2019-The Year of the Bear Market
January 2018- Global Synchronized Market Top
A global top is what we witnessed at the beginning of this year and the down side off of the top is now playing out in according to the script of a PBC(post bubble contraction ). Unlike the financial crisis of 2008 which started in the USA and impulsed outward, a PBC(post bubble contraction ) begins at the periphery of the world’s economy and is then transmitted towards the core of the senior reserve economy which is the USA. It has always been this way even since ancient times. The Roman historian Cicero stated that a financial disturbance in the outlying regions eventually arrives in Rome affecting the credit structures of the financial center. Those of us in North America seemingly have been immune to this all year…until now. The PBC has now arrived at the doorstep of the world’s financial system and it is now knocking at the door to come in. If one cared to watch you could see it coming all year, but if you just watched CNBC you just got blind sided.
The outer periphery unravels sending capital fleeing to the center
Frontier and emerging markets have been getting destroyed all year long. There has been no place to hide for these investors. Home based equities have been crushed, bond markets have tanked, even cash held in savings has not been a haven since emerging currencies have relentlessly sold off. If you stayed home in any local market sector you got killed…period. So money fled and flowed towards the financial center and that’s why North America has seemed just fine, in fact booming…until now.
World’s Stock Markets minus USA:
Clearly the aggregate of all of the world’s stock markets minus the USA are now entrenched in a confirmed downtrend, I would argue a bear market. It has taken on the form of a year long broad H&S top which has now broken down beneath a rolling over 30 W EMA. This chart says the bears have now got the ball and with capital now flowing away from the outer regions I don’t see the bulls taking back the ball.
Below is a closer up daily view of the MSWorld:
Emerging Markets-A Broad H&S Top ready to accelerate downward
Below we see all the elements of a classic well defined top. A H&S topping pattern with moving averages rolling over and becoming entrenched downward. Higher volume bars are the red down bars. There has been no sign of life here since the blow off January top:
Dow Jones Global Index– All the stock markets of the world
Now we put the USA back into the mix to see what all the stock markets in the world look like. What we see is a massive distribution top which has now broken down under a now declining 30 W EMA. What this chart is saying is it’s now
GAME OVER.
Sure we can expect a back test to the underside of this distribution triangle, which could take the form of a year end rally, but after that and likely when 2019 arrives it’s bombs away. Welcome to the global bear market of 2019.
Tenants of a Post Bubble Contraction
Let’s review the basic tenants of a PBC, refocusing on the big picture.
- There have been 5 complete PBC’s since the late 1600’s
- A PBC comes at the end of a credit cycle which typically spans 50-70 years
- A PBC is the markets way to reset an economy by purging high debt levels from the system through bankruptcy, debt restructuring and debt payoff.
- Once the process completes an economy can resume rapid growth rates since there is no longer an oppressive debt overhang impeding growth.
- The PBC process typically takes 15-20 years and is very painful and typically sloppy.
- Societal institutions undergo radical change due to the trauma of debt restructuring.
Previous Post bubble contractions
The last PBC visibly began in 1929 and ended in the late 1940’s. I say visibly because it actually started to take form in 1926 when the real estate market peaked in Florida and the British economy failed to respond to economic stimulus from the US Federal Reserve. These early symptoms were masked by the stock market blow off which continued into September 1929. Debt began to contract in late 1928, however the stock market had gained a life of its own and was undergoing a massive overthrow top. The world’s economy was bloated with unproductive and unserviceable debt which had been building since the bond funding of WWI which began 15 years earlier. Emerging market debt structures initially began to implode, as we see today, and eventually these forces were transmitted to the core in late 1929 kicking off what is known as the “great depression”.
The PBC of 1873 began with the stock market crash of September 1873 and lasted for the next 20 years. It was caused again by a massive debt build up from railroad construction and from the financial abuses during the US’s War for Southern Independence ending in 1865. Building parallel railroads to nowhere using bond issuance was not sustainable and led to the financial collapse under the Grant Administration.
Commodities Peak 8-9 years prior to ALL PBC’s
In all previous 5 recorded PBC’s commodity prices peaked 8-9 years prior to the final peak in equities. Our current PBC is no different as the world wide commodity peak occurred in mid 2008, nine years before the global synchronous top. This same sequence occurred in all 5 previous PBC’s.
Long Term Government Bonds should continue to trend higher
LT government interest rates are presently in an uptrend, however rates should turn down once the recession takes hold since the economy will no longer be able to sustain elevated rates. Government bonds therefore should progress to new all time highs with rates probing new lows in the coming years. This is hard for many to accept since FED “money printing” would seem to debase the bonds leading to higher rates, but that’s not what the PBC model calls for. In Japan after their 1989 peak JGBs continued to rally for 15 years despite the most radical money printing regime in modern times.