The Phantom Mania

Well, stocks are back at all-time highs. Ignited by the Fed’s “Not-QE” program and endless Trump administration teases of an “imminent” China deal, the S&P 500 has been propelled above its upward Bollinger band – a hyperextension only seen one other time since 2007:

Every week since Not-QE was announced has seen the S&P close green (this week finally ending the streak, barely). We’re officially in a melt-up, where both good news and bad news are accepted as valid reasons to push stocks even higher.

But what’s notable about this melt-up is that it’s missing a compelling narrative. Every past asset price mania required a feel-good mantra that convinced the masses “This time is different!”.

The South Sea bubble promised access to the untapped riches of the vast Asian sub-continent. Dotcom companies were going to unlock tremendous value previously trapped by the inefficiency of the old analog way of doing business. In 2017, Bitcoin looked like it just might replace fiat currencies overnight.

During the price melt-ups accompanying each of these manias, the public fell for the siren song of a radically better future, available RIGHT NOW if you just jump on the party train before it’s too late.

But today? What’s the radically better future being promised? Where’s the party train headed to?

A Parade Of Horribles

As best I can tell, it seems the rationale (I'm using that term very generously) for the current market melt-up is that:
  1. The Fed is backstopping the market again
  2. A trade deal with China is going to happen, likely soon
Let's dig into each of these. But before we do, let's be clear that neither of these promises a "radically better" future.

The Fed, and its central bank brethren around the globe, have been backstopping the market for the past decade. There’s really nothing new in that.

And resuming friendly trade with China will largely be a restoration of past conditions. While, yes, the drag of the recent trade constraints will be removed and perhaps the US will receive some nice concessions, it’s not like we’ll be gaining a major new trading partner that we didn’t have before.

In short: neither new QE or a China deal is transformative. Manias typically require a transformative narrative as their fuel.

Now, looking at the Fed’s new QE program: how material is it? Well, since the outbreak of the GFC, we know that the central banks have more than tripled the world’s money supply (from roughly $6 trillion in 2008 to $20 trillion today):

And how has that worked out?

Well – hurray! – asset prices (stocks, bonds, real estate, fine art, etc) have shot the moon. Mind you, at the cost of creating the worst-ever wealth disparity in the US, and many other countries as well.

And the main expressed reason for all this liquidity – to goose the global economy back to robust growth, how are we doing there?

Not well. Mission definitely not accomplished.

Despite the tens of $trillions created from thin-air over the past decade, of sacrificing prosperity from the future (and not just ours, but our children’s and grandchildren’s) in exchange for growth today, here’s where things stand:

On top of the sour GDP outlook, US companies are officially in an earnings recession, with every quarter of 2019 now projected to be lower than 2018's.

In theory at least, stocks are supposed to valued based on their prospects for future profits. Do shrinking earnings and an increasingly recessionary global outlook scream “buy stocks now at record prices!” to you? They sure don’t to me.

Now looking over at the China trade talks, what’s realistic to hope for here? The much-touted lets-start-with-the-easy-stuff Phase 1 ‘agreement’ still remains unsigned. And even if it becomes so, it doesn’t address the principal issues at the heart of the trade dispute.

Worse, it’s increasingly being regarded as meaningless. Yale’s Stephen Roach derides it as “hollow”, “flawed” and “ridiculous” with no real value beyond the superficial.

And being honest with ourselves, why would China strike a trade agreement with a president up for re-election in less than a year? He may not be around to hold up his end of the deal. It just makes sense to wait until the dust settles after next November.

And this goes triply when that president is currently mired in impeachment hearings. Trump needs the deal done soon much more than China does. Time is on their side, giving the Chinese the lion’s share of the bargaining power here.

Toss in the likely passage of the Hong Kong Human Rights and Democracy Act – which is massively offensive to China’s Politburo and already approved by both chambers of the US Congress – and the odds of the Chinese happily agreeing to anything substantive in the near future is about as low as Epstein having hanged himself.

So… ineffectual QE and pitiful odds of anything material happening with China anytime soon. These are the promises of a “radically better” future responsible for driving the current market melt-up? This is the rationale for stocks being the most overvalued they’ve ever been?

This doesn’t smell right. All asset price manias end badly. But at least you can understand the psychology that created the mania in the first place.

This time, you can’t even do that. Which leads us to believe that not only will this end badly, but sooner vs later. There’s just not a strong enough party-vibe to power the delusion.

Actions To Take Before 2020 Arrives

Given all the above, the prudent among us should regard today's hyperextended prices with healthy skepticism. Both history and common sense show us that what can't sustainably continue -- won't.

Now is the time to prioritize defense and to position your portfolio for safety. And for those with the means and constitution, perhaps to place a few managed bets on lower prices ahead.

Specifically, we recommend everyone reading this ask themselves the following questions:

  1. Is my portfolio sufficiently protected should the market drop 20%+ from here? (our primer on How To Hedge Against A Market Correction will help you assess this)
  2. Do I want to bet against the current melt-up mania? (our recent report Resuming The Crash Position reveals the speculative positions we're taking to profit should prices reverse from here)
The above questions are timely given today's extreme market distortion. As usual, we recommend exploring both seriously with your professional financial advisor.

But there are other important questions that are just as timely given the approaching year end.

Every one of us should be in conversation with a professional advisor asking: What smart end-of-year steps should I be taking before Jan 1st arrives?

The “right” answers will depend on your unique personal situation and goals. But common tactics include:

  • Offsetting taxable gains across your portfolio, including the thoughtful harvesting of any unrealized losses and/or use of “carryforward” losses from prior years
  • Deferring tax liabilities
  • If you're older than 70, are you meeting your Required Minimum Distribution obligations?
  • Charitable giving (and tax-advantaged ways to do this using your retirement accounts)
  • Evaluating whether it may make sense to electively distribute monies out of a retirement account to optimize tax considerations (e.g., to take advantage of a low income tax bracket if your taxable income is uncharacteristically low for the year) and/or to free up funds for more tactical deployment (e.g., in real assets or other investments)
If you don't have a professional financial advisor whom you feel comfortable discussing these important questions with, consider scheduling a free consultation with our endorsed advisory firm. They have decades of experience helping investors just like you navigate the decision-making process and position your portfolio appropriately given your goals.

Just don’t delay. The end of the year will be here before you know it.

And the inevitable market correction could well arrive even sooner.


This is a companion discussion topic for the original entry at
$1 billion bet that markets will drop by March 2020 seems like a fairly significant wager. Anyone have access to the full article and willing to provide a synopsis. The paywall prevents the plebs who are non-subscribers like me from accessing more than the first two paragraphs.

I’m not a WSJ subscriber either. But ZH posted this summary a day later:

Ray Dalio Denies He Is Betting On A Market Crash: "You Can Believe Me Or You Can Believe The Wall Street Journal"

After sparking much apocalyptic speculation following the previously reported WSJ article according to which Bridgewater has a $1.5 billion short position on the S&P which implies a sharp market drop before March 2020, the fund's founder, Co-Chairman and Co-CIO has come out refuting the WSJ article. ... Dalio published a brief LinkedIn comment in which he claims that the WSJ article's conclusion that Bridgewater is betting on a market drop is "wrong", and wants to "make clear that we don’t have any such net bet that the stock market will fall." .... What Dalio is in effect saying is that the short position is merely a hedge to its existing portfolio....

It seems the speculative money has front-run a phantom"fourth mini-cycle of expansion" that’s supposed to have started:
Not much of a grand narrative but enough for an era devoid of any secular expansion… until it isn’t.

and the odds of the Chinese happily agreeing to anything substantive in the near future is about as low as Epstein having hanged himself.
  Well played. Well played indeed. ;)
Well played. Well played indeed. ?
I figured that line would be well received by this crowd...

This just came out today, providing further validation to my assessment of the China trade deal status:

The news follows a previous Reuters report last Wednesday, according to which the signing of the Phase 1 deal could slide into 2020 as the two countries have hit an impasse over Beijing’s demand for more extensive tariff rollbacks. Officials in Beijing say they don’t anticipate sitting down to discuss a phase two deal before the U.S. election, in part because they want to wait to see if Trump wins a second term. "It’s Trump who wants to sign these deals, not us. We can wait," one Chinese official told Reuters, refuting a daily refrain from Trump who in turn has claimed that it is China that is looking to sign a deal quickly. At the end of the day, with neither side willing to compromise and show weakness, a deal may never actually happen. To be sure, as we drag closer to the Nov 2020 elections, China's leverage seems to grow (source: Reuters)

I’m mostly in agreement about the chances of a deal getting done - in that, it probably won’t be.
The dynamic I’m seeing play out is this: China’s buckets-o-money soft power (“Hunter Biden”, Nike & the NBA, etc) versus the situation in Hong Kong, which gives the Dems the chance to embarrass Trump from the right, along with the defense-cartel Reps. Add to this the new Committee on the Present Danger, and you have Trump himself and his desire to get a “good deal” for the US, and I’m not sure that buckets-o-money will continue to prevail. That approach may be past its prime.
Beijing is in a rush, for some reason. They want to seize Hong Kong too much, and they want to do it right freaking now. Winter is coming. Or something. And they seem to feel they are running out of time.
So while logic and experience and our popular wisdom that “Xi is dictator for life so he can wait forever” just doesn’t tie in with what we see them doing. They are not showing any patience at all. Not in Hong Kong, not in Xinjiang, not in the “sinicization” campaign, not in the crackdowns on Pooh and other sorts of really mild dissent, not in the “social credit system”, and not in the steady flight of capital out of the country. Xi himself warned his people that they were going to have to embark on a “Long March” - a scary reference to a terrible time in China’s past.
Taken together, it all smacks of desperation, of the gang in charge seeing that the wheels might be about to come off their wagon.
So given all that, it will be very interesting to see what happens on that Dec 15th deadline. If they can’t head off the next tariff increase, how many more US businesses will just give up and leave? I’m not sure they can afford to wait until 2020.
Certainly they haven’t shown themselves to be even a little bit patient. Not with Hong Kong anyway. They were before - but not anymore.
I think they really, really, really don’t want to do any sort of deal at all. But the tariffs may give them no choice.

DaveF, I would love to hear more about your perceptions on what is happening in China. I’m not familiar with the buckets-o-money soft power term, nor the historical events you are pointing to in Xinjiang, the “sinicization” campaign, nor the crackdowns on Pooh.
I’m not even sure where to look to come up to speed on these topics easily.
More information please.

From the article above:

Well — hurray! — asset prices (stocks, bonds, real estate, fine art, etc) have shot the moon. Mind you, at the cost of creating the worst-ever wealth disparity in the US, and many other countries as well. And the main expressed reason for all this liquidity — to goose the global economy back to robust growth, how are we doing there? Not well. Mission definitely *not* accomplished.
So here's the data...the most money printing ever coincident with one of the worst ever decades for global economic growth. It's worth noting that the dotted lines after 2019 are the hopeful projections of the OECD. I would gladly take the "under" on that bet. It's almost as if pumping more and more credit into a credit saturated system doesn't create the economic growth that the central banks bleat on so much about. It's almost as if this sort of data isn't reaching the "data dependent" Fed. It's almost as if the appearance of economic health (and the reality of a raging wealth gap) are what the Fed cares about most. Almost. I know the maxim is "never ascribe to malicious intent that which can be assigned to stupidity" but - c'mon - nobody is that stupid.

Examples abound:

Check out sent in undercover reporters.The AP released confidential documents yesterday.Google Chinese organ harvesting to the tune of at least a billion a year in profit.The youth of Hong Kong understands.So does our government…

Heh. I think you are just baiting me. “I don’t know what search terms to use.” Really? You??
Nevertheless, I will dutifully bite:
First: soft power definition: seeking to increase influence using non-kinetic means. A friend of mine who is in the belly of the beast right now asserts that (historically) China isn’t so good at kinetic operations. Over the millenia, China’s wins doesn’t come from winning military conflicts. Unlike (say) Rome, or Germany, China does not have a tradition of being good at warfare. So the CCP made a strategic decision to avoid kinetic confrontations and instead use “other means” (i.e. bribery and coercion) to advance their agenda.
US corporations have become adept at buying government in the West. The CCP has noticed, and they are just following in their footsteps.
Example: bribing US politicians (Hunter Biden gets to “manage” 1.5 billion -> Joe Biden: “Oh, those Chinese, we don’t need to worry about them”) just as one small example. Here’s an old article by Peter Navarro from 2016 - you might recognize him from Trump’s current team:
Likewise, when that NBA coach tweeted “stand with Hong Kong”, the CCP instructed the NBA to fire the guy. LeBron “Black Lives Matter” James dutifully opined that this coach was uninformed, and shouldn’t comment on stuff he didn’t know about. (Apparently, Black Lives Matter - but not Asian Lives - if they get in the way of selling Nike shoes in China).
Soft power is how China more or less bribes US corporate interests to stand in for China in lobbying the US population and the US government. Soft Power (i.e. bribery & extortion) almost got that NBA coach fired for a single tweet.
“If you want to play in the Chinese market, you will kowtow to the CCP.” That’s China’s soft power. And it is why the West has largely ignored Xinjiang, and industrial-strength organ harvesting from political prisoners.
This, from the country where half of the population goes literally apeshit over the issue of transgender bathrooms. Take 1-3 million Muslim people, imprison them and subject them to horrific conditions? Yawn. But fail to bake a wedding cake for a gay couple? Don’t have a third bathroom for 0.4% of the population? Its the end of the freaking world. (Why is that? That’s a question for another time.)
And of course if your organization even mentions this stuff, you can no longer sell into the Chinese market.
Executive summary: Xinjiang: from 1M - 3M people in concentration camps. We have testimony from an escapee. Hers is a remarkable story:
Organ harvesting. If you are a heart transplant customer for a Chinese organ transplant, you can schedule your transplant one month in advance. Think for a moment: what must the structure be that allows a patient to schedule a heart transplant one month in advance? A lay person won’t understand what this means - but I know you will:
The CCP has effectively monetized the political prisoner system. Cui bono?
Search terms:

  • china soft power
  • xinjiang escapee
  • organ harvesting tribunal falun gong
    The only reason #2 and #3 haven’t become bigger news? Well, that would be item #1. China has used its soft power (i.e. bribery & coercion) to “dissuade” western media from talking too much about #2 and #3.
    We’re too busy with transgender bathrooms, gay wedding cakes, and “racism” to notice.
    The stuff we have to deal with in the West? Truly First World Problems.
    Hope that helps.
We’re too busy with transgender bathrooms, gay wedding cakes, and “racism” to notice. The stuff we have to deal with in the West? Truly First World Problems.
First world problems, we wish. A gutted middle class, third world infrastructure, wealth distribution of a gangster state, completely dismantled industrial infrastructure, completely dysfunctional political system, one of the largest purveyors international corruption and violence, massively corrupt financial system, privatized prison system with more incarcerated than China in total and a completely bought and sold media. Soft power, we designed and engineered it globally. My understanding is the tariffs affect in the single digit percentage of total China/US trade. More then half of the stuff coming out of China is from off shored American companies selling back into the home market (don't know how that can be actually characterized as trade, forced on companies by wall street). Big issue is the global slowdown, which central banks are ineffectively trying paper over. Pointing at someone else doesn't work for me anymore, we have enough of our own problems.

Where I stand, desperation is the likely Fed motive, not stupidity or malicious intent, and has been ever since 2008. Like a drowning man thrashing about for air, I doubt the Fed is worried about appearances, fairness, nor even growth, but just trying to get one last breath before drowning in debt.
I guess I have more sympathy than anger regarding the current Fed actors. In the Paul Volcker era the US had considerable political & demographic firepower. Today, what else is there to do but pile up more debt in clever ways to delay drowning in our debt? What’s the realistic alternative, politically? I’m open minded, but I’m just not smart enough to see any. 2008 was probably the last chance to act in a democratic system but it would have taken a heroic and iconoclastic national leader (not a Bush or Obama) to get everyone (read: boomers) to sacrifice. Can’t see it. We get the leaders we deserve.

Go to about 47:00 to 1:01:00.

Roger B. Myerson
first version: July 1998 final version: January 2004
Abstract. The treaty of Versailles and the Weimar constitution were written in 1919 with expert advice from John Maynard Keynes and Max Weber respectively. This paper considers how advances in political and economic theory since then could help to better understand the problems of Weimar and Versailles. The Weimar constitution’s combination of a strong presidency with a proportional-representation legislature may be responsible for the breakdown of German parliamentary government, and may have facilitated the careers of extremist authoritarian politicians. The Versailles treaty’s huge reparations bill created a war of attrition that encouraged Germans to cultivate the Depression and Nazism.

I love Jim Rickards analysis, I haven’t heard him speak about exponential resource depletion but I`m positive he is well aware of it. My favorite part of the video is from 103:5-103:16 the look on the interviewer on the left at the 103:16 mark is priceless!
Thanks for the link THC,