ECHOnomics: The Quixotic Quicksand Quotient & Recalcitrance

June 24, 2016 seemed as if it was financial armageddon, not only in the US stock market, but financial markets around the world.

One week later, we’re back to where we were.

So what gives, and where do we go from here?

All I can say is, it’s time to be very, very careful.

I think it’s essential to acknowledge two key factors when evaluating the current state of financial markets, sovereign economies, and where oh where we might be headed.

Key Factor #1: Watch the Quixotic Quicksand Quotient, or, the QQQ

The QQQ is an ETF that tracks the Nasdaq, which, for my money, is the leading indicator on the future of the world economic outlook. While the Dow Jones holds your industrials and financials, the Nasdaq holds all of the innovating publicly traded companies: your tech and biotech/healthcare companies live here. If the world economy is growing, the QQQ grows because innovation is being spurred on – if anything, I look at the QQQ as a growth gauge. When the Nasdaq steadily climbs, I find it’s usually an indicator of general economic health and even optimism.

But, if that is the case, then why do I call it the Quixotic Quicksand Quotient?

Many companies that exist in the Nasdaq trade on faith. Faith that Company X is going to deliver on it’s promise to: treat a type of cancer, or provide omnipresent wireless charging, or 3-D print body parts, or grow crops that require zero water. You get the idea. Many of these companies are pre-earnings, and must raise funds to keep operations going either by diluting their stock, or, by taking on debt. You keep faith that they’ll fulfill their goal, and you keep your fingers crossed that you might have the next Tesla or Regeneron or Amazon in your portfolio. This is the Quixotic element of the Nasdaq. You’re fighting the good fight hopefully, investing in a company who’s trying to fulfill an unmet need.

The Quicksand portion is that ALL of these companies trade together. For good or ill. Facebook misses earnings, the entire Nasdaq may fall as a result. Facebook exceeds earnings and raises guidance, the entire Nasdaq may rise. Does it make any sense? No. But markets are less about sense or rationality than they are about momentum and emotion. The Brexit was a great reminder of that because while the economic impact on Europe MIGHT be negative, that’s entirely unclear. Because the markets were complacent about the vote, and the vote went differently than many predicted, suddenly, one wondered if the ENTIRE EU wasn’t going to implode. This herd mentality was seen prior to the dotcom bubble burst, and one example to highlight is Amazon. Amazon traded at 106.69 per share on Dec 10, 1999. On Sept 21, 2001, Amazon traded for 7.48 per share and 95% of all the dotcoms it traded with were bankrupt or folded into other companies. The quicksand won in 2000-2001.

The Quotient part of this is more just looking at the math of things. I’m not going to throw down any sort of quant type of stuff here, but just want to point out a few observations. In the history of the QQQ, twice has it failed to make a new high within a 6 month time frame following the dotcom bubble burst, from 2000-2002, where it lost 83% of it’s value. (That March 2000 peak of 118 still has not been taken out, even 16 years later…) First, in 2007-2009, the mortgage backed security bond crash, where the QQQ lost 50% of it’s value, and, in 2011, where the QQQ traded flat for a period of a year, before resuming it’s uptrend.

It has now been 7 months since the QQQ made a new high. The uptrend has stopped. That’s a red flag. If the QQQ fails to get over 118 in the next 5 months, it’s almost a certainty the world economy is going to falter.

Key Factor #2: Recalcitrance

Markets don’t behave rationally. If they did, the art of picking stocks would be easy. However, markets aren’t completely random either. The best way to describe them would be to say that they are, at best, manic. And the mania seems to be on the rise.

When you stick your finger in the air, and see where the wind is blowing, it’s blowing in the direction of disobedience. The Greek referendum was a clue. The Brexit was a bigger clue. Donald Trump may be the biggest clue of all that something has changed. People aren’t just mad as hell and not taking it anymore — it’s deeper. They’d rather burn down the entire forest than root out the sick trees and fortify the healthy trees.

Markets and trading work well when there’s cooperation. When there’s a lack of cooperation, you see strange things in financial markets, and stranger things in the world. The strange thing we’ve seen in financial markets is that both equities AND bond values are going up, while bonds are yielding lower interest rates than any time in history.

11 TRILLION dollars worth of sovereign bond debt is trading at a NEGATIVE interest rate.

Let that sink in.

People are actually putting their money into bonds that will likely LOSE money, but, because the bonds principal is safe and guaranteed, it means is that they are saying yes, I know I’ll lose money on this investment, but I won’t lose AS MUCH as I might if I kept that money as CASH under a mattress.

This is a mind-boggling sort of occurrence. And I don’t really know what it means or what it manifests, moving forward. I can say it’s unprecedented, it’s disorderly, and it seems to portend massive dislocations in the market.

Does this mean that Donald Trump is going to be President? Hard to say.

Here’s what I suggest:

Q: don’t tilt at windmills (don’t speculate right now) Q: pull yourself slowly from the sinking sand (take profits but don’t sell everything either) and Q: watch that 118 level.

Keep your eyes open to make sure that the fire that’s most definitely started can be contained.

And, if the wind picks up, buy more gold, raise more cash, and wait out the torching…

 

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