I wrote “Crash Alert!” on Dec. 12, a little over a month ago https://www.milesfranklin.com/crash-alert-3/#respond Please re read this so we don’t have to go over the nuts and bolts here. Since then, we watched equity markets all over the world take a dive into year end where most finished in bear market territory. As the new year started, we have seen equity markets bounce to relieve the vast oversold conditions. I believe the “dead cat” bounce phase has now run its course and the selling will resume shortly and into an outright panic mode.
Over the last month we have learned more regarding the real economies, very little of it good. The most important areas of weakness are trade and real estate volume/price weakness worldwide. Both of these are in confirmed downtrends and both are lynchpins to the financial system. Trade, because it provides “cash flow”, and real estate not only because it is a global asset of “wealth” but more importantly because real estate is COLLATERAL. This last point is very important because “collateral” to the banking (financial) system is now smaller than it was 6+ months ago when it was already too thin. Remember, higher rates had already directly affected bonds (collateral), now real estate is an obvious symptom of weakness and collateral shrinkage.
Back in early December I warned that liquidity was drying up and would culminate in a panic move. This did occur and the response from central banks has been as expected, they blinked. The ECB’s balance sheet shows zero sign of shrinking as promised. The PBOC has lowered the RRR rate earlier in the month and they also pumped the financial system with nearly $100 billion just last week alone. The Fed has also made mention of less or no more rate hikes in dovish fashion. Oddly, we now know publicly that the “plunge protection team” does in fact exist as CNBC and others were applauding. No more conspiracy theory with this one …
So here we are after the bounce and after the oversold pressures have been released. I believe we are now set for the event that will make history, namely a financial train wreck in a very compressed time frame. Why do I see this? Because of the backdrop and where we have come from to where math and logic say we will ultimately go. Think about the “backdrop” for a moment. The world is awash in debt that cannot be paid back which very importantly includes the issuer of the reserve currency, the U.S.. From a timing standpoint, maybe the most important backdrop is on the geo political front. All over the world, the globalists are being pushed back by populists as even former presidents in various nations have recently been arrested and protests by the great unwashed abound.
My point is this, in the real world …the populace has had enough of higher taxes and stagnant/declining living standards while being told everything is great. Though not to their liking, globalists are being routed.
Market psychology has already been cracked, during normal times we would at least retest the lows but these are far from normal times. We do not face a normal bear market where central banks can reflate again. The collateral does not exist for this to happen. Because the gross debt is unpayable and total promises made are impossible to honor, a total reset is in store. Whether this is an overnight (weekend) event or a very compressed 2-4 week event is irrelevant. Asset “values” will be unrecognizable afterward with current eyes. The next 2-4 weeks are very important in my opinion because even in garden variety bear markets, it is the action of the retest or failure of support that matters most. Big changes are afoot!
The above spoke mainly to equity markets because that is what the average person sees and uses for judgement. Credit markets are far more important. I believe we have gotten to the stage where credit markets are actually too big for central banks who have for years acted as the “plunge protection team” of debt. There is just one hitch, when a fractional reserve debt system gets so large, it requires exponentially more new debt to continue which makes a system already too large for central banks …even larger!
Lastly I want to make mention that crashes throughout history have all occurred from oversold levels. I mention this because our next move in equities is downward from the current short term overbought levels and a retest of the lows is in store. You will most likely soon see the markets greatly oversold again and will be told they offer a fabulous buying opportunity. I think not. Rather, I believe the Dec. lows will fail and true fear will set in. “Fear” even by those pulling the strings because they will know they have lost control. I don’t think we will have long to find out if this is the case. The volatility genie is fully out of the bottle, she won’t go back in until the landscape is vastly different …!
This article was held one day for our subscribers and then made public.