February 28, 2014

Seasons, Cycles & Spirals

Free-market Capitalism is morphing into a Corporatocracy that knows no bounds.

Herds of investors and speculators are smiling with glee and excitement upon witnessing consistently higher highs in equity markets for the past 5 years - despite chronic economic malaise in almost every sector and socio-economic group. The entire global banking system was on the verge of seizure merely 5 years ago - and yet the global equity markets have managed to print record highs consistently and on-demand ever since then.

Nothing has changed

Large banks are still leveraged and profiteer at will after absorbing hundreds of their smaller regional cousins since 2008 and receiving Trillions of dollars in financial support. Politicians are still points scoring for votes with rhetoric and teleprompters. The banking industry is still protected as if it was the golden goose. Central banks continue to implement the same dovish policies initiated in 2008 - easing very much and disclosing very little. Ratings agencies are as pliable and malleable as ever before. Regulators are still behind the curve and turning a blind eye - all in subservience to large banks who provide their funding. The self-regulating model of regulation is so much more market friendly, to be sure. And investors continue to be buffeted as they attempt to cling on to anything that floats in the stormy waters of today's markets - for now its equity market strength and US Treasury/Bund safety.

Not a trading week goes by without economic reality highlighting anaemia and dystrophy, only to be counter-punched by mass economic perception that employment is improving, inflation is stable and growth is recovering. Every single estimate from every single source, has overestimated the rate of recovery. The themes that get market traction are rarely rooted in reality. The business media such as CNBC/Bloomberg loves to debate inconsequential factoids and trivia while lambasting anyone who disputes the ridiculous mirage of economic well-being and for disagreeing with the kleptocratic status-quo. Several banks have admitted to price fixing, collusion, insider dealing, money laundering and even drug trafficking but those practises are never admitted to be rampant. Instead, financial crimes are PR'd as rogue, lone-wolf occurrences that are rare and limited in scope. The hypocrisy keeps growing and while petty thieves go to prison, the grand thieves get a pat on the back, invited to resign with honour and receive a golden handshake. Economic travesties are rewarded with positions of power, wealth and influence, not to mention a nice pension.

The lower and middle classes change places and share a decreasing share of the pie - while the aristocracy feasts and grows plump - protected by lawyers, civil servants, lobbyists, security services, PR moguls and 'yes-men' of all shades and varieties. If a shred of information threatens to hurt establishment interests, it is quickly classified; its source accused of endangering national security and anyone sharing it labelled as 'non-credible'. It all transpires with gruelling inertia and eerie inevitability.


The huge asset price appreciations over the past 5 years in equities in particular indicate yet another bubble being inflated; only larger and more egregious. This time, not so much led by exuberance but by illusory memes that were borne out of fear, grown on greed and fuelled by debt. In today's financial environment, starting a business without taking out a loan is unthinkable. Even profitable companies with strong capital reserves that do not necessarily require debt to operate, still routinely take on debt in the interest of boosting profits and growing larger. 'Growth' is the buzzword every politician, economist or central banker spouts as if 'growing' is the purpose of economic activity and economic policy. For those unaware, here is a definition of 'economy':

The purpose of any economy is to adequately allow for the distribution of resources amongst its population - it is not to achieve x% growth. Growth should be a by-product of a successful economy, not its ultimate goal. Instead of saying that the aim of economic policy is to generate stronger growth, central bankers and policy-makers should be saying that the aim of economic policy is to achieve 'the best possible allocation and future development of resources available to the economy'. They will never say this because such a statement would encourage de-centralisation, power sharing, wealth distribution, resource re-allocation, policy changes and equality - all things that the establishment despises. And also because anyone hearing such words is compelled to think and shout 'communist' and groan on about how the best available method of resource allocation is capitalism. It probably is were it not for the fact that every political system in history has failed not because of idealistic error, but rather because those implementing them have become drunk with corruption, greed and tyranny.


The swings between each boom-and-bust cycle are increasing in amplitude and the frequency with which they occur. Just like the weather where the summers are hotter, the winters are colder. Storms, floods and earthquakes are all occurring more often and to further extremes. Just as in nature, markets have seasons, cycles and spirals and symmetry. The question is: will investors' foresight for once outweigh their ignorance of hindsight? Probably not (unfortunately).

As recently as yesterday, the new Fed chief Janet Yellen, an uber-dove, was quoted as saying that "at this stage I don't see concerns" when asked about the potential imbalances in financial markets due to the stance of monetary policy. With poignant foresight such as that, coming from a seemingly respectable, economic heavyweight waving grand credentials, there is trouble ahead. There are many perceptions but only one reality.

Chart showing Dow Jones Industrial prices since 1984 (no pun intended)

For those investing in equities, be aware of the ultra-long term pattern taking shape. From the chart above, the Dow Jones Industrial Average is at a key crossroads and considering the inevitability of the boom-bust cycle, the next bust phase may be the largest in the Dow's entire history. The peak-to-trough decline is happening faster and falling more in nominal price terms since the dotcom bust in 2000 and the GFC in 2007/8. Past performance is indicative of future performance - it just depends on the time scale and how pedantic you want to be. Just like the seasons, equity markets are ripening for a decline.

History repeats itself?

The clock is ticking for yet another Lehman-style surprise to broadside the markets and for whack-a-mole games to begin in earnest as speculators scramble in search of the weakest companies to short. It has happened before and its drifting in that direction again. All that's required is a prolonged shortage of short-term credit on the global financial exchanges and eventually companies stop being able to breathe. Weather effects included.

Debt and phantom credit has become the very life and blood of modern economies.  An economic bust phase is inevitable  because boom-bust cycles have repeatedly occurred throughout history in all nations of the world. Timing and extent are the two mysteries. Wondering how high the Dow will go before it crashes is like asking on what day will a caterpillar become a butterfly.

The Dow could be trading close to 5,000 by the end of 2016-mid 2017 when overlaying technical analysis to the fundamental outlook. However, when the bust phase begins, the decline is likely to be more rapid and extensive than the previous two declines in 2000 and 2008. Even what we consider extreme, can be volatile.

Hope is the kindest nurse

The majority deem it safer to invest in crowds rather than swimming in a minority in the stormy waters of such speculative markets. Under the surface of all the false economics is the ugly truth that the majority of developed nations are in a quagmire of debt and credit, all magnified by derivatives and fractional reserve banking.

The possible scenarios are:
  • there is a significant market crash that completely transforms the structure of how the world's monetary system operates - which would presumably include a significant decline in the USD, lower stock prices in all sectors (especially financial), massive commodity price tilts, huge increase in base metals such as Gold and Silver, alongside stratospherically higher short-term interest rates in most nations but to varying degrees.
  • alternatively, the monstrous tangle of debt/credit lingers on for years, the can being kicked down the road by everyone who doesn't want to pick it up. This scenario will require the Fed/PBoC/ECB/BoE to keep flooding the markets with more capital to sustain zero-rates and prevent mass bankruptcies. Central bankers will also need to invent more imaginative names for the same disastrous monetary policy of 'print more, buy more, hoard more'

    An economic system built on financial debt servitude and devoid of all fundamental value will eventually fail and fall apart - despite the perception that it won't. Empires rise and fall and the "best laid plans of mice and men often go awry". The next 12-18 months will be an incredibly testing, yet very opportunistic time in the financial markets considering all the events that are due to transpire. Asset price moves in 2014-2015 could potentially be as infamous as those of 2008.

    The shocking thing, is that scholarly economists such as Janet Yellen, Ben Bernanke, Mario Draghi et al. should be working to stop and reverse the trajectory of monetary policy in the G20, but instead, they are collectively colluding and accelerating it - and dragging billions of people into the jaws of an economic catastrophe. 

    Written by George Tchetvertakov