I’ve worked for some great companies over the years. One of those was Intel. When you go to work at Intel they send you through a HazMat (Hazardous Materials) training class. At the time, the instructor led you through a little exercise at the start of the class that went something like this.
Instructor: What’s more deadly, water or cyanide?
Instructor: Maybe. How about this scenario – you have to swallow a micro-gram of cyanide or drink a gallon of water – which is more deadly?
Students: (confused disagreement)
Instructor: Neither, you would survive both.
Instructor: What about drinking 2 gallons of water within a few minutes or taking 1mg of cyanide?
Students: (tentative majority) Cyanide?
Instructor: No, you’d survive both.
Instructor: Now, what about 100mg of cyanide or drinking 4 gallons of water?
Students: (majority) Cyanide.
Instructor: The water would kill you not the cyanide.
The Lesson – In a given amount of time, and the right dose, ANYTHING can kill you.
Which is the point of this post and why I’m worried. Mainly about the markets but also the United States in general. We simply have too much debt. The Federal Reserve is printing too much money. The government continues to spend like there will never be consequences to their actions. We can argue about timing but not the eventual outcome – the US is being destroyed by its political system. Today’s QE4 is just another straw on the back of a once great, capitalist system.
Right now the S&P 500 is sitting just below its highs for the year, up 16% YTD (including dividends, 13.6% on a pure price basis). But corporate earnings and revenue growth sucked in Q3. Europe is in a recession and is kicking the fiscal can down the road furiously, in the process solving nothing. Japan is, as John Mauldin pounds the table on, a ‘bug in search of a windshield’. Corruption seems to be at an all time high in every country. The US political system is so broken it turns off the vast majority of Americans who don’t bother to vote anymore. And if you think those are big issues, it turns out we’re pretty lucky that the rest of the world is focused on Europe and, to a lesser extent, Japan because if they collectively decided to focus on the US then the reality that the US is actually quite broke might finally start to sink in.
What I really think is happening is everyone already knows its too late and the whole financial system the world is built on is going to blow sky high. If that’s the case, then you delay the inevitable as long as possible. It actually makes sense from a political perspective. If you know you’re going to crash the plane and there’s no arguing about the outcome, its just human nature to delay the crash as long as you can.
At some point, something is going to ‘die’ from printing / creating all this money (e.g. debt) from thin air. Either the USD will die, the market will die, the economy will die (in the form of massive inflation) or, and this is worst of all, confidence in the entire system that has been engineered by the unholy trinity of big government, big finance and the Federal Reserve, will collapse. People will stop spending on discretionary shit they don’t need. They will save more, likely a lot more. And since 70% of US GDP is consumer spending it will be game over until the giant ‘flush’ cleans out the current system and we reinvent things again.
All of the above sounds so negative, and it is going to be painful. But long term I’m still fundamentally an optimist. The technology humans create will most likely save us from ourselves, and I’m still betting it will. I just hope we can get through whats to come quickly so we can get to better times.
Meanwhile, here’s my equity curve headed into the final stretch (up 14.2% purely shorting the ES at opportune times throughout the year):
I remain short overnight. Until next time, trade safe.