The Good News In All The Bad Data

Tyler Durden's picture

Today's financial markets make a mockery out of sanity and logic. The difference between what SHOULD happen and what IS happening is perhaps the greatest it has been in our investing lifetimes.

If you're perplexed, flummoxed, frustrated, stymied, enraged, bored, irritated, insulted, discouraged -- any or all of these -- by the ever-higher blind grinding of asset prices over the past several years, despite so many structural reasons for concern, you have good reason to be.

Something Wicked This Way Comes

For most of those reading this, I don't need to re-hash all of the reasons you already read at and similar sites on a regular basis. Suffice it to say there's an overwhelming plethora of reasons beyond the simple 'reversion to the mean' laws of math: weak economic growth, geo-political risks, sky-high valuations, goosed stock earnings, record-high margin debt, insider sales, consumer confidence, retail buying, high energy prices, continued central bank interest rate suppression, etc, etc, etc...

Here's a smattering of recent headlines on the current macro environment:

Are these the sort of headlines that should justify a stock market hitting new highs week after week after week for the past 5 years, with nary a pullback of material proportion?

No, they decidedly are not.

Instead, these are all warning signs that merit caution, and at least some degree of de-risk. They are factual, data-driven signals indicating that the stability of the status quo is unlikely to be sustained. Yet, they continue to deflect off of the Kevlar surface of the reality-distortion field today's markets have surrounded themselves with.

The fundamental issue at hand is: risk is being mis-priced WAY too low in both the stock and bond markets right now. Therefore, the prudent investor will want to reduce their exposure to the inevitable mathematical reversion of prices.

The Good News In All This Bad Data

And now we arrive at the main point of this article: The current crazy/frustrating/scary/pick-your-expletive level of instability in today's market is actually GOOD news.

The disconnect between financial asset prices and fundamentals simply must -- per the laws of Nature -- resolve itself. And given the interruption-free 45-degree ramp the markets have experienced since 2009, we can definitively say that we are closer to the coming correction than we have been at any time in the past half-decade (here's a chart of the S&P 500 from its 2009 lows): 

The bullet has been dodged for five straight years -- given the instability and the inevitability, how much longer can it be dodged? Not for long, is our conclusion. And given the uninterrupted rise to record highs, the potential energy stored in the system now should be much more kinetically destructive than it would have been had it happened sooner. So, we are at a time in the markets when confidence is high that a big move will happen soon, and happen to the downside.

This is as close as we're going to get in our lives to reading tomorrow's stock prices today. While we can't divine exactly what they're going to be, the odds are very favorable that prices will be lower -- likely a lot lower -- for most assets in the next 6-24 months than they are today.

So, what to do with this insight?

TIME is your great ally here. Wait for the correction to occur, to bring asset prices back down to the point where the math to purchase them again make sense.

This was the main point of the presentation from John Hussman we recently highlighted. Simply wait and let market forces/reversion to the mean remove the risk for you. By opting to take very little risk in the immediate term (i.e., sit on the sidelines), your odds of being able to enter at much safer and much more attractive price points in the not-too-distant future are very high by historical measure.

If the above logic resonates with you, now is the time to build dry powder and to develop your action plan for the correction.

The Case for Cash

Market corrections are deflationary. They create demand for safety and -- as long as the major fiat currency regimes are still in place -- a tremendous scramble for cash.

The falling asset prices and lost income that come with such a correction result in, on a relative basis, fewer people being "cash rich" (especially if we think of the actual paper bills). And these falling incomes and prices, if severe enough, can create negative feedback loops (such as margin calls) that exacerbate the need to raise cash quickly. This will be true both domestically and abroad, and so the hunger for cash -- especially US dollars -- will be high (Charles Hugh Smith has written about this at length).

So this is why in a deflationary environment, cash is king.  And why our advice is: Be royalty.

The big picture for the Economic "E" we discuss here at Peak Prosperity is the inevitable Great Wealth Transfer that is underway. These transfers have happened many times in history (Chris and Jim Rickards have an excellent historical discussion in this podcast), and are the "blood in the streets" episodes where good assets can be obtained for pennies on the dollar. During these moments in history, it's vastly preferable to be one of the folks holding the dollars (or whichever assets have retained their purchasing power).

It's for this reason that, at this particular moment in time, the combination of dry powder + patience is likely the single smartest financial investment to make.

Somewhat surprisingly, it's a difficult step for many investors to embrace. After decades of being marketed to that "investing" means holding stocks and bonds, many investors fail to realize that, sometimes, cash can be THE best investment for the near-term. It's important to be able to recognize those times. Our conclusion here at is that now is one of them.

Remember, both mathematically and emotionally, it's much better to avoid loss than miss out on gain.

Moreover, in a market like today's where asset prices are being driven higher by central bank liquidity much more than anything else, you have two big challenges. The first is that, as everything rises, it's much harder to identify which ones are the stars and which are the dogs. The liquidity flood is obscuring the details (as Warren Buffet famously said, until the tide recedes, you can't tell who's swimming naked). And the second is that, as prices get driven much higher than fundamentals merit, it's hard to know what "fair value" is. It becomes a much more subjective call, versus an empirical exercise. 

Which is why our advice is to build cash and wait. Wait until the mathematically-inevitable correction occurs, and then start considering re-entering the financial markets. You will have the twin benefits of buying the same assets at lower prices AND have a much easier time evaluating the "slam dunks" from the stinkers using tried-and-true quantitative methods of valuation. Remember, too, that bubble burstings over-correct on the downside, so your odds of finding exceptionally good entry prices will be unusually high. Moreover, if you have discretionary capital to invest as a market decline is clearly underway, it gives you the opportunity to make speculative bets to the downside (this shorting strategy is discussed in greater detail in the Stocks & Bonds section in Part 2 and most definitely is NOT appropriate for everyone).

As you increase your cash positions, take measures to protect them should they become large enough. For instance, if they come to exceed the $250,000 limit covered by FDIC insurance ($500,000 for joint account), place the excess in a new account; ideally in another bank. At (and definitely above) that level, it begins to make sense to diversify your cash holdings into multiple currencies. Consult your financial advisor about good strategies for this.

Many of you may be wondering: But isn't cash a risky asset in the long term? After all, we spend a lot of time here at writing about the loss of fiat purchasing power and the inevitability of a currency crisis. And about the dangerous of wealth confiscation through government measures like the bank "bail-in" seen in Cyprus. Have those concerns changed?

Not at all. But timing is key in this story. We can easily experience a deflationary rout before a subsequent hyperinflationary one (see the Ka-POOM theory), which would first see cash treasured, and then later reviled. This is more or less what Chris and I see as likely to happen.

But since no one -- including us -- has a crystal ball, we will be tracking monetary developments closely every day here at and will issue alerts to our enrolled members as we see outcomes becoming more or less certain.

And in the meantime, we'll continue advising the build-up of dry powder.

Why Planning Is The Top Priority Now

He who fails to plan is planning to fail.

~ Winston Churchill

Fortune favors the prepared mind.

~ Louis Pasteur

As Pasteur implied, having a "prepared mind" when others are losing theirs greatly increases your odds for success. Bubble corrections are vicious and always occur much faster than the run-ups that preceded them. During them, time is short and emotions are hot. So you'll want to be as cool-headed and surgical in your decision-making as possible.

To do that, you'll need a good plan devised well in advance of the chaos. 

Your plan should cover positioning for:

  • Pre-correction: notably, where to best protect the purchasing power of your wealth (relevant to everyone) & speculative bets to the downside (for experienced investors with discretionary capital ONLY)
  • Intra-correction: less speculative bets once downside momentum is clearly in play (for experienced investors)
  • Post-correction: identifying attractive target assets and favorable entry price points for deploying dry capital (for everyone)

Some steps of your plan will be taken in the near term, which will be relatively easy to perform while the environment is stable. Others will be put in place now, but lie in wait, ready to be triggered by market developments. When it comes time to deploy them, there's likely to be a lot of stress, confusion and uncertainty in the air -- which is exactly why you want to make your decisions now, in advance, calmly and logically. 

It should go without saying that such a plan is best developed working with a solid professional financial adviser who appreciates the market risks raised within this article. Most people reading this (myself included) are not well-positioned from an experience and/or bandwidth standpoint to construct AND manage plan deployment on their own, and especially once volatility and trading volumes return to the markets. Work with your adviser, or find a good one if you don't already have one. But do it soon.

With the current wide discrepancy between asset prices and fundamentals, don't be caught as vulnerable as you were in 2008. And, with a little planning and prudence, position yourself to take advantage when reality returns.

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A Lunatic's picture

I'm looking forward to seeing what my remaining $2,867 will buy me after the correction.......

Greenskeeper_Carl's picture

Not they hard to figure out. Bad data means more fed printing, which means stock markets go up. It works as long as other countries are willing to give us real goods in exchange for the pieces of paper we print and hand to them in exchange.

Deathrips's picture

"Everybody has a plan till they get punched in the face."

Mike Tyson


This hay-maker had been thrown decades ago, it made initial contact with the face in 2000, the force was felt in 2008...and the tweety birds have been circling the economies head ever since.

There is no plan but to fall down now, even that plan is being MOPE managed. At some point the conga music will stop gyrating Bernie will cease to move and the reality sets in hes dead.



Fucking with free markets is like fighting the tide with a works till it doesnt.


Silver breaks out of a 3+ year downtrend...bitchezz!






max2205's picture

Getting a little ahead of ourselves here don't you think

Deathrips's picture


So the earner is dazed, tapped out and you think Im getting ahead of myself....ok....Bernieonomics was a little over the top.

Doubt it.


Lets try again.

As financed assets go through a "deflation" real assets may fall with them at first breaking tandem when the currency is identified as the culprit. In confusing times and panicked times smart people can obtain value, if they aren't panicked and/or confused. 

Paper managed metals/commodities and stock prices are bullshit. The real "things" matter.

Its good to have options.



Never One Roach's picture
Condominium Ownership Is Becoming the American Nightmare


"No one saw this comning."

Seeking Aphids's picture

What I don't get is how so many seemingly smart people think the Fed can let interest rates go up. The debt is too big..this is not rocket science. So, given this premise, they must maintain ZIRP (or reduce the debt, which is politically impossible). They want inflation to reduce  the debt so they still need QE to devalue the dollar and stimulate inflation/spending. Problems with this scenario: malinvestment, equity bubbles, loss of faith in the dollar. Result: other countries move away from the dollar, commodities/energy increase in value relative to the dollar, US economy continues its decline as mal/non investment and the effect of the exporting of good jobs/tax revenue by multinationals works its way through the system, the dollar loses value and prices increase, other countries increase consumption partially making up for the lower US consumption and the world carries on, albeit with the US in an escalating downward spiral as the ever-growing (despite inflation) debt becomes increasingly difficult to fund/ service. What is holding the dollar up given the above? Other countries are also engaged in the same policies. The dollar is still seen as a safe haven and as the most liquid currency in the world. When will this change? Either the event of a war or major credit default (in which case I guess the Fed's game can go on for a while longer) or

2. when QE/ZIRP are finally recognised as permanent programs and when it becomes clear that no recovery is in sight or possible.

How to invest if the above is correct? Commodities, gold/silver and g/s mines, energy. If I am wrong point out the error in my logic. All imho.

Took Red Pill's picture

You are correct. If interest rates go back to "normal" levels, the interest on the debt will kill us. Commodities seem like a smart choice.

Eyeroller's picture

I'm looking forward to seeing how I can hold onto $2,867 for another 6-24 months while I'm waiting for the correction (that's their definition of VERY SOON?)

AmCockerSpaniel's picture

I see the Fed printing, and printing, and printing...... They will keep buying the S&P500, and not let it tank. They have all the money they they want, and when they want it.

I can see them getting enough shares of all the BIG companies to control them. The fed has to many shares now to sell into any market with out causing it to tank. The only

one who can take all those shares is the US government. That will be slavery, not with a whip, but with dollars, and for the 99%. Only this time it will not be one race.

disabledvet's picture

"Liquidity. Everywhere and always the market is only about liquidity."

Remains to be seen if the Government of North Dakota can create debt "good as gold" of course. They're still flaring a stupendous amount of natural gas while "flaring" a stupendous amount of debt.

Still..."flaring debt" is a form of "liquidity generation." If "married" with actual natural gas in theory that State Bank could issue a "currency reserve" ("Bison Bucks.")

They would need a reserve of the actual natural gas first and "of its quality."

The Utica and Marcellus shale ("Ohio gas") comes out already "processed" or "sweet" thus "not in need of refining period."

Ironic since the biggest natural gas refinery in North America was just completed in....OHIO!

Still....long way from five bucks (current price) to 15 (all time high under "W.")

I do see that plans for a "natural gas powered fleet" are collapsing under the "weight" (batteries are very heavy) of Tesla...and OSK.

Save for the Navy and Marine Corps of course.

That new Army class of "MRAPS" gets 25 mpg apparently.

Those are Diesel engines of course.

lasvegaspersona's picture

Exactly what the Fed can do by using interest rate derivatives and Forex manipulation remains to be seem. I suspect they have figured ways to make a few billion a month go a long way. They have silenced the alarms so it is not possible to assess the actual risk of collapse in the usual quantitative ways. 

The outcome is certain...systemic failure...but the way it unfolds will no doubt be unique.

If currency failure comes first the plan detailed above will fail horribly.

Peter Pan's picture

I have the feeling that if cash is going to be king it will have to be cash in hand rather than cash in the bank. A serious asset adjustmnent is bound to case upheavel in the banking system and hence the cash at bank may not be so safe.

Then again, no one knows what crazy schemes we are yet to see from central banks and governments in addition to the ones they have already put in practice. They are actually crazy enough to print next time round and distribute it directly to the people particularly if the people are on the verge of exploding.

Predicting events and their timing is a great way to ruin your reputation.

GS-DickinDaMuppets's picture

This is a very clear, well written piece.  I look at the markets going up, up, up, for NO LOGICAL REASON, day-in & day-out and cannot believe that others don't or won't see the massive and blatant manipulation by TPTB.

I continue to stay on the side lines only investing in small real estate parcels and PMs, as I KNOW, (SOONER OR LATER), these markets are going to explode, spreading shit and financial destruction on all the little people that have struggled their entire lifetime in hopes of accumulating a small nest egg.  My only prayer is that the bastards that created all this destruction get their final reward in hell.

techstrategy's picture

Amen brother.  The way we send them there is to exit financial assets (particularly float scams like AMZN and NFLX), raise physical cash outside the banks (which prevents misuse) and buy gold (which front runs their end game).  Use their bubble against them.  Judo.

Hohum's picture

It's not mania.  It's liquidity plus the fact that investors (along with the rest of us) cannot create wealth.  So "faux" wealth will have to do.

NDXTrader's picture

As much as I love ZH as a news source...these kind of articles make me scratch my head. Asset prices are moving higher because the measuring stick (currency) is being debased. It's that simple...all currencies from the Dollar, Yen, Euro, Remnibi and on and on are being debased - that's it. If you are 6 foot tall and the ruler shrinks, guess what you will be 6 foot 2 inches. It doesn't mean you grew, it just means the measuring stick has been shortened. In a world with prices set by debased currencies, asset prices gain...pure and simple

Bruno de Landevoisin's picture

That same molten measuring stick will ignite the flames of inflation which will burn this house down.

goldpercent's picture

I completely agree with your premise. So, if one were to stay in cash at the moment waiting for a correction, you could put your cash into the stock market at a nominally low point.  The nominal value would shoot up, but your purchasing power would sit still, if you are lucky. 

Maybe if you put it all in on TBTFs you could see your nominal value go up high enough to counter the errossion of the underlying currency.  Big maybe.  Sounds too clever to me.  Your gonna need a 15-20% return to break even in purchasing power.  Now if GE hits $7 again there might be a trade because GE is special.  Tools of state control like GOOG and AAPL are also special and must be protected, so again you might have a trade.

Looking at fundamentals of real companies and trying to make an honest trade at that point seems foolish.  Seems like maybe you havn't figured out the game.  

So unlike the market, PM prices have remained flat or have declined.  Not because their value has changed and not because the value of currencies have gone up, but because they must go down to maintain the illusion of strong currencies.  Probably more important for the currencies that aren't USD than the USD as it seems those focused on USD don't understand money.  Keeping the price of PMs low is also great if you are trying to accumulate PMs in anticipation of the big correction.  So the actors that truely benifit from cheap PMs are most likely non US actors who have a short term goal of keeping thier citizens comfortable with their currency and a longer term goal of tranforming their currency.  I'm looking at you Russia and China.  In their position, what would you do?  

So how does one go along for the Russian/Chinese ride?  Honestly, I have no idea.  Physical is awesome, except that in most cases you will need to convert it into legal tender to use it.  Seems like this conversion may be heavily taxed as it may be carved out as a special kind of transaction.  You could convert it on the blackmarket, but that usually involves its own kind of tax ranging from bad pricing, legal risks and physical risk.  Paper gold is paper and even if you can liquidate it, I can't imagine it holding much value after the new tax regimes are in place.  Gold denominated accounts in Singapore?  Thats awfully far away, but if Singapore crosses their depositers, they will just have a tiny landmass off the coast of Maylasia.  They have a lot to lose. 

There is a reason many are moving thier cash into land, tools and provisions.  The trading game may be over for a while.  Unless you are talking about eggs for water.

All input and ideas regarding this are truely appreciated. 

Yeah, I know BTC.  I'm open to that.

bdub2's picture

Arguably the Most Bullish article in recent history. Between the Wall of Worry wreaking out of every orifice of this write-up, tired Churchill retreads, Tyson Bitches Silver Break-Out! after a few penny gains, it is woefully clear we've got a hell of a lot of BTFATH to go, and short metals asap.

Bruno de Landevoisin's picture

That same molten measuring stick will ignite the flames of inflation which will burn this house down.

telefunken's picture

yea everything is going to crash and there will be a bail in of bank accounts of at least 30%.What?-the money to feed mexican gang members has to come from somewhere.

RMolineaux's picture

Understanding the current economic situation in the US is like talking about hydraulics.  Newly created money is poured into the banking system.  From there it can flow into the stock or bond markets, to corporations via loans, to government deficit programs, to capital investment or to consumer credit.  But the valves that lead to consumer buying are closed by unemployment and low wages.  In the absense of consumer spending, most corporations do not invest in capital goods.  The only valves left open are corporate stock buybacks (thereby increasing executive remuneration), and speculation in the stock and bond markets, causing valuations totally disconnected from basic economic realities.   The core reality and cause of economic malaise is the mal distribution of income.  As long as corporate executives and Wall Street parasites stuff themselves with such an atrocious portion of the economic product no real recovery is possible.

LostandFound's picture

I cannot imagine that the FED will allow real deflation. They will likely intervene at the last minute. The consequences of them not intervening will mean that they might have to accept the fact that the increase of monetary stimulus over the last 6 years has been a failure.

They will print to infinity and probably create a new currency backed by paper gold!

This situation is getting closer by the day, no doubt when Q2 GDP is confirmed as negative (which will probably be later in the year) and a recession is formally acknowledged then things will move pretty quickly.

yogibear's picture

"If currency failure comes first the plan detailed above will fail horribly." 

Expect the Federal Reserve to keep trying to bid up assets. Bloated values become more bloated.

The Fed loses control only when the dollar collaspes.

d edwards's picture

If you think about it, if the fed hadn't been pumping $$$ like crazy into the system we'd be in a deflatioary depression. There sure wouldn't have been a 193% rise in the s&p.

Just goes to show that it's phony.

deflator's picture

 Why are so many people thinking "deflation first then hyperinflation"? Makes me wonder if they grasp the concept of fiat. Why would central bankers, governments and corporations who have so carefully and diligently manipulated markets so that they can construct a reality of their choosing only to give it all back in some pie in the sky market collapse? 


 Forget shorting markets and protect yourself from the whims of arbitrary rulers. The only way they give back control is if it is taken from them by force in a war.


 The only fundamental that matters is our money is created and destroyed at the whim of arbitrary rulers. Actual resources are captured at the whim of arbitrary rulers.

AdvancingTime's picture

I contend we maybe be at the tail end of the deflation that never really took hold and now are appraching the hyperinflation stage.

ebworthen's picture

Chart = 45 degrees of insanity.

deflator's picture

lower left to upper right by decree.


  When resources are seemingly infinitely abundant in that more of everything is being produced everyday and every year everyone is happy with the system of distributing resources by decree. When there is always more of everything to go around, the economics of fiat is not a "zero sum game."


 The difference between having a seemingly infinite abundance and just having an abundance to distribute by decree is like daylight and dark. The world is now governed by the darker side of distributing resources by decree.


 If we chart the past 150 years of abundance we have to draw a line nearly straight up from lower left to upper right. A 150 years of parabolic growth in abundance has created a psychology that resources are seemingly infinite. 


AdvancingTime's picture

What do stock markets around the world have in common with "girls gone wild" the video of college girls on spring break? The answer is both are crazy out of control. We have grown very complacent as money around the world has continued to flow into intangibles and promises.

Currently the market is all a twitter and locked in a "greed and stupidity loop." The loop can be explained as follows, stocks are rising so why get out, not getting out is causing the stocks to rise. When stocks do pullback it is a buying opportunity. Yes, we are indeed experiencing a double down and let it ride mentality. I don't have to explain the greed part. More about this subject in the article below.