A funny thing happened to the financial markets since the new year. Suddenly, a great many unicorns are pulling up lame, and what about the rainbows they were paraded across you might ask? Well, they seem to have been painted with watercolors, for the reign of reality has shown they were far from anything naturally weatherproof. Let alone permanent.
The issue at hand isn’t something to gloat on, nor some version of, “See I told you so.” What must be made clear is for all the people who chuckled, sneered, brushed off, or anything else the warnings from people like myself, as well as others is this: The new reality is nothing more – than the old reality. And nothing brings on tears faster than reality.
Over the last 5 years the consummate “bear” or short side player in the financial markets has been used as a virtual piñata for the so-called “smart-crowd” paraded across the financial media landscape, along with a newly minted herd of indignant to reasoning “bulls.”
Over, and over, and over again. (did I say over?) Month after month, year after year, any type of weakness in the markets has been met with nothing but buying action. The markets have been up, up, and away on nothing more than a “free money” buying spree. Although the a fore mentioned “smart crowd” incessantly argued otherwise.
Fundamental analysis has been absolutely worthless. Most charting patterns or technical analysis (primarily in the main indexes or correlated ETF’s) has been near worthless on holding any positions overnight – unless one has been a bull. Nearly every technical setup of a bearish nature has been nullified within nearly 48hrs for years. Bullish setups might be more statistically favorable to positive resolutions. However, not at the rate they have been over the last few years. The statistical odds just don’t work that way. Unless – the game has been rigged.
The issue front and center is if one has allowed themselves into believing their success has been from skill rather than just the beneficiary of Lady Luck. For this is where Lady Luck can also show; she can be one mother of a heart-breaker to the uninformed. (let alone make a gold digger blush with an unrivaled swift and thoroughness as to empty one’s account.)
Statistically speaking the main indexes sported a sell off this past month which not only has been near nonexistent for years, but also rather uncommon in decades past. Many have pointed to these occurrences and are expressing “bullish” outcomes or resolutions. i.e., Far more upside to come. I however think something is far different this time.
I could be wrong, and many will point to the recent bounce as proof which has worked every-time since 2008. So why would this time be any different? I believe it’s different because of 2007 thru 2008. All those other times people were actually getting in, or back into the markets. Today, not only are they not in, at every chance they take more out to reduce exposure or increase their safety in cash. (I know cash is a relative term, just think, “bird in the hand vs two in the bush” for this argument.)
To back up my thesis I use the following article that was posted on ZeroHedge.com. (for full article click here)
Equity Funds Have Largest Weekly Outflow In Over Two Years
One may think the data irrelevant however, since the charts, amounts, and other data points are supplied than none other than Bank Of America®. It should at least be taken into account that something has changed. And not for the better in my view nor would it seem one of the worlds, “Too big to fail” protected banks.
Data like this isn’t something a financial adviser at one of these banks is going to whip out in a PowerPoint™ presentation to conclude why you should turn over your assets to them with confidence. Is it?
The real issue at hand here is as I said before: “The new reality is nothing more – than the old reality.” But what exactly do I mean by this. Well, its two-fold. First – Its beginning to once again look, sound, and a few other things exactly like when we were all supposed to take comfort in the financial media “smart-crowd” as they reassured us over, and over, and over again that there was; “Nothing to see here people. Please keep moving (or contributing to your 401K) Please!” Only to then be hit with one of the greatest financial shocks in modern-day history.
The second which I believe and have said on numerous occasions is far worse: “Nobody’s going to wait around if there’s even a chance of another hiccup. Let alone plunge.” The data above seems to support my first inkling. Whether I’m right or wrong remains to be seen. Although what has also changed this time from last time, is the reality of trusted voices who argued on the same side of the issues as myself and others, not only capitulated, but seemingly are crushing their integrity in the minds of many as they seemingly became “bullish.”
Hugh Hendry was the latest, and seems to have done it at the very worst of times. Just when he was about to be, quite possibly, proven correct. Only time will tell I guess. Yet, as I said in previous articles: “Capitulate doesn’t mean you then go and join the other side.” A side many great intellectuals and people I admire made great arguments and reasoning’s why thinking that way was a fool’s errand. To then have them say the equivalent of; “Well can’t beat them, might as well join them!” shines a duller light on the credibility side of the ledger after that in my view.
Since January the Federal Reserve (Fed.) has shocked (shocked!) the financial markets and players with doing precisely what they said wouldn’t happen: Cut or reduce QE. (quantitative easing) Not only did they do it by $10 Billion per month in reduction, but then followed that with another reduction matching the first for a total of $20 Billion dollars per month. What followed next? Immediately our financial markets sold off in a meaningful way not seen in years, followed by absolute chaos beginning to take shape in the emerging markets.
Remember when every financial media outlet was professing with writers and talking head guests that what the markets needed to go higher was for the Fed. to simply get out-of-the-way of the markets because; the underlying economy was picking up steam and was well sufficient in strength and more to take the reins from here? Ooopsy, is all I’ll say to that. It would seem not only has that tune changed, but the band that was on the wagon seems to have vanished also.
Now suddenly China’s shadow banking system is running amok. Liquidity that was fueling the economic boom in China is seemingly overnight turning into a drought. How can that be you ask? You thought (and were told ad nauseam) it was China’s GDP and more that was the cure to all our ails? Seems like they were more addicted to the Fed. than the “smart-crowd” let on. Well, there goes that scenario I guess. But the flip side of that scenario isn’t quite finished, and has probably more real teeth than the paper tiger many thought earlier.
As I stated in my earlier essays: The issues to watch for as to what happened here, was when we “broke the buck” in the money markets. That’s when all bets were off. The place to watch out this time that can ruin the day for everyone is – if it begins happening in China. Well guess what? Yep, it’s starting.
How far it goes is anyone’s guess, but if Argentina is showing us anything (Oh yes, another it seems reliant on our Fed. interventionist policies) as it’s going full tilt towards monetary pandemonium. Who knows what lays next for the others. I am shocked of how little media coverage any of this is getting. But then again, most news now falls into the; “We don’t want to upset the children now, do we?”
All I know is the following: Back in early 2007 I remember both reading, watching, and listening to the so-called “smart crowd” hem and haw about why there was nothing to be nervous about. 5%, 10%. even 20% corrections from lofty prices were healthy for markets. But when they started reasoning the 30%, 40%, and more were even “better” times to get back in to see the market drop another 20% days later was when I knew these people really had no clue of not only what to do, but what was actually transpiring.
I could be totally wrong (and I have been and willing to state it) but, (and its a very, very, big but) this time seems hauntingly similar to last time. And if that inkling proves correct. The crying has already begun behind closed doors.
And if true, just wait till they open those nursery doors fully. For that reality will be more than tears can bear.
© 2014 Mark St.Cyr