Wednesday, May 19, 2010

Black Swan Time

This item is from Richard Russell who has spent his career tracing the markets and trying to stay ahead.  He is clearly scared.  I certainly am uncomfortable.  I am uncomfortable that he is uncomfortable.  I know all the trends and expectations are grinding down the general liquidity of the market.  It is presently vulnerable to a black swan event when something hits out of the blue that triggers a market washout.
I experienced this in the weeks prior to the 1987 abrupt market collapse and traded into a defensive position to protect my book.
I also sensed the vulnerability in the week just prior to 9/11.  Something about the markets triggered my internal red flags.
There were many other instances over the years and it is curious how often markets seem to sense a pending shift.
One of my better upside calls was to bid Canada 9.5% at 61 in June 1982 and also predict a market boom beginning September of that year.  I was not noted for ever throwing caution to the wind.
The markets are locked and cocked for a major general decline.  Without a trigger event, it will simply grind out over the next few months.  A trigger event will make it swift.
What I will try to do now is construct a list of potential black swan events able to produce massive global disruption and a grossly collapsed market.  This list are possibilities whose probability is non zero.
A         Gross Geology. 
Katla blows and Europe does without a crop this year.  A massive collapse of the already weakened euro zone economies takes place.  The rest of the globe struggles to move food supplies to save tens of millions from eminent starvation.  The Volcano continues to spew indefinitely.
No other prospect is presently showing activity but this is quite enough to put Europe out of action for two years at least.
B         Terrorist Nuclear Bomb
Nuclear war at the State level is not going to happen simply because it will not be survived by the initiator and this is well understood.
It is quite plausible for a Pakistani cabal to spirit a nuclear bomb out of the Pakistani nuclear program, or alternatively another such cabal is able to access a former Russian bomb.  It is too soon for the Iranians to do so.
It is then no trick at all to put such a device into a shipping container and to load it onto a container ship under control of a suicide bomber.  The most damaging target is New York.  However this can also reach Washington, Los Angeles, San Francisco, Hong Kong, Shanghai, Tokyo, Mumbai, Seoul, London, and Rotterdam.
This fortunately takes real resources to do.  That gives me little comfort because money will not be a problem and neither will personnel. The terrorists have shown that they can overcome all that.  These are real pending threats that are slowly developing.
The result of such an event could be the Third World War in which the Islamic world would be fully occupied by armies from every other country and where Islam would be forthwith banned with a full reeducation program implemented.  Many millions would die and many more millions would be displaced.

C         Human Folly
We are watching the progress of Europe in unwinding its banking difficulties.  I think they can print their way out of the worst and impose discipline on the members.  It is just messy and the declining Euro is helping to focus attention.
The real bad news is who is going to bail out California?  That is a black swan that can arrive as a bolt of lightening and it has been ignored by Washington to date.  The damage to the banking sector will be once again severe.
What happens if this triggers a collapse of the pension industry?
My point is that a lot of very big chickens are coming home to roost and no one has a plan.  I simply do not believe that the problems can work themselves out.  The housing collapse has not been addressed at all.  That I showed how to turn around but no such thing has been done. In short, financial deterioration is continuing and the dead cat bounce has run out of free cash.  There may be no more room to fix any of it.
Next year we could have millions on the streets as social systems collapse.  That is what happened during the depression.
My present point is that these are the black swans that I can imagine.  Have a good night’s sleep and recall that no one imagined 9/11 except the perps.

Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

Joe Weisenthal | May. 18, 2010, 8:57 AM | 66,483 | comment 101

Richard Russell, the famous writer of the Dow Theory Letters, has a chilling line in today's note:

Do your friends a favor. Tell them to "batten down the hatches" because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, "How the dickens does Russell know -- who told him?" Tell them the stock market told him.
That's pretty intense!
Update: By popular demand, here's more on what he sees in the market. The gist is that the markets recent gyrations are telling him that the economy is in trouble:

And I ask myself, "Am I seeing things? The April 26 high for the Dow was 11205.03. The Dow is selling as write at 10557 down 648 points from its April high. If business is even better than expected, then why is the Dow down over 600 points? And why, if there were 674 new highs on the NYSE on April 26, were there only 20 new highs on Friday, May 14? And if my PTI was 6133 on April 26, why is it down 17 points since its April high?

The fact is that I've been seeing deterioration in the stock market ever since early-April, and this in the face of improving business news. The D-J Industrial Average is composed of 30 internationally known top-quality blue-chip stocks. These are 30 of "America's biggest companies." If Barron's is so bullish on the future of America's biggest companies, then why isn't the Dow advancing to new highs?

Clearly something is wrong. But what could it be? Much as I love Barron's, I trust the stock market more. 
If I read the stock market correctly, it's telling me that there is a surprise ahead. And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead.

About Dow Theory -- First, we saw the recent April highs in the Averages. Then we saw a plunge in both Averages to their May 7 lows -- Industrials to 10380.43, Transports to 4298.12, next a short rally. If ahead, the two Averages turn down and violate their May 7 lows, that would be the clincher. Such action would signal the certain resumption of the primary bear market.

Just as for years I asked, cajoled, insisted, threatened, demanded, that my subscribers buy gold, I am now insisting, demanding, begging my subscribers to get OUT of stocks (including C and BYD, but not including golds) and get into cash or gold (bullion if possible). If the two Averages violate their May 7 lows, I see a major crash as the outcome. Pul - leeze, get out of stocks now, and I don't give a damn whether you have paper losses or paper profits!

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