The Lesson

The lesson of it all? The lesson is that lessons are not being learned. Of course the human species has an ingrained problem: We are all born with a blank sheet and have to learn everything from scratch. It would be helpful though if the elders could pass lessons from past mistakes on to the new generation.

But no. So we keep making the same stupid mistakes.

And here we are. Just four weeks after all time highs in markets America is again turning into bailout nation.

Yes coronavirus is an unforeseen shock. So what?

We’re supposed to handle a shock. We’re supposed to be prepared. We’re supposed to have savings and great balance sheets. After an 11 year recovery and market bull run based on cheap and easy money shouldn’t things be great and shouldn’t we be well prepared for the next downturn?

Is that really too much to ask?


We can’t even go 4 weeks without the Fed going apeshit on cutting rates to zero, launching $700B in QE, making discount windows available and launching $500B, even trillion dollar repos.

We can’t even go 4 weeks without the government launching a proposed $850B stimulus package, tax cuts, free money checks of $1,000 to Americans and suggesting bailouts for $BA and $GE.

That’s how fragile things are. They must be, otherwise the system would be able to handle a temporary shock.

But it can’t. Why?

Well for one our supposed great economy ever has the vast majority of Americans live paycheck to paycheck:

That’s a systemic problem. Sure you can blame people for living beyond their means, but in general most people just don’t have the income power to keep abreast with rising medial costs, home prices and all the other fun inflationary items that the Fed simply doesn’t count as inflation. How ignorant they are. PCE deflator. Please.

And then of course the same lesson again not learned that keeps repeating ahead of every bust: Greed and more greed.

When has it ever been a good idea to chase stocks to 150% market cap to GDP or even higher?

The answer is never. Yet they convinced themselves and others that it’s different this time. New flash: It wasn’t.

A lesson not learned and yet they did it. The chart was screaming unsutainability. And here we are 4 weeks later, yesterday closing at 109.5% market cap to GDP:

Reversion to the mean. And it could eventually get much worse.

I showed this chart in Bull Cliff in February and I stated:

“Investors keep piling money into this historically priced market….Central banks can deny all they want that they are not responsible for asset price inflation, but everybody knows better. The denials are not only hollow they are straight out lies.

And having created the Pavlovian effect we now see in the investment community they are leading investors to abandon all sense of risk when risks are mounting ever more around us as valuations and earnings multiples keep expanding as a result of monetary policy. And hence it may be said that central bankers may be leading investors off the cliff.”

Well done. Did anyone listen? I can’t say, but most haven’t. And now they are all in major pain.

It was the same environment of ‘abandon all reason’ during which investors chose to chase stocks like $TSLA going vertical.

Also in February I asked if $TSLA was a train wreck waiting to happen. I said then:

“Absolute vertical panic buying, it’s basically a reversion train wreck waiting to happen, technically speaking:

“This behavior here is dot.com type behavior. Get me in an any price. Market cap added by the tens of billions added every day without an actual earnings story behind it yet. It’s all future projections. What I’m saying is that vertical moves like this are not sustainable and there will be reversion pain.”

Well, here we are a few weeks later:

Investors just made the same mistakes they made in the year 2000 and the same mistake they made in 2007. Chase markets to completely unrealistic valuations and now coronavirus is the most brutal of triggers. Brutal because the Fed made the excess happen with their reckless cheap money policies last year. And now the pain is deeper than it would’ve been.

And now they’re doing even more of the same desperately trying to arrest the markets collapse.

But the best part is yet to come. Let’s bail out companies such as Boeing. Does this all smell like the stench of history?

Why should we bail out Boeing? The company has been responsible for major design flaws on their planes and has taken a major hit on this for the past year. Deservedly so. After all the company was cutting cost corners left and right. Why? Because they were short on cash? No.

The company has blown nearly $45B on buybacks in the past 8 years:

Their choice. And in process they have loaded up on debt. Why should we bail out companies that are so reckless with their operations and financial management? My suggestion:

I thought all this was called capitalism. You know socialism bad, capitalism good. Nah, it’s all talk.

There are no capitalists during a crisis:

Now the former party of “deficits are bad and we must get the debt under control”, already presiding over a trillion deficit before this new crisis, is pushing for an $850B stimulus package in an economy that will get hit by a massive recession.

I’m not opposed to the government stepping in to help in an emergency. That’s why we have government. What I’m opposed to is the hype, hypocrisy and excess that has preceded it. People got greedy, they piled into stocks at ungodly valuations. Companies that didn’t save or prepare for a crisis, instead were focused on short term market gains to juice up their stock prices. Companies such as Boeing that cut corners and blew money on buybacks for financial engineering purposes to enrich upper management and shareholders.

I say screw them. If you don’t learn the lessons of the past then live with the consequences. And who pays ultimately for the consequences?

We’ve seen this movie before

And so the larger lesson that nobody wants to confront: We keep creating business cycles driven by debt and cheap money and the consequences get starker each time around because we never address the root causes. We just mask them with ever more debt and ever more cheap money and hope for the best.

And right now they will keep printing and announcing ever more measures until they get markets under control and rally again. But be sure when this is all said and done we’ll end up with $2 trillion deficits, zero rates and a massive trillion debt burden and all we have to show for is a recession.

Oh wait. We already have all that. And we’re doing all this with this being our base line just a mere 4 weeks from all time highs, 11 years into a recovery:

The lesson? We haven’t learned a damn thing. We just keep circling the same drain under the pretense that it’s all consequence free.

Well, some just got an expensive 4 week crash course lesson in market history. See if the lesson sinks in this time. I’m not holding my breath.

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Categories: Opinion

24 replies »

  1. Great perspective, But I disagree on point. I have learned something, if I have poor judgement I suffer financially or go to jail. If the elites do either, it is not only a “pass”, but us little people must pay a huge price and bail them out. I have learned this will NEVER change!

    • Phil, with great disappointment and sadness, I have to agree with you. I wish we could change this situation, but I see no way out. These corporations make terrible choices and get bailed out on the taxpayers dime. Capitalism seems to be dying a slow and painful death.

  2. Isn’t this going to cause mass inflation at some point? And how will the gov pay back debt once rates have to be raised to combat inflation? I guess that will be the last nail in the coffin…

  3. Thanks for the excellent rant, Sven. But credit where it’s due: the Fed remains staunchly Apolitical…


  4. First, you are not wrong, but that isn’t helpful either. Education is the answer. Parents need to teach this to their children. Instead they spend all day on Facebook. Poor will always be poor because they live for today and save nothing for tomorrow.
    Second, please spell check first. A tough read with all the errors. Not being critical, just letting you know not to rush out the piece. Think it through. Love your work. Keep it coming.

  5. Spot on. You asked on twitter ‘what is the purpose of taxation?’ It’s to efficiently fund mostly essential services and to redistribute wealth. However, in the great USA, one of the richest nations on earth, it redistributes to those who can avoid paying proportionate taxes (wealthy corporations and individuals) from those who can’t avoid. As for funding services, that’s a very sick joke. Perhaps require corporations to issue as many shares as they bought back since 2009 before they qualify for assistance which would entail a proportionate equity stake at share prices after that issuance?

    Today’s recovery in markets was weak, SPX struggled to hold above 2500. I don’t expect tomorrow to be as good.

  6. Europe/China: “People, stay at home! We must stop spreading Covid-19!”
    USA: “People, we send you $1,000 to go shopping and stimulate our economy!”

    Genius capitalism. American style.

  7. Sven-you where right, so was I, and it sucks and I knew it would suck to be honest. I never wished this on anyone, yet I knew with high probability it was inevitable. I only hope we change as a species, and I do think this shock will the event that starts our evolution towards a better society….although it is going to be a rough ride unfortunately.

    The irony of the entire fiasco is that the industry who spread the coronavirus across the entire globe in a few short weeks is the exact industry that everyone wants to bail out first…airlines…LOL. Think about that for a few seconds, without the airlines, America would not be in a pandemic situation and the virus would be contained to Asia. Yest ships can transfer the virus, but much slower and much less travelers. Do not the airliens could have, and should have froze all travel to China by mid January (was typing that in these forums at that time). It was only logical, short term pain for long term gain, yet now that is inverted.

    Also Sven, note that the days of stock buybacks many be over for many years. The airline union stated that the airlines should not get bailed out as they bought $39 billion in buybacks. Mcdonalds spend almost $10 billion last year on dividends and buybacks, and has only 2 weeks of cash on hand to fund operations. How is the government going to bail out Mcdonalds without the citizens revolting, as the cat is out of the bag on what companies, large and small, did with all those tax breaks from the 2017 changes…they bought back stock and increased dividends, not worker pay. Note the stories hitting CNBC today…buyback are dead, long live buybacks.


    So until uncle sam buys stocks directly (coming at some point once markets hit 50-60% loss marker), I do not think I would trust any bear market bounce for a while. What company wants to hit the news wired with buyback anouncements, when unemployment hits 15% and main street does not get bailed out (the $1,000 per person I had recommended these last few weeks will not be enough, they will have to repeat, and often)? Do you really think this admin is going to bail out Wall Steet in an election year. 2020 is not going to turn out like most think, so be patient. That said, I am cost averaging into the markets from -30% to “negative anyone’s guess” with my 10 year or longer investments. This will pass in time, yet it will take longer than many suspect. Simply another episode of our species growing pains…

    Good luck with all your investments! Stay safe…

  8. Sven, all great points here. We all know how this crony capitalism works. Someday piper will be paid.But technically It starts to become a screaming buy. 0.382 retracement of all bull market is at hand. We should expect some more chop this week. Afterwards I expect final quick last move down and those stops at Dec 2018 bottom should be run (possibly overnight ?) 3280-3320 or so. But this is not guarn

  9. My expectation for the next 6 months is choppy rally back to all-time highs or slightly lower. That big gap at 3350 must be filled. And then next crash, just around or after election.
    Breaking down through 2280 with conviction changes everything and means the world will end

  10. Friday can be the pivot day again as it sometimes happens with opex days. Please remember they pulled the rug only after February expiration…

  11. Bravo, well done. I have been reading you for a long time and marvel at your objectivity and perspicacity, but on the other hand, everything is everywhere obvious. The United States takes advantage of its superiority in reserve currency and for some reason decided that they can print it as much as they want and save bloated companies at the expense of taxpayers. I am sure the day of reckoning will soon come and undermine their confidence in their EXCLUSIVITY.

  12. Overnight futures are looking fugly. Steady grind down -2% over last couple of hours. Think we should accept that there’s another -10% coming in the next week and hope it pauses for a while then. Mella’s 90 VIX is starting to look probable.

  13. I’ve been around to watch 87 unfold on TV, and trading in every crash and flash since. Worked on Wall St. at the major firms and designed trading software for the exchanges. At both bombings of the WTC too. The American public is either a bunch of pussies, doesn’t really care, clueless, or a combination of it all? Maybe they are all waiting for some lone character to step-up as a true voice? idk. Outside of gov lock-downs and other Orwellian policies, I do know that the new repo takes in toxic crap in the Billions, and then the loan money is put back into the casino while the bankers and firms reap Billions in bonuses and fees. And I do know the plebs that probably have had their savings or investments wiped out are getting 1K checks. WTF? My only question to Sven is when the 99% finally have the balls to stand up what will our Bastille day be called? Maybe CV19 is a blessing in disguise?

  14. There are lies……………….and there are dam lies. All investment markets are dam lies and a fraud! 30+ years of investing……………all the gains are now gone in just 4 weeks. I would have done the same had I just left all I invested under my mattress over the past 30 years without all the time wasted finding good investments. With the gains all gone the purchasing power of the original invested capital has now eroded 60% due to inflation over the past 30 years. Financial planners, investment advisers, the nice lady at the bank selling mutuals etc….. have all created their jobs at my expense! They are all about DSC fees and assets under management fees………..fees……..fees………and commissions. What a fraud! Shame on me for believing I could grow my money over time investing. 30+ years growing a portfolio…………….POOF !!!! Profits all gone in 4 weeks like a fart in the wind! What a bunch of crap! I knew the risks and still invested. Never again! Lesson learned after 30+ years better than never. My uncle once told me before he past away that if you live long enough you’ll figure out that almost everything in life is a FRAUD!

  15. Sven: “Now the former party of “deficits are bad and we must get the debt under control”, already presiding over a trillion deficit before this new crisis, is pushing for an $850B stimulus package in an economy that will get hit by a massive recession.”

    Which political party pushes for more deficit spending?

    Be honest, even though it’s hard to admit.

  16. Why should we be suprised when a recession begins? Why should we be suprised when we know that every wave has a trough? The wheat from the chaff, the parable of the ten virgins. The companies bought their stock instead of preparing and individuals did the same. Good and evil work with whatever hand they’re dealt. Lets not use this as an excuse to give up any liberties.

  17. The conundrum is that the entire world economic system was in on this fiasco too; sure, the Fed and Congress have been atrocious, but what about the ECB? What about the BOJ, BOE, China? US taxpayers bailed out the banks in 2008/2009; did European banks recapitalize? It doesn’t appear so. Yes it’s totally f’d up and as a taxpayer and investor/trader I have a substantial life investment in this debacle. However at this point, I’m OK with doing whatever necessary; if it means my children and grand children end up paying for it, so be it. Family tradition, as that is what I’ve done for my parents and grandparents. Welcome to the party folks!

  18. Its not that ‘we’ are not learning. ‘We’ don’t have any decision-making power. Everything makes perfect sense once you accept that the purpose of the market is to funnel money to elites, and volatility is an important tool for that. The system learns constantly – how to funnel more and money without triggering a public revolt.

  19. It looks market may have bottomed at SPX 2280 today. This crucial level held firm.
    Expecting 6-8 month rally back to 3300-3350 now. Should look and feel much like 2019 and should end with another mini crash around election. Breaking 2280 means total liquidation and in such case markets will be probably closed after next weekend. GLTA

    • I’m less confident on several of your points, KB. OK it had a bounce off 2280 today, but I think that will break within a week, maybe within 2 days. I don’t see 2280 as a really critical line in the sand, I would like to see 2150 hold and would be surprised if ‘total liquidation’ occured above 1800. A rally back to 3300+ this year would presume that nothing has really changed, methinks somethings fundamental have. I congratulate and thank you on your bold predictions, but I don’t share them.

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