs, it was easy for us to think we could forestall the collapse of a superheated market for high-end homes, a $1 trillion bubble in auto loans and another $1.2 trillion bubble in loans to college student unable to find good jobs. We’ve held disaster at bay until now, albeit barely. Let the Dow Average fall 5000 points, however, and these problems will crush our illusions, laying bare the man behind the curtain.

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