The French are revolting!

The French are revolting!

The French farmers, that is. And the Dutch. And the Belgians and now our very own British farmers – the nation that seems almost immune to modern mass civil unrest – are poised to join them in what I am calling Tractor Turmoil, As I have long maintained, the lethal combination of ever more draconian Net Zero mandates, the out-of-touch political elite bureaucracies especially in the sclerotic EU, and the high margin supermarket-enforced low gate crop prices is leading to the inevitable outbursts of farmer anger.

This is all part and parcel of the growing groundswell of anger that is sweeping the world. With the EU’s massive CAP payments to French farmers (that was originally designed to be reparation/transfer payments to France for their country’s destruction by the Germans in WW2) – and a currently high retail food inflation as crop prices they receive are unsustainably low – even this combination is not enough to keep them happy. And as the Net Zero screws are turned, a series of multiple whammies are appearing very likely in this Year of the Turmoil.

Adding insult to injury, the Net Zero measures, such as the ludicrous EU order to set aside 10% of a farmer’s land to planting trees, is alienating those farmer families who are currently living on the bread line (pun!). Not many people can eat trees.

Last week I asked if WW3 with Russia has kicked off. We already know that the Middle East has been a tinder box for decades and with the four-month old Israel-Hamas war, the match has been lit. And now the US has struck bases in Iraq and Syria in a further escalation of tensions with the unpredictable Iran. Anything can happen now.

With world turmoil ramping up, stocks are blithely zooming to new ATHs as visions of the fabled ‘soft landing’ appear in investors’ eyes. The VIX Fear Index remains well into the complacency zone.

Under the carpet is the ballooning levels of debt around the world especially in the US.

chart courtesy

Many are saying this debt doesn’t matter as it is owned by the public and is a debt they owe to themselves. But note the ballooning interest payments (green line) which has gone vertical. Most Western nations sport similar trajectories.

The UK debt repayments have now reached 10% of government spending. The scope for government spending reductions is zero with mandated increasing welfare payments and the need to increase Western defence spending from the current low levels in light of the increasing sound of war drums.

That means taxes must keep rising to keep a lid on exchange rates. And we all know that the UK has the highest tax take since WW2. Major tax rises here will ensure more civil anger and unrest (see Argentina’s civil unrest last week for a sneak preview of what can happen in the UK).

US Retail investors are blithely loading up with shares this year, especially in the Super Six (SS) in a FOMO mood, The Super Six, I hear you cry? Yes folks, the poster child for the EV ‘revolution’ – Tesla – has lost 55% off its ATH and has been kicked out of the Magnificent Seven. So we are down to only six generals leading the troops up the hill. Does this sound like a solid bull market on sound footings to you? No, me neither.

A note on how SS (formerly known as the M7) has come to dominate stocks.

Fund managers have an overwhelming reason to keep buying winners and sell underperformers to finance the winners. That is because Fund managers are compelled to keep buying winners/selling others to maintain their portfolio weighting benchmark compared with their peers. Being underweight the SS (aka not buying enough) is the same of being wrong and losing money (and possibly losing your job)!

This applies in spades with the AI sector – about the only game in town now that the EV and Net Zero revolutions are dying. This is how the herd instinct works among money managers today. They are being forced to keep buying AI by peer pressure – even those that have an inherently bearish outlook. And regardless of valuations. Many traders are keeping their eyes closed and fingers crossed as they press the Buy buttons.

That is one reason why Big Tech stocks are dependent on liquidity levels. The more low cost money available on Wall Street, the more ammo they have to keep buying (regardless of valuations) – and vice versa.

And when the vice vice versa kicks in, that is where buying starts to dry up and the selling can take over. This is how short term interest rates influences stock prices when valuations are of no concern. But eventually, valuations will matter especially when AI hope is currently trumping interest rate and liquidity experience.

With US short tern rates hovering around the 5.5% level and with the latest BLS jobs report showing no signs of a weakening economy (a big plus jobs miss on Friday), rates may even push higher – a total contrarian move against the overwhelming Wall Street expectations. A soft landing scenario?

But still stocks pushed higher over this Everestian Wall of Worry on Friday lead by the SS.

Incidentally, maybe I should rename the SS as it has certain connotations of crack downs by the authorities. Or maybe not….

The end is nigh – the S&P in final wave 5 of 5 of 5

It is rare for Elliott waves of several degrees of trend to pop out so clearly as they do today to offer a very clear message. And for market sentiment to be so one-sided as to scream: The Top is Nigh!

The confidence in my long-awaited very destructive wave 3 down in US indexes has jumped more than a few notches.

In Elliott wave terms, fifth waves are always terminal to the main trend. And fifth of fifth of fifths are even more so.

The above daily chart shows the wave patterns off the big wave 3 high almost exactly two years ago. We managed to capture much of the decline off that high into the wave 4 low in October 2023 (but missed much of the subsequent rally especially the wave 5 of 5 surge off the October 2023 low to the current ATH currently standing at Friday’s 4998.

Of interest is the 4998 high on Friday in wave 5 of 5 of 5

Market targets are often quoted in round numbers, and yesterday’s slight miss of the very extreme round number of 5,000 is notable I believe. When the exact round number is missed, a sharp decline often follows. I have a feeling that miss will become very significant next week.

Dumb Money is out!

Movies about financial markets usually appear around market tops. The infamous story of how GameStop ‘investors’ – a ragtag internet bunch of novice reddit traders, trolls and hangers-on – clubbed Wall Street ‘smart’ hedge fund short sellers in a money-losing retail gaming outlet franchise to death in the textbook short squeeze for the annals.

With the shares now down 90%, many have lost on their ‘investments’ but are they worried? In fact, some have revelled in their losses! That is considered investment success in some quarters.

And the movie was released last year and highlights how immune the get-rich-quick Reddit crowd was to their losses. Was this a rational investing approach? And does it shine a light on how much the gambling instinct has infiltrated the world of finance especially in the younger crowd.

And we know what happens to most gamblers…

Perhaps they gambled their Covid furlough payments as they considered it ‘free’ money for just sitting at home. Yes, the US and UK government response to Covid has produced unintended consequences months afterwards. And even more so in the major financial markets with their zero interest rates.

Some further thoughts on 2024

The current wave of anger will this year give way to fear, I believe. Already, there is an overwhelming fear of risk with the ‘new’ AI revolution discussion being dominated by moves to ‘regulate’ and impose restrictions on its development. But the cost of mandated risk reduction is being tested to the limits for car owners for their ballooning insurance premiums. And EV owners are certainly not immune with their premiums typically twice that of ICEs.

And when stocks turn down in earnest, company earnings will be hit, unemployment will rise, mortgage repossessions will increase as house prices will fall, bankruptcies will increase and the public mood will turn more angry. Fear will stalk the land and widespread selling of assets will accelerate.

The potential for a re-run of the Great Depression is there – but even larger. It has already started in commercial real estate and will spread to other sectors such as banking.

We should take evasive action.

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