With the Dow and Nasdaq violently cratering today, one of the greats in the business just warned, “I expect tomorrow could be just as bad if not worse than today was.”
By Bill Fleckenstein President Of Fleckenstein Capital
February 5 (King World News) – Before turning to the action I would like to put where we are in the “everything” bubble into perspective, as I had an insight this weekend, which everyone else may already have thought of, but it was new to me so I thought I would share it…
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The Weakest Links…
When the stock bubble burst in March 2000, it was the most speculative elements with the highest imagination potential — i.e., the dot-com stocks — that signaled the end of the mania when they broke. Similarly, in the real estate bubble, when the first-payment defaults began in early 2007, it signaled the end of the ability of the most speculative element — that being the subprime sector — to get basically any loan on any terms. After that occurred, the subprime sector got pounded, but the market itself held on and peaked out later that summer.
In the current environment, the most speculative element has been the crypto universe, which is 100% psychological, as there are literally no fundamentals behind crypto currencies. The craze for Bitcoins and their ilk will probably go down as the biggest mania of all time, making the tulip bulb craze seem somewhat sane. To the extent that is the case, the bursting of the crypto market, which I place at around Christmastime, likely signals the end of the current everything bubble.
…Should Give You the “Thinks”
What the path from here will be we don’t know. What we do know is that beneath the surface there is a structure that will mimic portfolio insurance once enough downside pressure has been created, even if what it will take to create that pressure and when it will occur are also unknowns. Thus, we need to remain alert to clues, but my feeling right now is that the break last week signaled speculative exhaustion for the stock market (which began with the exhaustion of the extremely speculative crypto universe).
So that is my framework for thinking about where we are, and as I thought about that this weekend and what I might do about it, I thought there was a decent chance the market would gap open and there would be a rally, which is in fact what occurred.
Within a minute today the market was down 1%, and then a bounce began. My view was that if we got the right kind of failure, say midday or in the afternoon, I would begin to do something about it, the thought being we could potentially get some acceleration right here and now. What turned out to happen was, after the 1% lower opening we got the obligatory bounce that got all the averages back to unchanged or slightly higher, but from there the market rolled back to the lows. (I shorted some Nasdaq 100 futures on the bounce. I picked them because right now research doesn’t seem to matter, but I wanted to catch liquidation should it occur.)
“A Penny For a Spool of Thread, a Penny For a Needle”
After revisiting the lows, the Nasdaq 100 bounced while other major indices made new lows, but then, after another bounce attempt, the Nasdaq 100 joined in breaking the lows, too. Thus, the stage was set for a late-day rout, which commenced with about an hour to go, as selling fed on itself, giving FOMO folks a taste of the brittle structure I have discussed ad nauseam.
And what a wild last hour it was, as the indices collapsed and then bounced, only to collapse again into the close. For instance, the Dow, which was down 700 points or so, tanked an additional 800 points (3%-ish) in minutes, before it rallied (the other indices saw similar patterns). But then that rally also fizzled and most indices, though not the Dow, closed on the lows. It was a brutal down day, with the market losing about 4%, and it has quickly illuminated the crash-prone structure that exists. I expect tomorrow could be just as bad if not worse than today was.
Not Exactly Bond for Glory
Away from stocks, green paper saw a bounce, along with both bonds and stocks early on, with bonds continuing aggressively higher as stocks weakened. It seems to me the bond market is in for a world of hurt, given that it is so mispriced and central banks are not only going to try not to buy them but sell them, combined with the fact that the federal budget deficit is liable to increase. That is a recipe for much higher rates.
Having said that, rising rates have and are going to put pressure on the stock market, so I would only like to get involved in bonds on the short side after we have had a stock market break and we’ve seen how far bonds can rally. Turning to the precious metals, silver bounced 1%, while gold closed up 0.75%. Oil lost 2%.
Electric Money Running Out of Juice
Lastly, crypto land was the scene of carnage again, with Bitcoin trading to a new low of about $6,700 and the crypto market cap falling to roughly $310 billion, which is a new low as well. We’ve now seen about half a trillion dollars wiped out of that market since Christmastime. Now, a lot of that money never really existed and a lot of folks have only seen profits evaporate, but a good number of late-comers (who can probably least afford it) have seen their capital erode, too.
To understand all that is wrong with the crypto market one only has to look at Tether, where the value of the coin has collapsed, but the market cap has exploded. In other words, they’ve simply “printed” a gazillion of them — and Tether was supposed to be one of the cryptos that was actually backed by something, mainly the same paper dollars that buyers were probably trying to flee (I’m sure that irony was lost on most of the buyers though).
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ALSO RELEASED: James Turk – Phase 2 Will Pave The Way For $11,000 Gold CLICK HERE TO READ.
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