Figuring It All Out

For two years, the question has been the same: when is something going to give, and when are we going to see some real volatility in the market thanks to 5% interest rates?

For two years, the question has been the same: when is something going to give, and when are we going to see some real volatility in some market — any market — thanks to 5% interest rates?

The answer, it turns out, may be simpler than I thought.

I gave up a long time ago trying to figure out whether the market is going to flash crash or melt up as a result of aggressive further easing. If I had to handicap the situation today, I’d predict both are going to happen: we will see a sharp decline in the market, as a result of either a black swan event, disappearing liquidity, an unexpected blowoff valve (more on this in a bit) or all of the above, which would trigger margin calls and a deleveraging. Then, from there, I would predict an unprecedented response from the Fed, who would flood the system with money and easing in a way that was larger by any factor than how they have done it in the past.

Whatever outcome occurs should be irrelevant thanks to the way that I positioned myself heading into the year. I’m hedged and short the indexes and a couple of specific names that I believe would plunge in the event of a market pullback. At the same time, I will be ready to use any profit from a sharp downturn to purchase sound money assets – namely, gold and silver, miners, first and foremost, and maybe some real estate and bitcoin – should they also wind up selling off in any type of panic that encompasses all assets.

But for me the bizarre thing is how long it has taken for either of these situations to take place. For all intents and purposes, the market has been in a very relaxed, slow and steady melt-up over the last two years despite interest rates being hiked at a record pace, record levels of outstanding debt, and mounting geopolitical instability.

I was starting to feel like it was officially time to don my tinfoil hat and ask questions about whether or not the markets are being held up unnaturally by the plunge protection team. Well, to be honest, I always think they are, but I mean, asking questions about whether or not it’s happening more now than ever.

But then I came across a couple of interesting facts that made me once again believe that my thesis could be correct, but my timing could just be wrong. On this blog, I often reference a sign in my local Korean deli above the sandwich counter that says:

“You never need patience more than when you are about to lose it.”

The sign makes the point that when you feel like despair is setting in, you may be the closest you’ve ever been to what you’ve been waiting for.

So here are two new pieces of data to chew on that I found this weekend.