- Maybe it’s not the time to be greedy after all…
- The perils of leverage…
- EXPOSED: An obscure tax loophole that could boost your bottom line by $625 a month…
Dear Reader,
Last evening I noted that investor sentiment has swung to “Extreme Fear” as gauged by CNN’s Fear & Greed Index.
In that same issue I proclaimed, loudly, my intense distrust of crowds.
The superior wager is often the wager against the crowd.
Thus I argued that the superior wager, presently, falls upon “Extreme Greed.”
Am I mistaken?
Messieurs Bert and Dion Dohmen — they of Dohmen Capital Research — believe I am mistaken.
Prepare for a “Liquidation Avalanche”
Thus these gentlemen inform us that:
- With the heavy selling the markets are experiencing, now is not the time to go bargain hunting… The recent selloff is likely the beginning of a bear market…
- There is a chance that the recent selling turns into a “liquidation avalanche.”
- That means forced selling for reasons, such as margin calls, or by money managers trying to avoid career-ending losses.
- We think that avalanche is just a question of when. Of course, our view is the very minority view. We like to be in the minority.
Why I Like to Be in the Minority
I too like to be in the minority.
Yet I do not like to be in the minority simply to be in the minority.
A minority of men believe Earth is a flat surface.
Shall I subscribe to the pancake theory of Earth merely because it is the minority theory?
If I did then I would truly be the idiot many believe me to be.
No. I like to be in the minority because I believe the minority is generally more alert and intelligent than the unthinking crowd.
Not in every instance and at all times. Yet often enough.
Heading for a Sharp Bear Market
Let us proceed with the self-professed minorities of Dohmen Capital Research.
Observe this chart, they counsel:
Source: Dohmen Capital Research
This chart, they conclude:
- Suggests that the longer term trend is still down and would confirm our economic forecasts that liquidity and credit will be contracting. That would pull stocks down in a bear market, which will probably be a sharp one.
- We are now starting to see that chart support levels don’t even generate a bounce in many stocks as they plunge through support on high volume selling.
- That is the first sign of a “liquidation bear market”…
- At record overvaluation levels for stocks, that will produce big selling of equities in a highly leveraged environment where there is little to no liquidity for buying.
It All Comes Down to Leverage
These Dohmen fellows do not believe this liquidation bear market would be a protracted bear market.
Yet it would likely prove a very sharp short-term sting.
That is because, as indicated, the stock market is maximally leveraged.
And the unwinding presently underway will gather and gather steam.
The result will be a fantastic deleveraging… as a collapsing house of playing cards may be said to undergo a fantastic deleveraging.
I note that margin debt — at least through January — runs to record heights.
I note also that margin debt leapt some 33% year-over-year.
You may consider the vast acceleration of margin debt a manifestation of speculative delirium.
Yet how rapidly delirious rapture can transition to delirious panic.
Triply Leveraged
Mr. Bert Dohmen, one half of the Dohmen pairing:
- There’s a giant wave of liquidation of highly leveraged stocks, like triple-leveraged ETFs, which are at an all-time record high… these are scams. But the greedy, part-time investor goes for those. So we have all this huge speculation, all with leverage. I’ve been warning for months, if you have a margin account, you may lose your house if you can’t meet your margin call within a couple of hours. People don’t realize that.
- Your stock market analysis must consider the leverage within the financial structure:
- You have to look at the leverage implied in the futures market. So, you can catch these things if you know where to look. Everyone looks in the wrong direction. They look at earnings, they look at dividends, they look at buybacks. It doesn’t matter. This is going to be a liquidation. We’ve had the highest leverage in U.S. history and it’s going to take time to unwind that leverage.
Maybe This Time Isn’t Different
“This time is different” gushed many artificial intelligence drummers.
Its potential is so vastly transformative that previous booms and busts count nothing against it.
And so they piled into technology stocks.
Yet “this time is different,” is the eternal trap for investors.
That is because it always is different — in the particulars.
A dot-com boom is not a housing boom is not an artificial intelligence boom.
It is these particulars that fox and deceive investors. It is why they believe this time is well and truly different.
Yet because they believe this time is different… is precisely why it is always the same.
It is precisely why investors perpetually stumble into the snare.
It is precisely why they come invariably and inevitably to grief.
The Only Place Where Fools Will Learn
As I have argued before: I believe powerfully in one fundamental concept — “reversion to mean” — and the punishing laws of probability.
Scales ultimately balance even, extremes iron out.
Mountains rise, mountains crumble, the strong collapse and the meek inherit the Earth.
In brief: Extremes do not endure.
And this time is different only until it is not.
The fools have rushed in under the theory that this time is different. Now many are hot to rush out.
I hazard that in time the same fools will rush back in under some variation of the ‘this time is different’ theory — until they rush out yet again.
On and on the cycle runs. And I hazard it always will.
“Experience runs a hard school,” as said old Benny Franklin… “but fools will learn in no other.”
Brian Maher
for Freedom Financial News
