Market Lullabies Forcing Us to Try to Stay Awake

Consistent with last week's post, we're trying to stay awake. To be clear, not in life in general. That's always a rather lively and interesting affair. The mere struggle to seek the True, the Good, and the Beautiful in the face of waves of the false, the bad, and the ugly is quite engaging on its own - never mind the particular items dished up by all manner of worldly and (more important) spiritual concerns.

Here, though, we'll restrict comments to our work world as it concerns markets and the economy - the areas that keep humming lullabies lately, causing our eyelids to grow heavy.

Let's get specific. Stocks - in the form of the S&P - have traded between 4080 - 4200 since April. And most of that time has been spent in the 4100 - 4180 range. Bonds and Gold have been similarly quiescent. Since we track the results of various assets each week, we've observed this. Hence our comments last week.

When it comes to stocks, we typically find "leaders" either in the form of sectors of individual companies with a sector. There are no leaders lately. Just same-old same-old, over and over and over again.

What's going on? Our best shot at this was posted last week.

Now, there was a bit of an upward thrust this week, breaking an intermediate range of 4100-4180. Whoopee! Wall Street's salivating, hoping you'll get excited and buy more stocks. This way the insiders will have suckers to sell their stocks to before the next leg down.

Leg down? With a Bear Market on hold, relative weak after an astounding speculative streak that began around 2009, you'd expect a more robust - maybe even disastrous - Bear Market. We do. What do you think?

Meanwhile, Gold has dipped, and we wonder if it may fall further to shake out any happy Bulls who watched it rise in 2022, exceeding other assets. After all, that's how people buy, typically: after an item has risen quite far. They're gripped with greed. They buy. The item falls - quite far. They sell, fearful that it will keep falling and ruin them. And so they buy high, sell low: the way of the fabulous world of investing.

We hear a lot about bonds: their yields are topping. A recession will force yields down, raising bond prices. Buy bonds now? It's up to you. We've gotten some lift from shorting them. Will we hold that positions if and when its "Buy bonds" time? Maybe; maybe not. Maybe we ride that out. After all, you have to accept the thesis that we're heading back down to zero interest rates for an extended period to abandon ship on the thesis that bonds ended their decades-long bull market and decisively have entered what could be a decades-long bear.

But who knows for sure?

So there's an attempt to check under the sheets where the markets and economy are taking a nap. With that, another slug of Brain Trust cogitation:

-   Bear Market rally that started in October on very thin ice that should break soon.

-   Contrasts SPY with IWM, RSP, and VALUG – All diverge from SPY (badly lagging) – Notes S&P propelled mostly by 6 stocks – NYSE much weaker than S&P

-   Banking crisis continues

-   Gold: Near-term expects substantial correction; long-term looks good (but would not buy now)

-   When Gold corrects, so will all commodities

-   If Gold does not correct meaningfully, would signal a very powerful up-move is ahead

-   Had predicted a long-term bull market in Gold starting 2000: See top 2030-32

-   Credit Crisis – not crunch - Banks are not lending/not making loans of any meaningful size: has never seen this in his lifetime – Not lending either because deposit outflow prevents them, or, if they have sufficient deposits, do not want to take on the risk due to belief borrowers may default. - Do not dismiss the seriousness of this situation.

-   This is what creates Depressions, not just recessions.

-   Repeats that bank failures so far as just tip of the iceberg

-   Inflation: not dead, but banks not lending means liquidity drying up which will lead to reduced inflation, even deflation – But thinking ahead, next phase would be massive money creation by CBs to prevent a Depression – and this on a global scale.

-   See TLT as possible shorter-term trade (based on chart), but this would reverse with money creation.

-   Re 60/40: Blackrock officially announced it is abandoning this.

-   Re Sentiment in Bear Markets: can’t count on contrarian plays. In Bear Markets, the bears are right. Contrarian opinion cannot resolve a credit crisis, record deposit outflows, corporate bankruptcies due to cutting credit lines

-   Review of manipulation of markets and face statistics

-   NB Re Fed cutting rates: In a Bear Market cycle, when Fed cuts rates, the worst of the market declines occur: a trap for Bulls, benefits short-sellers. – See chart of Fed Funds vs. S&P – Therefore if Fed starts cutting rates this year, the worst part of the Bear Market will follow.

-   Re Derivatives market: Could there be a massive default wave? – Estimated now at $1.6 quadrillion: In 2007-2008 was $370 trillion

-   NB: When next crisis develops it will be at warp speed – Current crop of leaders not competent to deal with this vs. last crisis, when many were competent.

-   Focus on Capital Preservation.