When I was running my growth fund back in 2005 I knew early on that housing was going to blow up the credit and equity markets. I was reading this article in in the WSJ and I had an epiphany. My epiphany back then was that the dollar based debt system is designed to blow up with regularity and that whatever is driving the economy at the time using credit will eventually be the unraveling of the economy. Above you can see the article because I cut it out at the time and taped it to my PC to remind me of what was to come. I have kept this article in my wallet as a reminder of how this game works. Now did I go out and position my portfolio for a disaster? No, but many did and lost their jobs and lots of money because being too early is the same as being wrong. What I did do is I waited until price started to tell me that I should begin to get nervous. In February of 2007 the sub prime market blew up and I knew it was time to watch the technicals very closely. So I began to shift the portfolio away from the consumer, housing and financials. When the market broke in the fall of 2007 I got extremely defensive and raised cash. For the next 18 months I put my feet up on my desk and watched as people ran around like chickens with their heads cut off buying every dip saying it was all priced in. I knew then that it takes time for credit and margin to unwind.
Lets fast forward to today 10 years later. The warning signs started to show up last spring when the momentum stocks took it on the chin and then credit spreads started to widen in the summer, then commodities took a nose dive followed by energy stocks getting decimated in the fall. This August the U.S. indices finally cracked. Basically this has been a bubble of literally everything. The Fed has inflated ALL FINANCIAL ASSETS. The economy used to wag financial assets now financial assets wag the economy. The next bit of news we shall hear is dreadful earnings misses and a complete air pocket of orders filtering through the system. CEO’s get paid on EPS and stock price appreciation so as stock prices fall they cut capex to increase earnings and a virtuous cycle is born the wrong way. This credit based system is designed to blow up. Unfortunately we have reached the end game and now $9 trillion of our poison lies on the balance sheets of the emerging market corporates and governements. At the end of this crisis, which is picking up into high gear, we will see a cry for a new currency system.
This is not the 1987, 1929, 2000, 1998, 2011 or 2008 analogue. This is the 2015 analogue and it is going to be worse than all of them. I have warned people for the better part of a year. My obligation and my conscience are clear now. I will not feel bad for making a ton of money for what is about to unfold. This will be fast, brutal and unforgiving.
Below is he last paragraph of the 2005 article. Ask yourself what are the similarities to today? Clearly energy has been a big contributor to the economy since the recovery began. Nearly 1/3 of all capex in the US came from energy. That is now gone. Also US exports were strong until the rise in the dollar. That is now gone. Housing in the US is about to implode along with the stock market which will cause more jobs to be lost. You see the Fed bubble is literally in everything and the prices you see before you are fake. They are Fugazis. The key to understanding the economy since 2009 is one of money printing. It has been a fake recovery, an illusion so to speak. In the absence of money printing what will pick up the slack? Answer: Nothing…this crappy economic recovery implodes.
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_In the absence of money printing the economy Implodes_
Soooo why would they stop printing?
Gorby,
Exactly! Now go put on a tin foil hat and go down the rabbit hole.
What is it that you think is stopping them from printing “to infinity and beyond”?
DJPS: IMO, fixed interest rate loans…and time.
what horse shit
Fly,
I guess it must be and that’s why I live in paradise.
How do you figure housing will be killed again? Asked by a 30yr old first time prospective home buyer.
BlueStar,
Thanks for posting.
You deserve every penny.
You understand what’s going on, how to play it & have the wherewithal to do so in size – a rare combination.
I’d rather be on the side a volcano than in a northeastern corridor suburb or city.
I feel bad for the majority of people who will be traumatized. I can picture the look of utter shock on their faces.
Years ago I was on the receiving end of a layoff. Word had leaked of the day, Friday. Due to my position, I knew I was likely on the list. As I strolled in at the last possible minute that morning; I saw others being escorted to their desks and shown the door. Total shock and disbelief on their faces. Glazed over deer in the headlights eyes.
Everyone has the same opportunity to see this slow-motion train-wreck coming. Most are good, nice people; who are also ignorant, arrogant, overconfident and feel entitled. There will be a price to be paid for that.
I’m glad you mentioned real estate. I got a few long dated otm homebuilder puts on Mon. But mainly I have pm stocks that I’m able to hold until the coin shops say, “We Sell Gold”.
got some $nugt lately
‘Basically this has been a bubble of literally everything’
And the ultimate un-bubble right now, dirt cheap? Gold & its miners.
Blue, the world is now ready for the demise of the dollar-based system, the Euro will become the main trading currency, and debts (USTs etc) will not be held as reserve assets, it’ll be currencies or gold (H/T Noyer).
I am short, legging in last 2 days, 2 more legs to go.
GM,
what currencies?
H/T Noyer means?
just to clarify, most people are complacent.
also, I’ll be getting my ass kicked, just like everyone else but hopefully not quite as bad – and I know it’s coming
Blue – last year you were on a similar tack and then the Japanese intervention and then European QE delayed a correction – whoch basically changed the rules on you – what could happen here that would change your short/mid term bearish landscape?
Like you said – being early is the same as being wrong. You could very well be way too early here….
QE for the common man coming next??
There is no trigger, no liquidity crunch, no viable alternatives. If you cash out of US equity, fixed income, in size, where do you put the money (the key word is “in size”? Everyone cannot be in gold. The recipe for the storm is usually massive leverage and lack of liquidity, in the same place. We have elements of both, but not in the same spots.
Blue, I remember the exact time In 2007 when I was in the car and a story came across on the radio about WAMU having huge issues on housing loans. It was July or August something like that. I think I heard that was the first crack in the egg years later. About 2 years earlier we were home shopping and saw a place for sale by owner. They gave us a price and we ran over with bid in hand. There were 3 other buyers in front of
the house with bids in hand. We went to the sellers front door and they said sorry we have a bid 30k higher than before. That and WAMU are were clues I will never forget. And Barney Frank was the biggest easy money drug pusher in history.
You contradict yourself in this post.
You say economy use to wag the financial assets and now financial assets wag the economy.
Energy Cap Ex, Exports and Dollar you point out is what will de-rail everything. Sounds like the economy is waging these financial assets still.
I think what you think is the EPIC DESTRUCTION is will instead be EPIC VOLATILITY instead.
If there is growth the cards wont collapse.
GM: Wishful thinking. The EUR currency is on the path to disintegration. The 10yr yield has been falling since 1981 and the trend is still intact.
Interesting piece. Thanks
Noyer:
http://www.bis.org/review/r111006h.pdf
Most do not appreciate that the Euro was designed to allow every sovereign to go bust, it is a standalone currency, a first for the world.
If you’re curious go check line 1 of the Eurosystem’s balance sheet.
pb, yes the yield trend is intact, but not for much longer, faith in sovereign magic and their solvency is looming.
“In the absence of money printing what will pick up the slack?”
Gorby’s question: “So why would they stop?” is a good one.
The answer is that they will not stop. Shit hits the fan only when their crack no longer works.
In a sense, it is a taxation issue. Countries like Italy, Greece, Spain, etc have long used money printing as a hidden tax on their populations. That is why they will ultimately dump the euro.
As to the US, do not underestimate the awesome taxation powers available to the US govt. When push comes to shove – and it will – they will do what they always do: increase taxes.
Taxes won’t help the US, as the economy goes down, US gov’s finances deteriorate, and then watch the dollar and its trade deficit.
Kaboom.
Of course they will. A reformation of the corporate tax system alone will bring in a shocking amount of revenue. All this overseas tax shelter stuff will be ended.
All the US “kaboom” projections imply mass exodus from US equities to some other, better place. Unfortunately, there has been a steady deterioration in other places. As long as other places are not looking more attractive (US bonds included), I would be very skeptical about “kaboom”. I think US prices can be maintained as long as US stays ahead of EU, Asia, which does not seem likely to change any time soon. The only wild card is some sort of geopolitical “kaboom”, but that one too, is more likely to happen in Asia or Middle East, the latter one would likely be more of a problem for EU than US.
Blue,
I work in the oil and gas sector and can tell you the carnage is much worse than anyone can imagine. The industry is in disbelief and the general public really has no clue what is going on.
The total job losses when you factor in independent contract work is staggering. I’m talking from the guys operating the drilling rig to the landmen out acquiring leases to the attorneys that represent these companies. These are all high-paying jobs by the way, and 80-90% of them are gone. And supposedly this doesn’t matter, and all is good? Wake up people. This economy and it’s supposed recovery are all a massive smoke-screen designed to divert you away from the true horror of what our wonderful government has done to it over the years.
I’ve watched 95% of my colleagues get swept under the rug and become a memory of “better times.” And this is just one bubble among many.
This entire economy is a “fugazi,” but then again I’m just a tinfoil, conspiracy theorist detached from reality.
Rogue Wave,
Your comments about getting laid off ring so true to me. I’ve watched nearly everyone I’ve worked with get axed in the last year or so. I’m one of the very few left and we’re all skating on very thin ice. I’m only around because I’m the most senior person at my job and do damn good work if I don’t say so myself. 😉 The same could not be said for any newcomers or anyone with even 2 or 3 years working with us.
pb, do you realise where the world economy is headed?
I’m talking the next 10-20 years?
I doubt it.
A quick trillion from offshore corporate tax will feed the federal hog for 6 months.
The US is dead already, the corpse may be twitching a bit, but the bubble burst in the late 50s, it’s all been debt ever since. Debt bubbles always burst.
Good luck to Americans.
Uglyflint,
Vivid memories man! I was working in commercial lending right out of business school in 2006, in fact I got the job before I even graduated and started while I finished up. I did this for about 6 or 8 months before I started hearing about “subprime” in early 2007. I had been thinking about law school even before this.
I could see things slowing down considerably early in 2007 with small businesses in the community where I worked. As a lowly credit analyst I started seeing more and more businesses giving us financials that showed no hope of ever paying back the loan after running earnings and cash flow models. Keep in mind, real estate was usually our biggest piece of collateral in our loan deals.
When I first started “loan committee” was basically to just rubber stamp what the credit analyst came up with, which usually showed the customer would easily pay back the loan, running a 5 year DCF model. The money would be disbursed within days.
Then in 2007 more and more loans were being rejected. Suddenly very few loans were being approved as we all started seeing things slowing down in out years. It got to where some loan committee meetings there would be zero loans approved. And we’re talking millions of dollars of money being lent out.
Needless to say I decided I was going to law school for sure in Spring 2007. lol. Shit hits the fan in 2008 as we all remember. It’s almost surreal to think about that time.
Gary, I suggest you look at the US markets from 66 to 82, compare with gold, and think.
Recency bias will be brutally punished.
PB,
You do realize that increasing taxes will not increase revenue? Taxes stifle growth. Instead of sending the Feds 40% of your income imagine what the money could do in the private economy.
As Martin Armstrong has said, confidence in government has peaked. The people of this once great nation will not stand for more taxes, more regulations and more job killing programs like Obamacare.
The debt ceiling will be hit in about 3 weeks and yet no one is talking about it.
QCI,
Agreed. Over the years tax rates have changed drastically, but tax revenues collected stay fairly stable. It’s a paper shuffle. Businesses do what they need to, to keep taxes under control. If the gov tries to force them hire; you change, move or shut down.
A good thread here. Some tough questions.
correction. force them higher (or force to hire – that’s also true)
QCI that’s something else. I’m wondering now what the WAMU subprime clue is being given to us today. I think this time it’s too many to count.
A few notes: The last two deflationary depressions lasted more than 20 years each. I expect this one to last AT LEAST 25 years, but 30-35 would be more likely. So yes, I know where this is headed.
In my opinion, Martin Armstrong is nothing but a con artist. The facts regarding his past activity prove it.
The economy is going into the shitter regardless of taxation. And it won’t just be higher taxes: nationalization of all tax-sheltered retirement accounts is going to happen as well. That will be quite the asset grab. In exchange for basically worthless equities, corporate bonds, etc, the govt will offer…treasuries.
Anecdotal,
Agreed. This is one of my favorite blogs Blue has done. Really good stuff.
PB,
I wouldn’t say he’s a con artist, but he does overinflate himself. He brings up some thought provoking subjects.
Ugly flint,
So true man. It feels like a culmination of many things this time. If you’re looking for a Lehman type moment Where suddenly everyone realizes how bad things are I think you look at $DB. Is there a geopolitical moment this time around where things spill over? All things to think about. Could the debt ceiling drama be the geopolitical tipping point?
http://nihoncassandra.blogspot.com/2006/08/enigma-of-martin-armstrong.html
An excellent primer on Martin Armstrong.
GM, 1966-1982 was the period of rising interest rates, which culminated at the all time high, right at the end of that period, accompanied by rising oil and gold prices and rampant inflation, while SP500 climbed a meager 20%. Please note that the interest rates started climbing only in 1946, right after WWII ended, and aside from a post WWI blip, have been declining for more than a century. Nixon killing the dollar convertibility and effectively confiscating EU gold certainly contributed to spectacular gold rise, but I do not believe it could be done again.
Overall, I do not see any relevancy of 1966-1982 to what is happening now, unless we enter WWIII soon.
Hello all,
Great thread. All I am trying to do is make folks think what is really going on and engage in polite debate.
On a separate note, Can you imagine a red candle that takes out the August low in one trading day? A trader I respect says the conditions are present for such an event. Stay frosty folks.
Where is Justin Lahart now? http://www.wsj.com/articles/jobs-number-leaves-fed-in-the-killing-yields-1443801424
Toasty!
Blue
Interesting you should pose a red day scenario right now. An E wave analyst I read just called for the same thing. He has been looking at 2 scenarios. A wave b up followed by a c move down which would be an orderly decline ultimately taking out the August low or a wave 2 up followed by a wave 3 crash which would be quick and rip 500 to 600 off the S&P. This morning he says the wave count off yesterdays action has eliminated the former and puts the later as a high probability. God knows what could cause that to happen
From an EW perspective, current move is not ABC if bear market on. Bear market is on, so it should be 5 wave. Looking at $NDX daily chart, by my interpretation of EW rules, sure looks like it is ready for a 3 of 3 down. Which would indeed be quite the sell-off.
Blue, I appreciate the debate and the thinking you triggered. What I would like to hear are the thoughts on where the money goes if US equities crash. I think a spectacular and swift crash to the tradeable bottom is wishful thinking, as it will quickly create opportunities to reload again. I am thinking we are more likely to experience Japan like scenario, as the market is lacking attractive alternatives to US equities. So the question is, if you pull the money out of US equities because the performance forward is expected to be poor for a prolonged time (no swift crashes), where do you reallocate your money?
Gary,
You ever wonder why the Saudis decided to stick with the dollar in 82?
There was a deal done.
The deal lasted for 18 years, when the Washington Gold Agreement started the clock ticking. The Euro was born, no need to support the dollar. China had just been bought onside with the plan, joining the BIS in 97 I recall. The following year, Gordon Brown had to bail out ALL the banks short of gold, as the Chinese swooped.
Now, everyone is ready, the Saudis. Russians, Chinese, the ECB, they all know what must be done.
The bubble that started at Genoa in 1922 will be burst within the next 2 decades, it will alter everything.
Most on this this thread seem prepared to a certain degree.
Good luck.
I meant to also say Gary…the *money* will be mostly evaporated, some $750 billion of margin leverage in the US alone.
It gets wiped out.
A few lucky investors will get out in time, and like the 70s will head for gold, always the hedge.
GM
Taxes create demand for USD. The Fed is the monopoly supplier, they’ve stated this publicly more than once. The Fed can supply the demand side regardless of what Federal taxes are.
‘Taxes create demand for USD’
BS sorry, most dollars are created by commercial banks in the eurodollar market outside of America.
MMT is so hopelessly lost in the woods of US-centric theory, poor irrelevant things.
And hence the Fed will once again by surpised and clueless about the eurodollar crisis about to hit.
Just check Deutsche Bank’s woes, and consider the repercussions for the *dollar*.
QCI – agree with you on the devastation in oil – dad was a Petroleum engineer and I remember 1983 – 1987 and then 1994-1996 quite well, but not fondly. Watched my dad bounce between managing multi-million dollar drilling operations to cleaning drill pipe. He told me i could do anything I wanted, except go into oil. I picked cybersecurity…..
https://twitter.com/sentimentrader/status/652569772903657472
Bluestar has Bad Company https://www.youtube.com/watch?v=ww5GXbk58R0
Hello Blue.
So last week certainly didn’t finish lower!! Bit of a squeeze of shorts.
The bulls here seem very complacent that they’re in the clear now.
I have shorts within 1.3% of current FTSE highs.
Any thoughts, you still reckon the big bear lies directly ahead?
Cheers.
get your pm’s
http://kingworldnews.com/michael-belkin/
King world news have been plugging PM stocks for the last 4 years. Guys in there where talking $8000 silver. They are funded by the PM lobby group. Don’t listen to them.
I guess the US didn’t want to be upstaged by Putin, so they did what they could have on Day 1 of their fake attacks on ISIS http://russia-insider.com/en/breaking-isis-leader-abu-bakr-al-baghdadi-killed-air-strike/ri10403
watch for another ramp in futures off this
let the games begin
Juice,
The strike on Al Bagghadi was last spring, or am i misunderstanding what is impied in the link?
IW40 – no it’s current news but was hastily delivered … apparently he is not among the dead http://sputniknews.com/middleeast/20151011/1028356296/baghdadi-alive.html
In any case, the US could have killed him a long time ago if they really wanted to … perhaps Putin stealing the spotlight and the headlines has the US wanting to one-up Putin with a high-level kill or successful military-op. Let the games begin.
“Let the games begin”?
The games began when our ancestors lived in caves and hunted mammoths. However, they have become increasingly sophisticated with each passing generation.
How about trading when a computer program is on the other side?