Part II: the Bear Argument
We also point out our alternative scenario which, if, going to happen, is starting now. This scenario suggests stock market prices are peaking in what was a false move to the upside over 2009-2014. This implies that the stock market correction which began in 2000 is still underway and has many years left to unfold. It also implies that stock markets are about to undergo a rapid and relentless decline to their 2009 low points and most probably lower. Falling oil, gold, metal and bond prices over the last few months support this scenario which suggests economies are still undergoing this huge consolidation.
The current divergence between stock markets and commodities indicate a major topping process is underway. In addition Austrian Business Cycle Theory suggests a massive divergence between the amounts of new money coming into the system on a year on year basis is diverging with capital goods prices such as stocks and real estate. This implies the system cannot support asset prices at their current high levels. Even if the US Fed were to begin another round of quantitative easing it would not be enough to sustain asset values – especially stocks at current levels. If this scenario emerges over the next six months we can predict this will give rise to an economic depression lasting 8 to 13 years before an economic recovery gets underway. See the chart below to get a sense of the disparity between M2 Money Supply growth – non seasonally adjusted compared to the weekly DJIA close.
The alternative view suggests it is the resumption of the bear phase of an ongoing correction since 2000. The massive money supply pumping had created the sub-prime bubble that should have been left to sort itself out in the 2008-2009 phase. Since then we have seen bubbles in commodities, education, shares and real estate. The divergence seen in the above M2 NSA Money Supply – DJIA graph illustrates how much worse the situation has grown with stock prices occupying high levels and the amount of new money coming into the system remaining static. This is untenable.
Summary of expectations – short term bull market scenario
• Expect stock markets to correct more deeply over 2015 (14720, 15340 (DJIA) and 1738, 1814 (SP500)) against a growing bullish optimism before beginning an upward exponential surge in stock, commodity and real estate prices. Anticipate any decline of stock markets or economic data to be met by central banks restarting their QE programs. 14720, 15340 (DJIA) and 1738, 1814 (SP500)
• The collapse of oil prices in the last quarter of 2014 creates a potential game changer for most economies as cheaper energy prices flow through to Main Street. It is likely Crude Oil prices will be capped for the next few years at around US$80 per barrel. This takes the pressure off consumer prices but once again translates into higher share and real estate prices.
• Anticipate consumer price inflation to remain low in the US, UK, EU and Japan. At the same time higher than normal unemployment and the potential for continuing stagnant economic activity will prevail. At this time we anticipate seeing US consumer inflation increase dramatically with the potential to see 4-6% very quickly. The only thing really holding CPI figures down at present, is falling oil prices in late 2014.
• Interest rates will start to rise in 2015 as central banks try to normalize credit markets.
• • Expect credit markets to re-price themselves if inflation does kick up creating a liquidity trap for central banks.
• Anticipate the US, Japan, UK and German stock markets to benefit at the expense of emerging markets as cash gets sucked from the periphery to the centre. Similarly the US dollar will continue to strengthen as money floods back to the centre from the periphery.
• Expect a collapse in stock and commodity prices followed by economic contraction where both inflation and high unemployment are experienced at the same time after this spike in stock and commodity markets prices. This may not happen for another 3 years as the ‘Roaring Teens” finishes up.
• Anticipate social and political dislocation in many countries including the US to continue to escalate.
Summary of expectations – short term bear market scenario
• Expect stock markets to begin a relentless stair step down punctuated with savage counter rallies. The nature of the decline will tell us if this is a correction in a broader ongoing bull market or the beginning of the bear market. One clue would be if the correction points mentioned here are taken out in one continuous uninterrupted decline (14720, 15340 (DJIA) and 1738, 1814 (SP500)). Anticipate any decline of stock markets or economic data to be met by central banks escalating their QE programs. 14720, 15340 (DJIA) and 1738, 1814 (SP500)
• We might also anticipate inflation to break out in an unprecedented way especially in the US, UK and Japan and central banks will be unable to contain it. At the same time higher than normal unemployment and continuing stagnant economic activity will prevail. Interest rates may rally sharply on rising inflation and start to rise as central banks try to normalize credit markets in 2015 before plunging as evidence of the growing bear market gathers.
• The coming phase will be difficult to read as markets enter their final death throws and competing bullish and bearish forces play out.
• The coming depression that unfolds will last 8 to 13 years.
• Anticipate increasing social and political dislocation in many countries including the US.
Conclusion & End Game
Whether we have a few more months or years of twilight before the beginning of a new “Dark Age”, suffice to say, that from now onwards we can expect increasingly tough times punctuated by phases of optimism. And of course the coming generation of correction will not merely be confined to asset prices and the vagaries of fiat money and bad economics, but also to societies and politics, both domestic and geo-political. Generations of people will learn about long forgotten natural laws and how it applies to human behavior. Social mood will have become dark and this will also express itself through every aspect of society, both culturally and economically. Music, the arts, fashion, crime, politics, social mood and drama will all reflect the new paradigm. The growing social political and economic tensions we have witnessed a harbinger of what is to come. This phase will reset the stage for a new beginning for people from which a new and sustained social and economic recovery will slowly begin. By the time that point has arrived however, the nature of our societies and the way we relate with people and between nations will have changed. The wrangling about why it had to happen will be well underway.