Will the next sell-off be a big one or ‘THE Big One’?

Thursday, 14 October 2021 — Wollongong

[7 min read]

Dear Reader,

Are you anxious about the state of the markets right now?

And where things might be going in 2022?

First of all, you’re not alone.

Since 2 October, the number of people plugging ‘market crash’ into Google has spiked.

In the US, a recent survey showed 57% of investors now think that big crash many have been waiting for is imminent.

67% say they’re now keeping a cash buffer outside the stock market to protect themselves.

From my contrarian perspective, that suggests you’re probably not going to get a ‘market crash’ in the way that most expect. But that doesn’t mean there won’t be pain.

Besides, this increasing and widespread fear is a relatively new development in the context of this ‘everything bubble’.

It’s no longer the permabears who are fretting over its end.

If you’ve followed my investment advisory research, you’ll know about my theory that the plumbing of the global monetary system has sprung a leak. In short, the Fed’s reverse repo facility has gone from virtually zero in March to a peak of US$1.6 trillion at 30 September.

The mainstream narrative is that it’s the result of too much cash in the system. The more ominous explanation is that there is not enough collateral. That is, sound assets to secure overnight borrowing.

It’s all pretty arcane. Still, I highlighted this to readers back in early August and recommended a more defensive stance was required. Two days later, the market peaked. Whether that was good luck or good management remains to be seen.

But due to the hidden nature of it, the leak has continued to go unnoticed, or its cause misdiagnosed.

Why is this important?

Why should you care about this now?

Well, both Vern Gowdie and myself are in agreement that a significant correction is coming.

The only thing we don’t align on is the scale.

Whether the next sell-off will merely be a big one…or THE Big One.

Vern is convinced it will be the latter.

I’m not so sure.

Either way, we’ve both been very busy in the background recently.

We’ve been working on our own strategy papers, showing you how to best navigate what may lie in wait for investors in 2022.

While they’re different in the single issues that they focus on, what links them is this:

A crisis is coming that most Australian investors are oblivious to

And you’d best start preparing for it sooner rather than later…

On the surface, there are no signs of an impending crisis at all.

Yes, we’ve had a slight downtrend over the last month. While that’s happened before in this bull market, it’s the first time prices have traded below the 50- and 100-day moving averages in a year (see chart below):

Overall, markets have managed to brush off anything and everything thrown at them.

The central bank cavalry simply rides in and makes everyone’s dollar whole again.

Do you think this goes on forever?

As the founder of Vanguard Investments, John C Bogle said:

‘Reversion to the mean is the iron rule of the financial markets.’

And yet, the pattern to rely on has been a melt-up rather than a meltdown.

This was the underlying idea for my ‘Life at Zero’ thesis.

That is, prolonged low interest rates would debase the value of money, especially when measured against stock markets. Therefore, stocks would rise in the face of weak underlying economies.

And this is where Vern and I differ.

Longer term, I think markets will keep marching higher on the back of central bank idiocy. Interest rates are pinned to the floor and will stay there for years.

But shorter term, I see some real risks building (we’ll get to that in a second).

Vern, however, thinks a much darker fate awaits most investors in 2022.

In fact, he’s just doubled down on this thesis.

Vern’s identified four ‘Code Red’ investments
you should think about liquidating now

‘Code Red’ is a term used by the military, medical professionals, emergency services, and even climate scientists.

When a situation escalates to a Code Red, the public is alerted to the dangers we face. And told how to prepare for the probable eventuality.

Yet, when it comes to markets, says Vern, no such alarms are being raised.

Not by government. Not by mainstream media. And not by financial advisors.

So he’s decided to do it himself.

He’s still busy putting the finishing touches on this research. It should be released around this time next week.

If you’re worried about a spectacular end to this ‘everything bubble’…and want practical advice on how to prepare rather than just scary warnings…then watch this space…

But let’s look to the shorter term.

I, too, have a warning paper that we’re releasing in The Rum Rebellion tomorrow.

There are no certainties in markets, only probabilities.

But I’ve identified what I’m convinced is the highest-probability risk to your investment portfolio in 2022. And an investment strategy you should employ now with this risk in mind.

It’s bigger than a sizeable correction in the stock market — although I see that coming. To be sure, I think this correction will throw up plenty of good long-term buying opportunities. But it will also produce plenty of value traps.

You’ll see what I mean tomorrow. But as you’ll see, the risk I talk about is not strictly stock market related.

Instead, it’s an existential threat to Australia. And Australian portfolios in particular.

And it’s something I really think you should be planning for now, both mentally and from a portfolio perspective.

In the research we’re releasing tomorrow, I’ll give you a plan to do that.

It’s to do — as you may have guessed — with China.

For the past 10 years, China has overseen a runaway property boom. It has tapped the brakes on that boom occasionally. But every time it looked like it was slowing too much, it hit the accelerator again.

Dare I say it, but this time is different.

The Chinese Communist Party, who desire social stability above all else, decided last year they could not let the boom go on. It’s over.

That has huge implications for Australia. The economic relationship we’ve had with China over the past 20 years will be radically different over the next 20.

As a nation, we’re not remotely prepared for it.

But you can be.

More on this tomorrow…

Regards,

Greg Canavan,
Editor, The Rum Rebellion

An intriguing item in the Argentine press caught our eye.

Referring to rising public anger in the midst of an economic crisis…the Buenos Aires Times reports that tempers:

‘…came to a boil one recent evening, when a hungry mob forced a [cattle truck] driver to let out a cow and proceeded to slaughter it right there on the street.’

Hmmm…that’s not likely to happen in the US. America’s urban mob is probably unaware that beef comes from animals. And it would have no idea how to butcher one.

Instead, annoyed by consumer price increases and the arrogance of the ruling elite, it will shut down airlines…hospitals…and the whole supply chain.

Food will disappear from the shelves. Gasoline pumps will go dry. Mobs will form in the streets…

And who knows? Maybe Donald Trump will be re-elected! Then, with his customary numbskull bravado, he will make the situation even worse.

Fed’s fraudfest

But wait, we’re getting ahead of ourselves.

We saw yesterday, Ms Janet Yellen, Secretary of the Treasury — along with the whole elite establishment — is seeking to eliminate anything and everything that might get in its way.

Debt ceiling…tax competition…

And the privacy of bank accounts, too. Here’s The New York Times on a recent Biden Administration proposal:

‘…[T]he administration wants banks to give the Internal Revenue Service new details on their customers and provide data for accounts with total annual deposits or withdrawals worth more than $600.’

Day by day, the ramparts are battered. The elite shock troops advance. Nothing will be allowed to stop the fraudfest.

Tax…spend…borrow…print.

Good guess

But where does it lead? 20 years ago, looking into the future, we saw a long journey ahead. It would take the US to Tokyo…then to Buenos Aires.

By that, we meant we were in for a slog of punky asset prices and a sluggish on-again, off-again recession, à la Japan…to be followed by money printing, leftish populism, and inflation, como en la pampa.

Of course, we were just guessing. But we were right…and we were wrong.

The US’s Main Street economy declined — just as it had in Japan. So far this century, GDP growth rates have been cut in half…real net investment has been flat…and adjusted for inflation, real industrial production has gone down, despite the addition of 50 million people.

And left-ish, Argentine-style populism arrived too — in the form of the aforementioned Mr Trump.

Boom to bust

But over on Wall Street, it was a different story. It was get-down-and-boogie time, with a big bust in the Nasdaq in 2000…followed by a boom-bubble-and-bust cycle that ended in 2008…followed by another one ending in 2020.

Each time, the bust was followed by a printing lalapaloosa at the Federal Reserve and a BTFD (buy the f**king dip) reaction by investors…leading to another bubble cycle.

But it all depends on printing more and more money. And how long can that go on?

Is it just a matter of time before stocks crash and cows are butchered in the streets of Boston?

Tomorrow’s news

Today, we saddle up…with a cushy fleece on the hard Argentine seat, we aim to range wide and far. We’re going to explore that enchanting land south of the Río de la Plata.

What are we looking for? A glimpse at tomorrow’s headlines, of course. If we’re right, Americans are headed to the pampas…

Here’s a headline from the Buenos Aires Times that we think we’ll see here in the US in a few years, ‘World Bank economist rules out risk of hyperinflation in Argentina’:

‘The World Bank has ruled out the risk of hyperinflation in Argentina, where year-on-year prices have surged more than 50 percent, and believes a new agreement with the International Monetary Fund (IMF) regarding the country’s multi-billion-dollar debt will further reduce that possibility.

‘“I don’t see that risk,” said William Maloney, the World Bank’s chief economist for Latin America and the Caribbean, at a press conference on Wednesday, when asked about the threat of consumer prices spiraling out of control in consumer prices in Argentina.

‘“Inflation is around 50 percent but the government still has some tools to prevent the crisis from deepening.”’

What a relief. The gaucho feds only steal half your savings every year…or 100% in 24 months.

Is that what’s coming in the US too? Just change ‘Argentina’ to ‘US’?

We can live with that, right?

Right?

We’ll find out more, tomorrow…

Regards,

Bill Bonner,
For The Rum Rebellion