Bear Market

Government interference by both central banks and regulators (the latter are desperately fighting the “last crisis”, bolting the barn door long after the horse has escaped, thereby putting into place the preconditions for the next crisis) has created an ever more fragile situation in both the global economy and the financial markets. As the below charts and data show, price distortions and dislocations have been moving from one market segment to the next and they keep growing, which indicates to us that there is considerable danger that a really big dislocation will eventually happen.

With an all time high of 293 ounces of paper per ounce of registered physical gold, it appears hedge funds continue to ignore systemic risk and surging physical demand, merely following the trend lower in paper gold prices by adding to already record short positions in gold last week. With the speculative world near-record long the USDollar and record short gold, how much longer can the status quo boat can remain upright with so many on the same side. After this week's shake-out of USD longs courtesy of Draghi, one wonders if the gold squeeze is about to begin?

Silicon Valley has been in a food fight for about three years now. Everyone knows it’s going to end, except for the folks in Silicon Valley. Anyone who invested at these valuations will richly deserve what’s coming to them. Those prices were cuckoo.

If this is the case, the next Crash has already begun. This would put us at the equivalent of where the markets were in late 2007: just before the whole mess came crashing down in 2008.

The lack of fear in risky assets is another way of saying that risk premia have been low, or as we also like to put it, that complacency has been high. Not fully appreciative of this inherent risk, it seems many investors have refrained from rebalancing their portfolios, and bought the dips instead. We believe the Fed’s efforts to engineer an exit from its ultra-low monetary policy should get risk premia to rise once again, that if fear should come back to the market, volatility should rise, creating headwinds to ‘risky’ assets, including equities. That said, this isn’t an overnight process, as the ‘buy the dip’ mentality has taken years to be established. Conversely, it may take months, if not years, for investors to shift focus to capital preservation, i.e. to sell into rallies instead.

Long term risk has increased quite a bit, no matter which data points one happens to consider. Whether one looks at valuations, market internals, leverage or positioning, there are now more warning signs than ever. With the support provided by strong money supply growth declining as well, it becomes ever more likely that these potential dangers will actually materialize. It is an accident waiting to happen.

Forgotten what 2008 was like? What's coming will be far worse.

Is Apple going to produce more electric vehicles ten years from now than BMW?

Once again, the expected outcome of the most recent wave of deterioration in market internals will likely depend on one’s view of the current market regime. Are we in an environment that can continue to largely dismiss these breadth warnings, ala the late 1990?s? Or are stocks fated to eventually succumb to the weakening internal foundation as in the post-2000 period?

“The correction didn’t really solve a whole lot. You have all the same underlying market fissures in place, yet they will have lasted another six months... the odds are very high that the top was in May. I still think we’re looking at a cyclical bear market.”

Global policymakers have gone to incredible measures to stabilize market, financial and economic backdrops. Yet reflationary measures will continue to only further destabilize. When policy-induced “risk on” is overpowering global securities markets, fragilities remain well concealed. Fragilities, however, swiftly manifest with the reappearance of “risk off.” Rather quickly securities markets demonstrate their proclivity for illiquidity and so-called “flash crashes.” So after an unsettled week in global markets, the critical issue is whether “risk on” is giving way to “risk off” dynamics.

Is the post-September rally already over... or is it just getting started? The answer likely depends on what market climate we’re in now.

"We fear we have been bullish over the course of the past several weeks… indeed rather aggressively so… and did not pay sufficient heed to the warning signs of lesser volume.  We are not wise enough to say that a bear market is now upon us, and indeed we are wise enough NOT to say that but discretion is the far better part of valor and the safety of the sidelines after several weeks of real bullishness on our part is to be sought."

- Dennis Gartman

It is important to note that the current weakness of gold is primarily in dollar and sterling terms. For investors in Canada, Australia, New Zealand and the EU gold is once again acting as a hedge.

Breaking a critical trendline (particularly one that has been in place for several decades) is one thing. Breaking it and then failing to reclaim it during the following bounce is indicative of BEAR MARKET.