Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Yeats, "The Second Coming"
From late 2012 I have been gradually layering and developing the thesis that a secular bull market started in November of 2012 (with a possible revised start date of June 2012), ending the sideways secular bear market that started in 2000. Here are the basic components of that thesis through the last report:
In this report I am adding an additional layer to thesis related to market psychology: the bull market will accomplish the gradual, step by step destruction of bearish psychology. I'm calling this the "Death of Disasterism".
My last report absolutely nailed the call to Short Treasuries to the day. I also nailed the characterization of the subsequent decline as a bear market and a long term secular asset shift.
Total Treasury Market Index broke channel rail and long term moving average support as anticipated:
As the US equities markets correct from new all time highs some preliminary takeaways have emerged from the recent pullback. The most evident lesson from this period is that bearish market psychology is far from dead. Immediately upon the April 22nd intraday reversal following Ben Bernanke's comments on QE tapering, bears emerged from their caves in droves to call the top in stocks and predict the decline and fall of western civilization. And that's not an exaggeration. There is a deeply embedded bearish psychology at work among market participants and observers which rises to the level of ideology. This corrective episode in the market story may have revealed that there are very few real bulls and that current market psychology is heavily skewed towards a range between disasterist bears and conditional bulls. Essentially, there are very few who place the market at the beginning of a valid secular bull phase, a great many who feel we are in the latter phases of a cyclical bull which started in 2009 and a large number who believe that some sort of major market disaster must be impending.
Most investors and traders know that guarding against emotions is a major component of success in the markets. Emotions cause reactivity rather than actions based on analytical thinking. But an even more dangerous distortion comes from psychological factors. Frequent mention is made of "sentiment" and there are fragile attempts to usefully quantify the feelings and emotions of market participants. But in my opinion traders and analysts would do better to focus on the psychological thought patterns prevalent at a given market juncture. Psychology involves unconscious thought forms which over time become embedded structures in the mind. These are often referred to as assumptions. While emotions can be tempered by a cool mind, a mind that is operating according to a relatively fixed set of assumptions is difficult to transform in real time. It generally takes significant traumatic force to disrupt and dislodge an embedded thought form. But even more pernicious and dangerous still is the complex, organized construct of thought forms known as ideology. When under the sway of ideology the mind is totally committed to a unidirectional, unidimensional outcome. All emotions and thoughts that do not correlate with the ideology are treated as enemies to be destroyed. In the spheres of politics or religion, ideology is often not overcome short of crushing military defeat or death of the adherent. In the markets, ideological commitment is often never overcome, even after bankruptcy and financial ruin.
This current correction may be showing us that large swaths of the investing landscape are not merely afflicted with deeply seated emotional and psychological baggage but with remarkably entrenched ideological belief systems. In this light, we are potentially not close to the bear capitulation that often marks an important top but rather somewhere in the initial stages of the destruction of bear market psychology and thus un the early part of a secular bull market.
An observer of the Israeli-Palestinian conflict famously remarked that both sides were afflicted by "a complete inability to accommodate a competing narrative". I think that characterization is applicable to a large segment (perhaps the majority) of market participants today. They are operating under an ideological construct that does not accommodate any consideration of alternate possibilities. Where ideology predominates, analytical rigor recedes correspondingly. I am keeping my mind open to a long term bearish scenario for US stocks and I have been maintaining a plausible Elliott Wave count that accommodates this possibility. But so far, we have not seen the kind of long term technical action that would seem to validate and activate that scenario. It seems to me that recently too many have jumped back on the long term ultrabear bandwagon far too easily and far too soon on the basis of what is quite arguably a standard market correction.
Let's characterize the most common outlooks predominant in today's market:
Now admittedly I'm having a little bit of fun here. My purpose is not to be offensive but rather to make my point provocatively. While everyone is subject to ideological mental formations, I would have to say that in this market The True Bulls are the least ideological because they represent the contrarian view and they are not fighting the market trend. Rather, they are interpreting market action as a discounting of future economic activity and corporate profitability and are on the lookout for dynamic growth stories that match the market's price action.
The Weak Bulls and The Disasterist Bears assume that the market's price action is either "wrong" (including in a moral sense) or else represents a mispricing of market value. While I am open to the possibility that the market has been mispriced, much as it was at the 2007 high, I am not willing to adopt that as an ideological assumption.
In the interests of full disclosure I should inform the reader that my personal ideological belief system gravitates towards the Libertarian, free market, anti-Keynesian, anti-Monetarist, sound money and Austrian school of economics. My personal ideology is that, if implemented in monetary, fiscal and economic policy, that set of beliefs would yield the best result for the most people over the longest time frame.
The epistemological problem that The Weak Bulls and The Disasterist Bears are having at this juncture is one of cognitive dissonance arising from the gap between the moral hazards of Keynesian Monetarism and real world outcomes. According to what they "know" to be "true", the system "must" implode...yet it has not. The source of cognitive dissonance is ideology: "the complete inability to accommodate a competing narrative". According to the operative ideology, the possibilities are limited to either: 1) some sort of economic/financial disaster or 2) robust, balanced economic growth following a dissolution of the Keynesian world order. In this Either/Or construct there is no room for the current, unfolding reality which by all appearances is far more layered, dynamic, variegated and complex than the ideology will accommodate. Rather than revisiting their assumptions in light of this dissonance, TDB and TWB adherents have rather publicly decided to push their conclusions to the outer limits. A gigantic yet unapparent ontological elephant has sat itself down in the middle of the New York Stock Exchange. Written large upon one side of its massive body is the legend "This is NOT a market!" and upon its opposite side is written "This is a Ponzi scheme!".
An unprecedented ideological revolution has taken hold. Essentially a very large percentage (probably a majority) of market participants do not believe in the existence of a market per se. In other words, the prevailing belief system is that prices in what we commonly refer to the stock or equities "market" are not determined by supply and demand driven by rational, informed decision making and cogent information regarding future economic prospects. Rather, prices are manipulated and gamed higher by the printing of Federal Reserve money and a variety of manipulative mechanisms including futures markets, derivatives, high frequency trading and false economic data. There is no spoon, there is only The Matrix. In this worldview, the possibility that increases in stock pricing might be forecasting future economic growth is not accommodated. This is "known" to be an irrational impossibility.
The ontological conundrum that TWB's and TDB's are facing is that their universe of possibilities is fixed. The outcome is "known" without any doubt: there will be another economic and financial disaster. Yet history has a way of generating surprising results that defy expectations.
During the last major bear market epoch from 1966-1982, it was broadly "known" (or at least very deeply feared) that: the US had entered a period of intractable, permanent decline; inflation could not be stopped and consequently a reversion to a precious metals monetary standard would be necessary (making gold and silver the best possible long term investments); Japan would supplant the US as the global economic powerhouse and Japanese interests would run America; The US would be forever at the mercy of OPEC and high crude oil prices; and "Global Cooling" would result in a new Ice Age. It took an 18 year bull market to transform and nullify these disasterist ideological assumptions until not a trace could be found at the euphoric top.
In our contemporary cycle, there are a myriad of hybrid outcomes and "unknown unknowns" that stand a very good chance of generating a real world result that in retrospect will be recognized as largely unanticipated. Few anticipated or invested in the technological revolutions of the last bull market until that phase was largely completed. Not long ago it was "known" that "peak oil" would devolve the globe to pre-industrial living standards. The emergent reality of an energy independent, crude oil exporting United States was not even being contemplated.
In researching a future BullBear Market Report which will compare and contrast the 1982-1984 sequence with our contemporary market analogue, I found these interesting abstracts:
The stock market has again risen to record levels, indicating that investors look for the economy to recover over the next few months. The rally has been aided by a continued decline in short-term interest rates as the Federal Reserve Board moved to loosen credit conditions. In addition to improving economic fundamentals, the market's internal dynamics assisted in boosting the rise in basic industry stocks. Many out-of-favor stock groups have yet to catch up to the market, and most analysts think hard evidence of earnings improvement will be necessary to push them significantly higher. As they have been throughout the rally, individual investors are still skeptical about the rally's staying ability. As Richard McCabe, market analysis manager for Merrill Lynch & Co., indicates, customers are still net sellers practically every day. However, the rate of selling has slowed steadily in the past several months.
Wall Street's Wild Weeks
Despite the world economy, the Wall Street securities markets became bullish during the 10-week period from September through mid-November 1982. Overall, the stock market gained 39.3%, an increase valued at $412,700 million. As the market continued to gain during this period, it absorbed large bankruptcies, including Johns Manville and Revere Copper & Brass, and overcame political developments which would have normally driven it down. The increase in stock sales in the 10-week period showed renewed interest in growth stocks, which could lead to the market's attracting more risk-taking capital. Although stock market activity is an indicator of economic recovery, other indicators have not shown such a strong movement. However, the market's price surge could be indicative of the US economy and, eventually, the global economy laying the groundwork for a structural boom. The 10-week period's bullish market was a symbolic declaration that the end to recession is near.
This Year's Action in the Dow: Wow!
On August 17, 1982, the Dow Jones Industrial Average rose a record-breaking 38.81 points, and 92,860,000 shares were traded. The upward trend was very strong for the next 3 weeks, and the market gained 150 points. Institutions, which accounted for about 3/4 of Big Board trades poured money into their old favorites. The market's explosion was all the more remarkable because it came from nowhere, and the predictable skepticism never really dissipated. After the market settled down, some bearish factors re-emerged due to the economic situation. When the Federal Reserve Board eased its rigid control over the money supply in the fall, the market first climbed and then slid. However, the election results sent the Dow soaring 43.41 points to a record 1,065.49. Although the economic recovery did not materialize, the market hit another new high of 1,070.55 on December 27. The big winners in 1982 were the airlines, automobiles, the savings and loan group, building materials, semiconductors, medical services, and retailers.
These were written when the market was at precisely the same relative juncture at which we find it today: breaking above prior all time and cyclical market peaks and consolidating in a corrective phase.
Optimism was tinged by doubt and skepticism while the global economy continued in a lingering recession and signs of domestic economic recovery were marginal at best. Yet most market participants at that time were compelled by market price action to conclude that, however unapparent at the time, the market mechanism must be discounting future economic growth. They were right and they were richly rewarded. Today, most market participants consider that sort of approach to be a wild leap of faith since it is "known" that there is no market, only The Matrix. It is also "known" that the US and global economy is hopelessly broken. And it is assumed that all future developments have been accurately accounted for and there are no "unknown unknowns". Market psychology is largely trapped inside of a very well defined box. "Outside the box" thinking is scarce.
The Death of Disasterism is already well under way. Here are some of the planks of disasterist psychology that are already well along the path to destruction:
The above list is by no means exhaustive and the brief commentary I offer here could certainly be expanded to a full paper on each point. But if my general thesis is largely correct, we should see a series of such ideological sacred cows slaughtered in the public marketplace one after another.
My purpose is not to laud the performance of the Keynesian Monetarist banksters and their political cronies. Free market advocates need to confront the situation squarely. We are very likely faced with quite a few years of hearing the Ben Bernankes, Larry Summers and Paul Krugmans of the world congratulate each other and crow loquaciously in an unending series of TV appearances, banquets, books and articles as they claim to have "saved the world" and particularly the United States.
My response to such future claims would be the following: "You are claiming credit for the successes of our market driven economy, but your interventions, regulations and market distorting money printing only served to delay, disrupt and hamper the new technologies, new industries, new markets and new efficiencies that would have come much sooner, more efficiently and with greater effect for the greater good. Our economy found its footing and eventually spawned vital, new, dynamic growth and prosperity IN SPITE OF YOU, not because of you."
They say that "in the land of the blind, the one eyed man is king". In this sense, in a global economy of quasi-socialist, corrupt, overregulated, debt ridden, malinvested economies, the United States is that one-eyed man.
We do not know why the US stock market is in a bull market now but we may be able to glimpse some possible factors that will, over time, be revealed:
One could easily challenge any of the above points and counterpose any number of disasterist themes. But then that goes to my larger point. The psychological and ideological tendency now is for market participants to dismiss any notion that counters disasterist assumptions. Thirty years ago, at a similar juncture, market participants began to ask themselves what the bullish action in the market was trying to say about the future. Today, not so much.
As always my analysis will contain a set of objective criteria that will tell me that I am on the wrong side of the market. The balance of this report will contain the technical analysis supporting this introductory thesis.
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