Financial topics

[Higgenbotham]

The unnatural thing that's amplifying the current euphoria is Trump.

In the 1980s, I lived in a city of 34,000 that lost a lot of manufacturing to Japan. So this city was 10-20 years ahead of the manufacturing job losses experienced in the rest of the US. Around the year 2000, as the rest of the country was going gangbusters, a downtown revitalization effort was planned, ostensibly to help the town, but also to line the pockets of the good old boys left in the town.

A local insurance agent, upon hearing about the effort, was reputed to have quipped, "This is the last hurrah for the good old boys."

[Higgenbotham]

[John]

That's really scary, isn't it.

[Higgenbotham]

It really is.

[Higgenbotham]

2018 GLOBAL INVESTMENT STRATEGY OVERVIEW

“The air in risk assets is getting thinner and thinner. Asset returns will likely peak in early 2018, but
optimism fueled by recent stunning returns and historic low volatility could be followed by a sobering
flash crash a la 1987, 1994 and 1998 as central banks, the major sedative of volatility, start to withdraw
liquidity.”

- Michael Hartnett, chief investment strategist

http://newsroom.bankofamerica.com/files ... rategy.pdf

I can hardly believe my eyes. I don't believe a major bank or financial institution has ever allowed the use of the word crash in their forecast!

[Higgenbotham]

But it isn’t just Alabama.

The flu epidemic is spreading across the US.
18 people have died in Dallas, Texas from the flu, 4 in Tennessee, and 27 have died in California. Hospital waiting rooms are jammed with flu victims, the doctors are running out of medication, ambulance services are strained and even IV bags are in short supply. Influenza is impacting 46 states.

In total, the flu has killed 85 adults and 20 children in the United States and last week, the CDC reported that the hospitalization rate for people with the flu DOUBLED.

https://www.zerohedge.com/news/2018-01- ... toll-rises

A pandemic or just the fear of it could cause a flash crash. These kinds of issues and their impact on the market used to be discussed by financial firms but not anymore.

[John]

In today's world, "flash crash" does not mean "crash."

Harnett is predicting a "flash crash" which today is the popular term
for a 10-20% correction followed by a quick recovery, after which the
market goes up again. A "flash crash" is something that is to be
loved and embraced, since it means you can buy the dip and make a lot
of money.

A "crash" is different. That's a 10-20% correction followed by a
quick recovery, but then the market starts going down and keeps going
down, even when Wall Street becomes as placid as a produce market.
People keep thinking that it's just a flash crash, and so they keep
buying the dip, but even these bargains suffer a ruinous fall. The
ruthlessness of the bull market is remarkable, as if it were
ingeniously designed to maximize the suffering, and also to insure
that as few as possible escape the common misfortune. This is The
Principle of Maximum Ruin, where the stock market ruins the maximum
number of people to the maximum extent possible.

[Higgenbotham]

Here's a daily chart of the 1987 crash:



It may be that Harnett has had clients out of the market and is hoping to get them back in.

[Higgenbotham]

This is roughly what I expect:
Freefall to 1700 in 2-4 days (from wherever the high occurs)
Gyration between 1700 and 2200 for a few weeks
Collapse to zero over indefinite time period, but faster than 2008 and 2009

The gyrations between 1700 and 2200 will suck people in who feel they've missed out for the past 2-9 years, then the trap door will really open.

[Higgenbotham]

The reason I think the foregoing is going to happen is what you will hear today is some version of the following:
"We don't sell until the AD Line diverges"
"We don't go short until there is an unsuccessful test of the high"
"We don't sell until (name your indicator) makes a lower high as the stock market makes a higher high"
"We don't sell unless Dow Theory confirms"

So, as a result, what I think will happen is the market will crash from the high straight down about 40% without warning, then from that low the standard methodologies will give buy signals.

If this is the biggest bubble in history, which I believe it is by far, it will not pop like 1857, 1929, or any other. And it's not like the Tulip Mania or the South Sea Bubble either; those are more like Bitcoin because they didn't consume the entire economy.