Its Over, page-322

The Post Bubble Market Contraction Thesis Receives Validation
Stock-Markets / Financial Markets 2018 Sep 26, 2018 - 11:19 AM GMT
By: Plunger

In the last two reports I developed the thesis that we are in the early stages of a post bubble contraction (PBC). This contraction actually began in 2008 and is now reasserting itself in the form of a global liquidity crisis (GLC). In this edition I show how this thesis just received mainstream validation and it’s now time to begin developing an investment strategy.
The FED and central banks responded to the 2008 crisis by lowering rates to zero or less and injected trillions of credit into the system. Indeed, they were able to re-inflate the pre-crisis bubble and put the contraction on hold, but only at the price of corrupting the core of money and credit itself and their actions exasperated the gap between the haves and the have nots. QE in the end turned out simply to be monetary policy for the rich. The result has been to start a world wide populist movement causing outside political contenders to win elections
PBC Thesis get’s validated
Since the last report the PBC case chronicled here received validation from the world’s most prominent hedge fund manager – Ray Dalio.
Dalio seems to have had a bout of conscience as he enters the twilight of a very successful investment career. He just completed a 470 page book titled “A Template For Understanding Big Debt Crises”. He has offered the entire book in PDF form for free to anyone…no strings attached. He also conducted very forthright interviews on CNBC and Bloomberg which one can view on youtube.
Why would Dalio do this? After reading the book and watching the interviews it’s quite evident to me the man unequivocally sees a train wreck coming our way in the form of a PBC and it’s a warning to all of us. No doubt he will be able able to navigate the waters and make money during the crisis, but the man also wants to be able to sleep at night knowing he warned us. Thanks Ray… you are a good man.
Here is the book:
Big Debt Crisis
As a minimum, I recommend reading the first chapter up to page 65. I imagine most of you will get hooked after that and keep going. Also don’t be surprised if you find yourself thinking “Hey this is what Plunger has been talking about all year long!”—Validation!
What is Dalio really saying?
Realize who this guy is. He runs the biggest hedge fund in the world, Bridgewater Associates. He can’t just come out and say disaster is dead ahead. Hence he says this bull market is in its 7th inning and likely still has 2 years to go. If he said it was the 9th inning he would suffer redemptions and be the scourge of Wall Street. He would be like Peter Schiff who is now banned from CNBC. So he clearly is hedging his comments, but it’s my suspicion he is positioning himself for the downside right now. That may not mean shorting, but he may be using this recent move to the upside to exit long trades. I know you are going to read at least the first chapter for yourself, but below are a few salient points he makes. You may notice I have been making some of the same points for most of this year:

• 2009-2016 is the equivalent of 1929-1936. A bubble was followed by a crash. The FED then lowered rates to zero.

• Today’s market is similar to the market of 1937. Rising rates broke the market ushering in a recession.
• The next recession will have fewer stabilizers as monetary policy will exhaust quickly.
• In normal recessions, lowering rates is enough to restart the economy, but when debt reaches today’s levels it’s not enough.
• In countries with a reserve currency, like the USA, a debt deflation is the initial outcome NOT an inflationary outcome
• Initially there is a large currency devaluation of about 50% against gold.
• Aggressive money printing typically begins 2-3 years into the contraction.
• Prolonged monetization ultimately leads to the public questioning a currencies store of value function causing a flight to alternatives such as gold.
• Ultimately deploying Helicopter money runs the risk of over stimulation and may lead to hyperinflation.

It’s not my intention to rehash the entire book as I am hoping you will read it yourself, but I would like to highlight one chart in particular; U.S. short term interest rates of the past 100 years. This chart really drives home the point that this next downturn has the potential to be catastrophic. The reason is because the FED has already shot its wad by bailing out the system over the past 10 years. He points out that recessions are cushioned by the FED lowering rates which allow the debt mountain to survive due to debt service made easier. But look how long the work out took in the 1930’s. Now take a look at how little room the FED has to maneuver this time, then consider how much more debt is in the system now.
Think of how in 2008 lowering rates to Zero wasn’t enough to rescue the system. The FED had to inject trillions into the system once rates hit zero. Next time the economy is destined to have an especially hard landing which translates to crashing asset prices. One has to wonder with only a minuscule amount of rate reductions available this time, what is going to keep all of the outstanding debt inflated in the next crisis?

One has to wonder with only a minuscule amount of rate reductions available this time, what is going to keep all of the outstanding debt inflated in the next crisis?






2019 similar to 1937?
I have shown these two comparison charts before as they are instructive. The bull market from 2009 to present is eerily similar to the 1932-1937 bull market. All other bull markets rise on increasing volume as the bull gathers steam, however these two bull markets which were driven by government stimulus and financial engineering rose on decreasing volume. This was indicative of a gradual reduction of liquidity in the market. When the end came the lack of liquidity led to a violent decline of 50% over the following 12 months ending in 1938.