Buying this dip? Avoid it like the plague!
I must be one of the few operators in the financial markets still working that had a ringside seat for the 1987 Crash known as Black Monday when the Dow fell by 22% in one day. That day has haunted me ever since. I was a trainee commodities futures broker in a small office in Los Angeles and watched transfixed as my suitcase-sized monitor with its green Quotron screen flashed the carnage in the S&P all day long.
The furious action in stocks in recent days has had me reminiscing!
The vast majority of operators today are too young to have had that experience – and that is why it is often said that share slumps only arrive when no-one alive can remember the last one. The most recent crash was of course in 2008 – and even that one is too far away for many of today’s hedge fund algo kids to remember.
A crash of the current magnitude required a maximum build-up of bullish sentiment and complacency beforehand. Without that, crashes cannot occur. The hopper must be full of exuberant bulls to produce the cascade of selling we are seeing – forced and otherwise.
As I said before, the coronavirus is the perfect Wall of Worry that markets were finally incapable of overcoming. Prior, all Worry Walls were easily surmounted especially last year when the underlying signs of a weakening global economy were evident to those prepared to open their eyes and see them. The gap between the economy and stocks yawned ever wider. That’s what an extreme mood of complacency does – it ignores all evidence for caution. Until it’s too late. That’s when true contrarians such as yours truly come into our own.
Last year, momentum was king! Why worry so long as the FAANGS were advancing with only minor setbacks which were heaven-sent dips to buy? And that extreme psychological state was ripe for the smashing, as I noted at the time. And with what a weapon! I cannot think of a more devastating risk to markets and economies than a pandemic. It shuts almost everything down – and is the prelude to massive social unrest, as I have stated before. Fear is rampant as the rising death count is plastered all over the media.
In fact, social unrest has already started. Here is one report of such in the USA with looting and panic buying of guns for protection (?). This is starting to get real ugly. Here is a scary chart of the surge in online searches for “buy ammo online“
Unlike the notoriously fake ‘global warming’ hockey stock graph, this one is genuine. It’s a bull market in guns and ammo!
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The dollar is surging – again
The race to the bottom is on! And the US dollar seems to running dead last in this race, despite several Trillions being promised to ‘support’ consumers and businesses as the economy grinds to a halt. But other nations have set up similar relief programmes, so why is the dollar holding up compared with the euro or sterling?
For one thing, the dollar remains the world’s reserve currency and the vast majority of international debt is priced in dollars. Rating agencies are starting to review their assessment of the various credit-worthiness of nations and companies and will be downgrading much of this debt – and much will lapse into default in this deflationary wave. Watch this space.
That puts the dollar in great demand by the remaining creditors in order to keep paying interest on their mammoth loans and to avoid default. The balance of demand for the dollar and the other major currencies is being heavily skewed in the dollar’s favour. And as the bond defaults grow, demand for the dollar will surge.
Not only that but there is a dollar shortage within the arcane world of repo Treasury funding. That has piled more upward pressure on the dollar.
And the charts appear very favourable to continued dollar strength
I have a nice five wave red ‘a’ wave to the 104 high last months, then a three down in a ‘b’ wave to the textbook Fibonacci 62% retrace and now we are in a ‘c’ wave that should reach at least the old high of 104.
Naturally, I am bearish the euro and sterling. Both economies have piled sovereign debt upon already massive debt loads to fund their ‘support’ programmes (which may have to be increased further if as I suspect, economies will not get back to ‘normal’ anytime soon to get tax revenues flowing in)!
We really are sailing in uncharted territory. Remember, Britain funded its war effort in WW2 by massive loans from the USA. Apparently, we ‘won’ that one, but paid the victor’s price by austerity forced on the populace for years thereafter. Meanwhile, the ‘losers’ Germany and Japan received Marshall Plan aid and recovered much more quickly. Lesson: If in a war against the US, make sure you lose it.
But in this current virus war, there is no deep-pocket USA to bail anyone out – we really are all in this together. That is why the pandemic was the one blow above all others that no-one could benefit from. The ultimate Wall of Worry is making us all losers (except toilet roll manufacturers!).
A few more thoughts on the pandemic
While I have stated that the global economy was ripe in early 2020 for a shock to the system, I did not imagine a pandemic would appear on the scene to transform the historically extreme bullish mood to one of extreme fear (not yet panic).
And while we have mostly meekly followed the self-isolation ‘advice’ (aka orders) of our glorious leaders to try to contain the virus spread, signs are growing that this approach may be wrong. Many leading virologists and scientists/engineers are asking if the cure is worse than the disease. After all, this is a new strain and most people who contract it remain unharmed.
Here is a thoughtful piece by a very capable US engineer who casts doubt on the wisdom of the US and UK approaches compared with the trillions to be spent.
But my point is that the reaction of politicians to the pandemic threat has been savage and utterly destructive to a vast swathe of people’s economic lives. It may even be seen to be over the top. Soon, anger levels will erupt at what many will see as a needless attack by the state on their selves and families. They will see that many of the reported fatalities would have died soon anyway from their underlying conditions – and the regular un-noticed seasonal flu deaths far outstrip the ‘official’ coronavirus deaths so far. No shut-downs have resulted from these.
But my point is that this scenario for a Deflationary Depression was in the works last year anyway – it took the reaction to the virus threat to bring it about. It was the rapid swing of social mood from extreme bullish to extreme bearish that resulted in the current ongoing economic destruction.
The darkening social mood – as measured by the savage falls in stocks – will ensure an upcoming revulsion to governments and politicians in concert with the ubiquitous UK quangos. We may even see revolutions in the streets before long if we are forced to endure more self-isolation as the warmer weather will tempt us outside. Hmm.
