Or Is It Something Worse...?

[cmartenson (Chris Martenson)]

Originally published at: https://peakprosperity.com/or-is-it-something-worse/

NOTE: I’m at the IMA conference in Atlanta, and wouldn’t you know it, the markets decided yesterday and today were the right days to melt down? But, as luck had it, Paul Kiker is also at this conference, so after my emcee duties were over, I sat down with Paul in between panels and dinner to record this special episode for you.

Executive Summary

Dow’s plummet of over 2200 points, following yesterday’s losses, signals what I believe to be a 2008-style liquidity crisis. This is a significant event, and if it truly is a liquidity crisis, preparation is key because in such times, everything gets sold off indiscriminately.

Understanding A Liquidity Crisis

A liquidity crisis is not the same thing as a sell-off. It is an event driven by forced selling driven by big-money players who borrowed to juice their returns. It’s all happiness for their returns on the way up (and to the right), but a sudden nightmare when the worm turns. They are extremely rare events, most recently experienced in 2008/09.

After Lehman Brothers’ collapse, we saw a similar scenario where there were no buyers, and everyone was scrambling to close out their positions before they were liquidated out from beneath them by their creditors. This led to a massive sell-off, with the S&P dropping 18% in just four days. The current situation feels reminiscent of that time, with high trading volumes indicating forced selling or deleveraging. It’s a moment where everything, from stocks to commodities, is being sold off, and one of the ‘tells’ is that the usual safe havens like bonds aren’t rallying as expected.

The Role of Leverage and Market Dynamics

Leverage plays a crucial role in these scenarios. Hedge funds and Wall Street players often operate with high leverage, seeking substantial returns. But when the market turns, even a small percentage loss can wipe out their capital, leading to margin calls which, if they cannot be met, lead to forced selling. I believe this is what we’re witnessing now, with massive sell-offs across various sectors. The speed of these market moves is accelerated by algorithmic trading, which now accounts for a significant portion of market activity. This mechanized trading can exacerbate market volatility, as seen in the rapid declines we’re experiencing.

Implications of Tariffs and Economic Shifts

While tariffs are being blamed for the market’s downturn, I don’t buy that argument entirely. The market was already overpriced and primed for a correction. The tariffs might be an excuse, but the real issue is the liquidity coming out of the system. There’s a shift toward supporting labor over capital, which could be contributing to the market’s unease. This shift, coupled with the realization that the Fed might not step in to rescue the market as it has in the past, is creating a perfect storm for a potential recession.

Conclusion

As we navigate these turbulent times, it’s crucial to remain disciplined and manage risk effectively. This is where Paul truly excels.

The market’s current state is a reminder of the importance of having a well-prepared financial strategy. For those who have followed prudent financial management, such as maintaining emergency funds and harvesting profits, this period could present opportunities amidst the disruption. As always, stay nimble and be prepared for whatever comes next. If you’re seeking financial advice, consider reaching out to experts like Paul and his team at Peak Financial Investing. Until next time, stay informed and stay prepared.

[friedrichs_teeth]

I am so thankful for your updates Chris. And a special treat to have Paul joining you to have 2 very smart guys taking a look.

I thought something was wrong with the markets and although there were all sorts of different views, the majority of us had no idea what to think and we are blessed with your collective wisdom.

If it is a liquidity event, that explains gold and silver selling off, right? You sell whatever you need to meet your margins (or the equivalent that big boys have to do when they run out of capital).

I think you made the prediction a few times that on friday something happens and by the time you get back in Monday they’ve changed everything.

Well I’m praying for everyone and i hope it is not actually a thing so big that we have a before and after story.

[publiusflavius]

Of course this is political, Drumpf’s enemies with Big money have been waiting for a pavlovian pin, which he has been stuck with.

[midelman (Prov3:5-6)]

Paul and Chris, in addition to the Markets per se, I appreciate your discussion here (and on prior occasions) on the Up Side of a recession and resetting overpriced valuations. Lower housing prices help young people and others with lower earnings currently priced out to buy a house. Lower prices can encourage them to start families.

Reshoring manufacturing and sending (underpaid and exploited) migrants and immigrants home should help American labor. (Remember Family Wage Jobs?)

Let’s champion those causes. The ruling class and elites have run the ship up onto a shoal - maybe this time they’re the ballast thrown overboard to refloat the boat.

[arsann (RuS)]

Restoring the US to its former glory with its own industry and independent of (cheap) inputs from other countries like China is in itself a noble goal. It is indeed sad to note that in order to attack e.g. enemy China, the U.S. first, for the production of missiles has to go begging considerable components and raw materials from that same China.
So the goal in itself is OK.
Whether it is realistic, future will tell. It is no easy task to reverse a process of 30 years of globalization, and drastically change the supply chains of all American and global companies.
But the way in which this process is being rolled out repels. The arrogance, the one-sided tyrannical behavior of the Trump “administration” does stump. Suddenly every foreign nation is labeled an enemy who are busy ripping the U.S. off. Any consultation with other partners is absent. King Trump has spoken. And is going to play a game of golf the day after he drops the bomb. Period.
It is obvious - and perhaps the point of all this:

• That the world turns against the US and unites in it
• That this will result in at least a recession and even a depression in the US and perhaps globally
• That the world’s financing of the US, partly through Treasuries, partly through investment through the stock market pulls out. That out-flow has been going on for several months - reason also why US stock markets fell sharply and Chinese/European stock markets less so. Money was funneled out of the US towards Europe, China … and gold.
• Luke Gromen gives that framework well in an interview last week in On the Tape with Danny Moses
  Looking ahead. I was impressed by the argument of Chris at the time that refineries cannot easily switch input oil types. That this is a lengthy and sometimes even impossible process. Well: that necessary switch is now being dished up by the Trump administration to every company worldwide. This cannot but lead to a sub-optimal working of the global economy as we knew it until now in the next few years. Everything becomes uncertain, visibility becomes 0, so does financeability, investment decisions are postponed… There is not a little sand in the tank, no the tank is full of sand.
  The global economy will poach, “priced to perfection” is over. Government deficits will increase sharply, and in the medium term we will read about sovereign defaults. Of the U.S. as well.
  Is this the ultimate goal of the Trump administration: to initiate a process leading to and justifying the sovereign default of the US, and activate the Great Taking / introduction of digital currency?
  Here is the link to the Luke Gromen interview. luke gromen on gold youtube latest - Search Videos

[peak1970 (YR1970)]

Watch this and you will quickly realize what an amateur show this administration is. They WILL break something or unite the world against/away from the US. We all will pay the price for decades. How about that 10% penalty?!

The bizarre way Trump’s team calculated reciprocal tariffs | About That

[larrythelogger]

Larry Johnson from Sonar21 and his take:

https://sonar21.com/some-observations-on-tariff-hysteria/

[larrythelogger]

VDH’s take on the tariffs:

https://x.com/FreyjaTarte/status/1908281098141892883

[vtgothic]

This data is from 2023. We’re 2 years on, now.

[barbarah]

Thanks for all the conversations with Paul. You guys do a great job of keeping things in perspective. My biggest hang up is knowing it’s best to take a profit and get out before things go south…… but being so pissed off about having to pay taxes on profits if I do sell. Paul often talks about taking the emotions out of investing. Could you briefly touch the point about dealing with tax implications sometime? That’s my emotional hang up. Thanks for all you guys do.

[permiegirl]

That’s an interesting chart! But then where is all the completely shitified crap coming from if not China? For example, we needed a new hose for our air compressor, hubby having sent a nail through the old one. Ordered a Dewalt on Amazon. Lasted a few leaky hours before a hole blew. So he did a fast Depot run for a no-name one. That leaks but works well enough to use for now. Most everything sold to Americans is shit, but I thought it was mostly Chinese shit.

[arsann (RuS)]

VDH still assumes that the tariffs DJTrump showed are actual tariffs. In a month or two he may have figured out the arbitrariness of the calculation LOL.

[vtgothic]

@permiegirl

I thought it was mostly Chinese shit.

Well, China’s not completely out of the low-end products market. But for the most part, shit Home Depot and WalMart stuff isn’t Chinese any longer. China’s moving up the value added chain, and is increasingly producing better products than the West, sometimes on wholly new fundamental engineering. Perhaps your Home Depot no-name crap is coming from Vietnam?

[permiegirl]

Well, the Dewalt crap is still made in China. My experience still contradicts your chart but maybe that’s not your experience.

[vtgothic]

Yeah, I was about to say that too. VDH is clueless; he even thinks Russia woke up one morning and decided to initiate an unprovoked invasion of Ukraine. (I wonder what he thinks of the clot shot…)

@larrythelogger: as @arsann says, these are not tariffs. The Trump Admin did some simplistic math based on wholly false assumptions.

Plus, of course, it’s impossible to be the world’s reserve currency and not run a trade deficit. You have to export more dollars than you get back to keep the globe in liquidity. For Trump to say on the one hand that he wants to level the playing field and, on the other, that he’s going to make suffer any country that tries to stop using USD for trade settlement requires cognitive dissonance.

And thirdly, while the US can reshore production (and should, imo), it can’t do it without first creating modern infrastructure and transportation, and totally reforming our truly pathetic education system so that we can produce work-capable adults, who also know math and how to read for understanding.

If Trump really wants to reshore he needs to do that first. Since he’s not doing that first, he’s telegraphing that he wants foreign and domestic companies to bring the plants to the USA, but will have to let them also import the foreign workers, designers, and engineers who operate those businesses. Most Americans will only be qualified for rote manufacturing jobs and for cleaning up at the end of the day. Not American workers’ fault, but it’s the fault of our failed social structure and culture.

I think what’s going to happen is that the rest of the world is going to continue to pull away from the West, especially the USA, and let us sink to the level we’ve actually earned by our entitled b.s. Analysts say, for example, that China can be fully disconnected from the US in 2 years.

[russcr5187]

@barbarah

Could you briefly touch the point about dealing with tax implications sometime? That’s my emotional hang up.

If I can be permitted to offer some thoughts … one phrase I used to use with my clients is the idea that you shouldn’t “let the tax tail wag the investing dog”. On the other hand, in those days it was demonstrably better on average for most people to stay the course rather than try to time the market twice (once on the way out, then again on the way back in). People would call me during a nasty drop in the market and say, “Take me to all cash!”. To which I would reply, “OK, it’s your money, but here’s the rule: if you tell me when to get out, you have to tell me when to get back in.” Not one client went through with the all-cash exit.

HOWEVER, that was then and this is now. One of the reasons I retired is because the future has never been as uncertain as it is right now. Staying the course is a prediction about the future. Personally (and this is not meant as investing advice), I would eat the taxes and sit on the sidelines for a while. But that’s just me, as I have managed to reach financial independence at this stage of my life (79), with positive net income pretty much every month.

The bottom line in all of this is that every person’s situation is different, including (and especially) their tolerance for risk. I wish you all the best in your investing future.

[russcr5187]

What’s also disappointing is that we seem to have ratings inflation, similar to the way student grades have been inflated as the nation becomes more stupid.

[vtgothic]

Well, it’s not my chart. And it’s based on data from international organizations, as it says at the bottom.

And, the chart does not say what percent of US “consumer electronics” (for example) are represented by the $96 billion worth of consumer electronics exports. It says that our $96 billion of imports of consumer electronics from China is just 22% of China’s global exports of consumer electronics.

Maybe all of our crap hoses come from China. I don’t know. But the lesson is that China can survive without trade into the US. This is why tariffs and other forms of economic war against China won’t work. I do know that a lot of textile production has been offshored from China to Vietnam and Bangladesh; probably also elsewhere - hence my offhand guess about your leaky hose.

It’s still the case that China is engineering better phones, better EVs, and has even just permitted their first flying taxis this past week. They found a way around the effort by the US to prevent them manufacturing microchips, and by building their own design beat our performance at the same time. Plus, let’s not forget their free opensource AI released last month.

It’s all evidence of the fact that China is moving up the value-add chain. And can live without the West much more easily than we can live without them. Including, we need their rare earths to make our weapons with which to threaten them. And China just put export restrictions on some of them as part of its retaliation for these so-called tariffs (that aren’t even tariffs, really).

[binkey]

I view this as a shift of money flows. Those business operations subject to the tariffs end up having higher costs. The cost will be that which the US government or whatever government is applying the tariff successfully skims using tariffs.
This change in money flows means economic adjustments. Since the full extent is unknowable, people refuse to commit investment funds. (I am not adding investments until the smoke clears).
We can be sure that the pundits will have plenty of opportunities for click bait. As you properly note, Chris, we and even the pundits are in the cheap seats. About the only logical conclusion is that the tariffs will provide a large new tax revenue source which Congress will salivate over. Yes, someone has to put in the work to generate those revenues. They therefore remove money from someone’s disposable income. Here is the key unknown. Those tariffs are supposed to be exchanged for other disposable income relief. However, if those tariff revenues are treated as a “harmless” new source of revenues by the political system, we will have added a whole new tax burden with no benefits. As we are at max tax-paying capacity today, any new tax burden would launch bad economic times and those declining living expectations almost always end in uprisings.
Conclusion: The future will depend upon our political system exchanging tariff revenues for income tax relief and reducing expenditures to levels that John Q. Public can willingly afford to pay.

[redneck-engineer]

@larrythelogger

VDH’s take on the tariffs:

Aside from the side comment about UKR/RUS, VDH is spot on.

Vietnam quickly responded by offering to zero out their 46% tariff on American goods. Just like Trump said. Reciprocity.