Unlocking The Psychology Of Bitcoin's Bear Market

Important note:  a trough low occurs before a breakout to the upside.  We reached a Bitcoin secular low in November 2022, independently of when the next breakout will occur.

https://www.zerohedge.com/crypto/unlocking-psychology-bitcoins-bear-market

Gold's strange 'bear market': Deutsche Bank opens gold vault in Singapore

http://www.gata.org/node/12673

The Federal Reserve Bank of San Francisco's own economists forecast a bear market in stocks for at least another decade, bottoming out in 2021.

http://www.frbsf.org/publications/economics/letter/2011/el2011-26.html

The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13% relative to 2010. The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027. On the brighter side, as the M/O ratio rebounds in 2025, we should expect a strong stock price recovery. By 2030, our calculations suggest that the real value of equities will be about 20% higher than in 2010.

 What's next?  Will the progressives now label the Fed itself financial terrorists?

Richard Russell: Rising gold signals death of USDollar

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/10/4_Richard_Russell_-_Rising_Gold_Signals_Death_Knoll_For_US_Dollar.html

In 1971 (Vietnam and deficits) when foreign nations (particularly France), demanded that the US settle its deficits with gold (as specified in the Bretton Woods Agreements), Richard Nixon and staff were worried about our disappearing gold reserves. Their answer to settling our debts in gold was a resounding and historic "no." In doing so, they shut the gold window. Thus, the time-honored link between the US dollar and gold was broken. The US would no longer give up its gold to settle its international debts. At that point, the US and the world went completely off the gold standard. The US dollar would then be the world's reserve currency.

Without the discipline of gold, the Bretton Woods agreement fell apart, and central banks were free to create fiat currency out of "thin air," as much of it as they wanted. The ignorant public accepted the intrinsically-worthless fiat money. "Now we're all Keynesians, " said a shaken Nixon.

The phony prosperity since 1971 was built on a Fed-created fantasy currency. Fantasies can only last so long -- until they meet head on with the brick wall of reality.

Thus, I believe that the very fundamentals of this bear market will be an epic clash between a world built on fiat money and a return to the reality of intrinsic wealth.

This bear market will be about the collapse of fiat money. In all history, no fiat currency has ever survived. The fundamental of this bear market will be about the collapse of the world's fiat currency and all the fake prosperity that has been created through fiat currency. In other words, cold reality will prevail. The people of the world will, at last, realize that money by fiat is not reality, it's fantasy money and a dream created by man.

In essence, what we're seeing now is a battle to the death between intrinsic money (gold) and the fiat paper created by the world's central banks.

The magnificent slow motion collapse of the fiat system which you are now witnessing will consume some individuals around you who are not prepared. This time it is global, and when the dust settles you must own real money - gold.

David Rosenberg remains bearish on equities

http://pragcap.com/david-rosenberg-is-dow-5000-really-possible

* Secular bull and bear markets typically last 16 years

* During the secular bear market, most if not all of the prior gains made (again,in inflation-adjusted terms) in the prior secular bull condition, are wiped out. Look closely at the chart and there is a very subtle upward drift – the secular low points rise over time, albeit fractionally.

Assuming inflation averages 2% annually and that 2016 marks the end of this secular bear episode (seeing as it began in 2000) then the historical pattern would suggest a test of 5,000 on the Dow as the ultimate trough (at that point, gold will likely be 5,000 too). This does not preclude cyclical rallies along the way, but these will be “bear market rallies” such as we saw from March 2009 to April 2010 and investors should not be tempted into any other strategy than to rent these rallies and not own them.

Dead cat bounce?

Due to my increasing anxiety with every rally in equities, I gathered some charts of the S & P 500 Index. It recorded a low of 666 in early March 2009, down from the October 2007 high of 1565. This represents a decline of 57.5% from the peak. What came next has been this powerful 50% retracement to approximately the 1000 level. A Fibonacci 61.8% retracement yields a value of 1078 as an intermediate peak for the SP 500. I would be a net seller if and when we approach that level.

For comparison's sake, between the 1929 peak of the Dow Jones Industrials Average to the low in 1932 (see first chart above), the market had a handful of double-digit gains. But in that duration, the market declined by 90%! In other words, for every 1 step up, the market took 3 steps down.

From the 1932 low to the 1937 peak, the DJIA had 3 triple-digit gains, including one for almost 300%--almost a quadruple. But none of these powerful rallies prevented the Great Depression. And investors holding since 1929 weren't whole again until 1953.

The harder a market falls, the higher the market rebounds, but the more difficult it is to get back to even--despite multiple powerful rallies. With the 2007-2009 decline "only" measuring 57.5%, this retracement rally should not have been surprising.

To the trained eye of an electronics engineer, the SP 500 chart between 2007 and 2009 looks like a waveform transitioning between logic "1" to logic "0" (see second chart above). However, instead of being an ideal waveform with uniform horizontal and vertical lines, the signal is distorted with undershoot and high-frequency ringing.

In layman's terms, this market is a dead cat bounce. And gravity will eventually cause it to fall back down before finding a steady-state equilibrium. The hope is that the SP 500 secular low of 666 will not be revisited, and that the index will find a trading range of consolidation above that low until a recovery is well-established.

I still posit this is a bear market rally--and not the beginning of a secular bull market. The world economy is still undergoing a delevering process as corporations, individuals and governments are still awash in debt. Banks haven't honestly accounted for toxic assets on their balance sheets. With unemployment climbing, tight credit conditions, and the American consumer tapped out, any economic recovery will remain muted. Equities may still rise from here, but at some point (soon), the market will become over-extended.

The disconnect between the market rally and the jobless economy

I've always posited this recent strong rally, while good for account values, was a bear market rally--a sucker's rally, if you will. While a 40% rally is legitimate by any measure, it's within a secular bear market. Why? Any recovery will be tepid, as industrial output is plummeting, cash- and credit-strapped consumers aren't spending, banks aren't lending, and the private sector isn't hiring. Barron's has a good article on the true measure of the state of the economy, tax revenue:

http://online.barrons.com/article/SB124579469824143923.html#mod=BOL_hpp_dc

I don't know when the market will wake up and realize how dire the prospects for worldwide economic growth are. But as long as central banks continue to print currency in an attempt to stimulate their respective economies, I suppose asset values can continue to rise. Aside from pivotal event-driven biotech stocks, and a few precious metal plays, I am on the sidelines, even if it means I miss the next 10 or 20%. It's never wrong to take profits.

It's been a good ride, but I am not going to fall in love with this market. I don't want my heart to be broken.

Devil's Advocate

I visited a former colleague yesterday, and presented the weak dollar/strong commodities thesis to him, with some agreement. As many of you know, this huge rally has been great for our account values, but it has made me increasingly nervous. I've asked for counterarguments against these plays, and was looking to poll some of you in our email threads last night. After a long day, I was too tired to post, so I will do so today:

1) Despite success in our holdings so far, what could derail the current rallies in commodities? Hubris is not a virtue when markets turn south.

2) Are our pivot event-driven microcap biotech stocks immune to an overall market downturn, or are we merely decline-resistant?

Well, today's actions confirms my suspicions--even if precious metals are a hedge against inflation (as are other hard assets), when the market tanks, it takes almost every sector with it (unless you are short the indices). If individuals, hedge funds and in hard times--institutional investors have to raise cash, they will sell any asset class, whether it's a gold ETF, REIT, or just regular old equities.

Having said that, nothing goes straight up (I know I have been redundant here), and corrections are healthy. The pertinent question is this a correction, or the start of another demand destruction decline?

On equities, I'm still of the opinion that we have been blessed with a strong rally since March 6, enclosed within a secular bear market. I still see too much debt within the consumer, corporations, real estate, as well as public sectors. Foreclosures and unemployment are rising, this time infecting borrowers with good credit, not just sub-prime borrowers. Commercial real estate defaults are exploding. And with 70% of our nation's GDP consumer-based, all these entities are in the de-levering mode--of course, with the exception of our nation's exploding balance sheet. And if consumers and businesses aren't opening their wallets, every attempt by the economy to recover will fail.

So where does that leave commodities? I suspect a bifurcation between commodity prices and equities overall. Even tho the world will consume less energy due to industrial and consumer demand destruction, inflation is still the boogey-man, mainly because the US Treasury has printed too many dollars. The pivot point is when those dollars start circulating through the economy, creating a multiplier effect. Currently, banks are hoarding dollars in order to recapitalize their toxic balance sheets. When and if commercial bank lending resumes, the Fed will be powerless to turn off the spigot, igniting inflation. It will be too little, too late. It is political suicide to raise interest rates and reign in money supply while citizens are losing jobs and their homes.

Will I be proven right? Nobody knows, but so far, the market agrees with me, as history has shown with 100% accuracy central banks are always late in closing the discount window. And with the economy on such shaky ground, I predict they will be late again in tightening monetary policy.

Conclusions? Commodities remain in a secular bull market--one that started in 2001, and one that corrected immensely in 2008, due to the financial crisis. In other words, we will experience a correction, and gold may correct 10% perhaps. But eventually, inflation will take root, as central banks worldwide attempt to stimulate their respective economies. Besides, inflation reduces the debt burden. In a perverse situation, central banks now want to INDUCE inflation, instead of trying to manage it. And as long as the Fed is intent on trillion dollar deficits, the US Treasury will continue to issue trillions of dollars of paper. Savers will be destroyed, and debtors rewarded. With the US government the biggest debtor in the world, guess who benefits from inflation?

As for the stock market, this bear market rally will also experience corrections, and could even go higher with the S&P 500 touching 1100. But don't count on us reaching our all-time highs. I don't see that in the cards, and if we do, it would be the short of our lifetime.

Having said that, I would appreciate counter-arguments. Sometimes losing money is more instructive, and despite our recent gains, my anxiety level is heightened. I even sold some of my winners earlier this week, and bought a few SPY puts last week. Turns out I may have been early with the puts, but better early than late.

Biotech update

All our biotech plays are green, including obesity, swine flu, renal, and various oncological drug companies. This is a relief, but it always concerns me when stocks gap up. I've taken some profits, leaving most shares on the table in case they gap up due to pivotal events. While I am bearish short-term, this bear market rally has some juice behind it as the Fed continues to pump the system with a flood of dollars.

Nominally, investors should do well, but returns will lag in real terms once inflation kicks in. More on that later...

Taking profits

And in these skittish markets, I'm not ashamed. Took some profits on TBT, up 50% due to rising 30-year T-bond rates (TBT is a double short ETF betting on rising bond yields and declining bond prices). It gapped up today and could break out, so I kept some on the table. But with a 50% profit, I had to take some off the table. If the Fed goes through with quantitative easing and monetizes that debt, they could temporarily drive bond prices up and yields down. Long-term, I'm still bearish Treasury bonds, so I will wait for another good entry point to buy TBT. But with volatile markets, you take your winners and cut your losers. Buy and hold won't work going forward (it didn't work in the last decade either).

Also, I cashed out partial positions in a uranium stock (up 25%), and of course DNDN this morning for a better than 300% pop. Notice I said "partial", as I am merely taking some profits, but letting the house money ride. Most professional traders average in their buys, and average out their sells, because no one can buy at the absolute bottom or sell at the absolute top. Don't blow your wad with one initial big trade. And don't get discouraged if the price drops a little as soon as you buy, or goes up a little when you sell. Knowing when to sell is as important as knowing when to buy.

The reflation play is still intact, and I will be looking to buy into dips on hard assets (commodities, precious metals, energy). We are in the throes of a bear market rally, but I certainly don't want to stand in the way of stampeding longs. When I hear talk of the beginning of a new bull market, I'll know this rally would have been a head fake, at which point I will buy some appropriate puts. If I miss the big decline--oh well. NOT losing money in this market is like a win.

I also want to get liquid and keep my powder dry, as another biotech opportunity is presenting itself. This may not be another DNDN blockbuster, but FDA approval seems imminent. Stay tuned.

Sector Performance during a Bear Market

This is another Barron's data sheet gathered by Mark Lundeen depicting stock performance among different industry sectors. Between 1963 and 1975, gold mining stocks were the biggest winners, by far. Other winners were the drug sector stocks. Bringing up the rear were installment financing companies, utilities, and airlines.

Treasury Bonds tanking

Today was a watershed event in my eyes. Despite the feel-good moment the media and powers-that-be are trying to portray with today's presidential lunch, the markets reacted very unfavorably to Paulson's semi-admission that we are not out of the woods yet. For those that follow fixed-income markets (which is much bigger than the equities market, and hence, much more foretelling), the Treasuries bubble has burst, and the Fed and Treasury will no longer be able to influence the long end (30-year bonds). They have dropped short-term interest rates as low as they could, but the long-end is mostly market-driven. Buyers of bonds believe inflation will be muted going forward (either 10, 20, or 30 years). Sellers of bonds believe inflation will erode their returns. Mistakenly, bond buyers also believe they are safe havens. The future will prove this assumption false, as bond prices are subject to the soundness of the currency, inflation expectations, and supply/demand of said Treasuries.

Once the market figures out (and it eventually will) that the USDollar is about to be a toilet paper currency, they will demand higher rates of return, driving up interest rates--and basically undoing what the Fed and Treasury have worked so hard to do--lower long rates to reduce mortgage rates, and stabilize the housing market (hopefully). In other words, the gov't can only do so much--and artifically keep long rates down for only so long. The dam will eventually break, rates will soar, as will inflation eventually. The bottom line is that the Chinese and Japanese will no longer support the US deficit (our funding needs are in the trillions) and stop buying our Treasury bonds, as they retrench and try to stimulate their own economies. In other words, buyers at our huge debt financing auctions will be scarce. This is the final bubble bursting, and this time, no one will be able to step in to prop it up.

Anybody who lived thru the 70's knows how ravaging high interest rates are. To be honest, I've been shorting T bonds for a couple weeks, and with Barron's article over the weekend proclaiming the same, I actually have more conviction, as Barron's is one of the few prescient mediums. Gold is still in a secular bull market, but it is taking a necessary pause due to deflationary concerns. But even the Fed and Paulson are acknowledging the long-term risks of what they are doing--they just can't help themselves as they fear the mother of Depressions. Problem is, they are only delaying it, and exacerbating it with their monetary and quantitative easing (providing credit and injecting capital).

Despite periodic snapback rallies, we are in for a different era--and it's not going to be pretty. We are in for several years of deleveraging, with markets moving sideways with a downward bias. Gold and silver will continue their secular bull market.

I have incorporated a wave investment thesis, and firmly believe big asset moves occur approximately every 20 years. It's uncanny, and there is a reason for it: investing is generational. We have lost a whole generation of investors who will never touch stocks again, due to scandals, crises, TWO stock market bubbles, fraud, and most of all, LOST money and lost confidence that buy and hold works. They've seen their grandparents' retirement savings dissipate overnite, their parents lose their jobs, and their own job prospects bleaker than ever. THIS OCCURRED IN THE LATE60'S/EARLY 70'S, USHERING IN A DECADE OF DOLDRUMS! The former Nifty Fifty stocks collapsed, and I recall my dad's friends declaring they will never invest in stocks again. They were justified--until the 1982 bottom, when smart investors eased back into stocks, while the general public was shunning them. Previous false rallies were met with shunted resistance, causing the last bulls to throw in the towel.

A bottom was only formed because Volker said enough is enough, and raised interest rates into double digits (money market accounts were earning 12-13%!). Mortgage interest rates were 15%, because Volker shook out the excesses, and then ushered in lowered rates.

So given that this bear market began in 2000 with the tech bust, we've got another 8-10 years of crappy returns, with sawtooth volatility and sucker rallies. Warren Buffett himself warned of this 8 years ago, as he said investors needed to lower their expectations of equities going forward. Remember: between 1982-2000, stocks had their best run EVER! (Unfortunately, the average investor only earned 2.3% per annum during that span, as they are horrible market timers).

In fact, the only asset that gained in the 70's was our friend gold. I have no idea of the timing, but it is coming. Shorter-term, I'm already up 40% on my short T-bond trade (it's a double-short ETF) in a week. Despite further attempts to prop up bond prices, eventually the avalanche of sellers, and lack of buyers will usurp any attempts to prop up the US bond market.