These Are The Markets That Try Men's Souls

SpacePete · Oct 2, 2015

Great headline from one article today: These Are The Markets That Try Men's Souls

It's a slight rewording of a quote by Thomas Paine from a pamphlet read to soldiers on on December 23, 1776 before one particular battle during the American Revolutionary War:

"These are the times that try men's souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph. What we obtain too cheap, we esteem too lightly: it is dearness only that gives everything its value." ~ Thomas Paine
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Its getting hard to find much positive news or optimism that doesn't sound overly strained in the markets recently.

A few interesting extracts from various sources below. The second article has an important conclusion about why we should be thinking about these things:

"Why is all this important? We track all of this because seeing these signs early gives us a better chance to mentally and physically prepare for the next shock. The press does a very good job of constantly painting everything in a rosy light, and that's fine, but it's not very helpful if it also misleads. Lots of people are woefully unprepared for what's coming next. For many it will be a shock."

Last month's simultaneous volatility spike and stock downturn were unpleasant surprises for investors.

...Over a few days in late August, implied US equity market volatility, as measured by the VIX, tripled. And the S&P 500 Index lost almost 11%. The last time market risk had shot up this quickly was almost 30 years ago during the Black Monday market crash in 1987.

Why did so few investors see this coming? History provides some clues. Our analysis of past market declines found that markets rarely fall so suddenly without warning. In fact, of the biggest equity market declines over the past three decades, almost all came after a steady rise in volatility. August 2015 was one of the exceptions.

That history may have caused investors to assume they could wait until volatility had drifted higher before shopping for downside protection. We think that's a lot like scrambling to buy flood insurance after the storm starts. By then, it will either be very expensive or not available at all.

Src
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Deflation Warning: The Next Wave

Summary

* The signs of deflation are now flashing all over the globe.
* The possibility of an associated financial crisis is now dangerously high over the next few months.
* Lots of people are woefully unprepared for what's coming next. For many it will be a shock.

The signs of deflation are now flashing all over the globe. In our estimation, the possibility of an associated financial crisis is now dangerously high over the next few months.

As we've been saying for a while, our preferred model for how things are going to unfold follows the Ka-Poom! Theory as put out by Erik Janszen of iTulip.com.

That theory states that this epic debt bubble will ultimately burst first by deflation (the "Ka!") before then exploding (the "Poom!") in hyperinflation due to additional massive money printing efforts by frightened global central bankers acting in unison.

First an inwards collapse, then an outwards explosion. Ka-Poom!

A Failed Strategy

What exactly do we mean by deflation? Back in 2008 the central banks of the developed world, as well as China, had a choice:

(1) admit that prior policies geared towards encouraging borrowing at a faster rate than income growth were a horrible idea, or
(2) double down and push those failed policies even harder.

As we all know, they chose option #2. And so here we are, just 8 years later, with nearly $60 trillion in new debt piled on top of the prior mountain - while GDP grew by only $12 trillion over the same time period

...The only way the central bank "strategy" (and we use that word very loosely) could have worked was if very rapid economic growth emerged to justify the accumulated levels of debt, comprised of both old and new borrowing. Central banks were indeed hoping such growth would materialize and lessen the burden of servicing the interest on all that debt.

But that growth, quite predictably did not emerge.

Bright Red Warning Lights

The global economy is downshifting fast, and there are lots of flashing red warning lights indicating as much.

Doug Noland has captured the emerging market pain caused by the hot money that is now flooding out of those territories, as well as provided a great explanation of the bubble dynamics in play.

...

What does it mean when we see currencies in retreat across the globe? It means that the hot, speculator money is rushing out of weaker economies and back towards the stronger center. This is consistent with a liquidity crisis, one where all the borrowed money used to spark all those heady asset gains and falling yields on the way out do the exact opposite on the way back.

...Why is all this important? We track all of this because seeing these signs early gives us a better chance to mentally and physically prepare for the next shock. The press does a very good job of constantly painting everything in a rosy light, and that's fine, but it's not very helpful if it also misleads.

Lots of people are woefully unprepared for what's coming next. For many it will be a shock. Not because they couldn't see it coming years in advance and made their own mental and financial adjustments on their own terms, but because they wouldn't. Preferring to avoid an unpleasant truth they put it out of sight and out of mind, hoping that somehow things would work out in their favor.

http://seekingalpha.com/article/3544636-deflation-warning-the-next-wave?ifp=0
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These Are The Markets That Try Men's Souls

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These Are The Markets That Try Men's Souls

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