A Year of Turmoil

The team at Acting Man wishes you and your loved ones a Merry Christmas / Happy Holidays and all the best for the new year!

Hopefully our missives helped you navigate the treacherous waters of the financial markets this year. As our low posting frequency attests to, we unfortunately continued to be incapacitated by our poor health. Nevertheless, we did our best to chronicle the growing cracks in the bubble edifice.

Evidently the Bad Santa got hold of the markets this year.

It seemed particularly important to us to keep readers apprised of our market observations this year. Since we were forced to economize in terms of time and energy, we decided to focus on this subject and postponed articles on theory, history and political issues to a later date (we did discuss economic theory from time to time in a financial market context though, such as e.g. in “Capital Structure as a Mirror of the Bubble Era”).

(Click on image to enlarge)

An up-to-date version of the chart our most recent market update ahead of the FOMC announcement started out with. We hereby declare this the most eerie chart pattern comparison of the year. The stock market actually managed to create a near perfect mirror image of its 30-year seasonal pattern. We have never seen anything like this.

It turned out to be quite an interesting and exciting year – in the Chinese curse sense, that is. We have shown the above chart depicting the nearly perfect inversion of the normal seasonal trend many times over recent months and have frequently stressed that the sharp decrease in money supply growth in the US and abroad represented a serious threat for overvalued “risk assets” (the most recent updates on US money supply data in chronological order can be accessed here: “The Liquidity Drain Becomes Serious”, “Liquidity Drain Accelerates” and “The Federal Punch Bowl Removal Agency”; the most recent global update: “A Global Dearth of Liquidity”).

The most recent update of TMS-2 growth shows a further decline to 3.4% y/y as of the end of November, in line with the preliminary estimate of our friend Michael Pollaro. Incidentally, Michael and Ed Bugos point out that the quarterly growth rate of TMS-2 is a mere 1.2% at present, while the narrow gauge TMS-1 is currently even contracting at 1.4% quarter-on-quarter. This is all the more remarkable as growth in commercial and industrial lending continues to accelerate – but as we have pointed out in the past, this is actually a late stage cycle phenomenon, as companies begin to scramble for capital that is scarcer than was previously believed (see: “A Scramble for Capital” for the details). Meanwhile, total US bank lending ended the month at a 3.6% y/y growth rate, which is far from what was considered boom conditions in the past.

Frankly, we almost wish the year had become a little less exciting in December. After all, who needs such enormous market upheaval this close to the holidays? It should be a time to relax and recharge one’s batteries. Instead we find ourselves glued to the screen every day, supervising the progress of option trades.

Reportedly the Good Santa was detained by Customs for violating the new not-so-free trade regime.

Although we always point out that we cannot make precise predictions, we do consider evidence-based probabilities and have made no secret of our bias (after all, we are on “Death Watch” for the Great Bernanke Echo Bubble since the beginning of the year – see also “Too Much Bubble Love, Likely to Bring Regret”).

Our most important idea was probably that the end of the bubble would differ in several aspects from previous cycles – this is to say, not all of the usual warning signals would be present to conveniently warn market participants of an imminent peak. Let us be clear that it isn’t even certain yet that the bubble has really ended, but it does look extremely likely.

Assuming that is has ended, there were indeed several developments that made its demise unique. We will go into more detail on this point in an upcoming update on credit spreads. The fact that the latter did not lead the decline in equities was in fact one of the things that turned out to be different from before, as was the unusual market weakness in the month of December.

Let us just add this: we believe that because of these differences there now exists what we would term a “bear market hook” – a misguided narrative that will keep many investors in the market as it continues to decline (more on this soon).

This is one of the data points that suggests that the bubble has indeed ended. The recent expansion of multiples will likely give way to a period of contraction from here on out – and if one looks at previous major valuation peaks, it is clear that once the market starts heading down from extremely high valuations, it doesn’t stop until the contraction of multiples is well advanced. A “reversion to the other extreme” is a far more likely outcome than a “reversion to the mean”.

Still, we take no joy in the market declining into the holiday season and we generally don’t really like bear markets, even though they have salutary effects in many respects. The socioeconomic implications of a severe bear market are something we look forward to with some trepidation these days. The stock market remains a barometer of the social mood, and as such the demise of one of the biggest bubbles in history harbors many potential dangers.

Nevertheless, just as we said last year: enjoy your holidays anyway! Hopefully you will see more from us in the coming year – as mentioned above, this year we still battled and had to shelve a number of articles we originally planned to publish. We will try to catch up a bit next year to the extent our health permits.

We also wanted to remind you that a donation to this site is a tried and true method of warding off visits by Krampus and generally will not only contribute positively to your spiritual well-being bit also to how posterity will remember you. And yes, we do take cryptocurrencies as well – we have spread out a bit and added new addresses for different currencies, a list of which you find below (more likely survivor currencies will be added over time).

Just to be safe, in case the good Santa gets out on bail…

 Charts by Seasonax, stockcharts, Acting Man, multpl.com