On Friday, 26 January 2018, I published a chart of the Dow Jones Industrial Average’s new record trading at 26,616. The stock market gained over 7% in the month of January. In the past few trading sessions, we have seen the markets drop over 2,500 points, giving back all the gains for 2018. And it’s not only the Dow Jones. Things are looking grim in Japan. The Nikkei has plummeted over 9%, China is down 7%—all this despite Asian central banks buying hand over fist.
What happened? On Friday, 26 January, stock valuations in America were higher than they have ever been in the history of stock trading. The downward price action we are now witnessing remains less than a 10% decline from the frothy peak, and given the bubble we still have, this is nowhere near a precipitous decline, yet. However, the way markets work is akin to someone slowly walking up the staircase to the top of the Empire State Building. It takes them about three hours to get to the top, only to be pushed down the elevator shaft—which takes about 30 seconds and ends in a very ugly manner.
Since the election of Donald Trump in November 2016, markets have skyrocketed an incredible 45% based entirely on hope. Hope is never a trading strategy. You need quantifiable economic data that is supportive of a recovery—none of which we have had for the past 10 years.
Our reckless central banks continue inflating grotesque asset bubbles in the bond, stock, and property markets by providing endless trillions of dollars in liquidity. Obama’s so-called recovery miracle was based on a false narrative and central-bank manipulations during a period of mediocre economic growth.
The “Trump bump” in growth numbers we have recently seen is temporary and a result of the natural disasters in Puerto Rico, Florida and Texas. Even with the “fake recovery,” youth unemployment remains near record highs, the labour participation rate has not been this bleak since 1977, and high-paying jobs are as hard to find as hen’s teeth.
US debt markets are a complete joke. “Investors” are going to wake up to the sad fact that high-yield bonds are not high-yield—they’re junk. Junk is called junk for a reason.
Not only can junk bonds default, they will default. Add on the pile, corporate leverage has never been higher. Standard & Poor’s has rung the bell signalling the top of the market, warning that any incremental increase in interest rates could cause an explosive wave of credit defaults across America.
Margin debt is a huge problem. It has also hit record highs at the top of the market. This translates to people buying stocks on cheap credit and when the prices decline, they become forced sellers and the firms liquidate their positions.
In addition, the risk-parity trade is long in the tooth. Buying bonds and selling stocks or selling stocks and buying bonds has finally run its course and commodity trading advisors, otherwise known as momentum chasing market sages, or “MOMOs”, are scrambling for the exits as if someone had shouted fire! The US dollar, bonds, gold, and silver have all found buyers and are trading higher, as we witness a flight out of risk assets into “safe havens”. Seems that a few highly leveraged volatility trades have gone wrong, which have exposed exchange traded funds’ (ETFs’) inherent problems in a gargantuan and explosive way. We will soon see who is naked when the tide rolls out.
And yet, the government narrative praises a “fake recovery” that is no more than plunder by the top .001%.The Federal Reserve left the “easy money” high-liquidity punch bowl out far too long and allowed the punch-drunk yield-chasing morons to invest in highly leveraged zombie entities. This can only end one way—badly.
And it’s not just in the United States. Let’s not forget our friends in China. China is on the precipice of bank defaults, hiding toxic loans, and trying to keep money on shore. The EU and their central bank’s monetary madness are not much better. Germany doesn’t have a government. Italy can never repay its debts, and neither can Spain, France, Portugal, or Greece. It’s just bread and circuses for the plebeians, while the .01% parties and plunders. What could possibly go wrong?
So what happens next? Will the markets bounce? Highly likely. Will the bounce be a dead-cat bounce? Most likely. It’s possible that the markets will stabilise and rally to new highs, but if they don’t, stocks may plummet 60% or more. Will the reckless Federal Reserve pump more liquidity into the market once again bailing out its overlord masters and the .001%? Likely. After all, the Fed always has your back—or maybe not.
What I know for sure: 1) It’s impossible to pick the absolute top in a bubble. 2) There are asset bubbles everywhere inflated by 12 years of reckless central bank and Federal Reserve policies.
In closing, was Yellen’s farewell a pump, dump, and blame it all on Trump? The old Ponzi three-step pumpy, dumpy, Trumpy? All good questions. In the meantime, prepare—BOHICA! Stay tuned for the next chapter in Planet Ponzi.
Mitchell Feierstein is CEO of Glacier Environmental Fund and author of Planet Ponzi: How Politicians and Bankers Stole Your Future.