The Great Depression Fractal Part VI - The Final Mania
If the fractal continues to closely repeat, the Dow Jones could rise to 50k and then drop to 5k, all within the next 5 years! Sounds insane, but people in stocks have seen nothing but gains for the last decades. That's an enormous amount of generational wealth.
I like to think of the market as a breathing organism holding its breath for longer and longer. At some point, it runs out of oxygen and needs to exhale. The longer the breath is held, the less healthy the market becomes and many cells become deprived of oxygen. Once it finally exhales, life is pumped back into the cells and it can begin creating new life and sustaining again. This is why I think a big market crash needs to happen in order for smaller businesses and individuals to start regaining a foothold in the economy again. All that pent up energy in the stock market has taken it from elsewhere --- from arts, culture, education....these things are hardly accessible anymore. If someone wants to be an artist, they better come from wealth first because they surely can't afford art school, and they surely can't afford to spend years making art for zero income until they get their big break. You might say sharing art has become easier with the Internet, but with this comes a lot more competition, and many more barriers. It's always been hard to do these things, but right now we're experiencing a crunch where it's A LOT more challenging. Many refuse to accept or see this, though they do feel that there is something inherently wrong, hence why w're getting unrest on both ends of the political spectrum.
The fact that people can't agree on why things are this way tells me something else needs to happen. Not even a pandemic could snap people out of it, and this is because it largely affected those without wealth. So ultimately something will need to happen that affects the wealthy, and something that unites people under a more coherent narrative. if not, I'm quite afraid for what our society will look like in the next 20 years. Probably something out of a dystopian sci-fi novel. I mean, it's already looking that way.
Here is my original post about the "great depression fractal" from 2018:
It's a bit outdated, and I've learned a lot since then. But this is an idea I've been thinking about for quite some time, as you can see. My other follow-up posts are linked at the bottom.
Everyone with wealth is running away from the dollar. But people also have extraordinary amounts of debt. Eventually the demand for cash returns as people realize they need to pay back their debts, and that goes for governments and institutions as well. I think trimming some risk from assets at this point isn't a terrible idea. I finally did this with some of my crypto, as I mentioned in my last Bitcoin analysis, where I successfully called the recent top. I think the next generation of wealth will be made in the aftermath of the next great depression, NOT right now. This is only my opinion. Maybe I'll be wrong. Maybe I'm really just living in my own world.
In any case, it's very interesting how history rhymes; we got decades of wars and technological innovation, followed by a pandemic, and now a roaring 20's for the stock market. A hundred years ago, we got decades of industrial growth, the first world war, a pandemic, and then a booming period of heavy borrowing and spending on credit.
Now to the technicals
Zoomed in, you can see a bearish divergence on the monthly chart, and also how high I think the Dow can go before the crash:
I think upside will be somewhat limited by that long term rising trendline overhead (red). From there, it can drop back down to retest the broadening formation (orange), and if that falls, it should confirm our Great Depression II, meaning potentially an 80-90% drop for the entire market. And of course, it could always drop before it even gets towards the $50k target.
The bearish divergence on the monthly chart for SPX is still there! This divergence is what allowed me to call the market crash prior to the COVID panic, even before COVID really had started to scare investors.
But the questions remain: What causes people to realize it's time to pull out? And why can't the dollar just continue its decline to zero? After all, currencies do tend to be replaced...eventually. Interestingly, we are in an economic crisis rivaling the Great Depression, as a result of COVID-19, but asset prices aren't reflecting the real economy. Why? It has a lot to do with currency, as mentioned above. The amount of money printing has been absolutely insane. With this much printing, you'd think that the dollar's valuation would be at zero already. But observe this chart:
This is the S&P 500 versus the M2 money supply. What you can see here is that it's currently trending sideways, meaning that the stock market is actually not gaining in real value, and that actual growth has completely stagnated. The only reason stocks have been rising over the last couple of decades is due to this money printing and currency devaluation. This might change at some point. We do not know if this chart will break up or down, from consolidation. That's the true mystery here, and again why this post is entirely speculative. What would happen if this chart broke to the upside, for instance? It would mean that the market is generating real value. The last innovation bubble was the dotcom boom, and you can clearly see it on this chart. It still hasn't gotten even close to those levels. Right now, this is telling me that dollars will probably be printed again during the next crash. But what if it's not enough? Then this chart would break down, the dollar currency index might skyrocket, but the oversupply of dollars could ultimately lead to massive inflation.
I'm also seeing some hidden demand for real dollars, as DXY has broken the long term downtrend and held it as support:
I also think we're reaching a point where federal monetary policy will need to swing towards taxing the wealthy more heavily. We have not seen highest nominal tax rates this low since prior to the New Deal. To me, this is a signal that policy will likely shift in another direction. Even something as simple as that can cause a crash. Policy aside, although assets now belong mostly to an elite class, the 99% needs real dollars to pay their expenses. They will do whatever they can to get ahold of more cash, and that brings me to my next section.
The Revenge of Retail
What causes demand for dollars? Debt needs to be repaid. Limits will be imposed on borrowing, which means consumers will need real cash to enjoy life. The average consumer has spent the last year hardly spending anything on entertainment, travel, dining, and drinking. Once the pandemic ends, people are going to rush to live again. And many will need to borrow in order to make this happen and not miss out. Interest rates will need to go up again. Profit-taking from the stock market combined with the return of asset prices to Earth can cause DXY to break out. This is a possibility, and why I've taken my initial risk out of the crypto market after purchasing at lower levels. I still hold the majority for the long term, but if I see more signs of sustained weakness I might take more profits and increase my cash position.
What we see today in the stock market is clearly mania. What's fascinating is that we're seeing retail traders fleece hedge funds, which shows the danger of borrowing and money printing. It also exposes how arbitrary stock valuations have become, and how manipulated they can be. It also proves that the 99% does indeed have power over institutions. Forcing out failing companies by shorting them into the ground while deepening the pockets of cannibalistic tech companies has been the name of the game. But the game stops here (see what I did there?). Nothing goes up forever, especially not like this. I'm concerned about the future, definitely. But I think a crash would offer the next great opportunity.
Optimistically, I see a green energy and infrastructure revolution, sustainability, more robust mental healthcare, and flourishing arts as what could rise from the ashes.
Or, the status quo will continue without any large market crash, the wealth gap will continue to widen, and society will become incredibly boring. What we're seeing during the pandemic right now, especially in big cities like New York, is an incredibly boring world. Things continuing as they are, I think, would go against human nature. Humans naturally want to create, connect, and support their communities. Are we really leaving these vital elements behind? If not, I think we will see some massive shifts over the next decade in financial markets. I'm just preparing myself psychologically for something ridiculous.
I'm having fun exploring possibilities, and I hope you are too. This is not financial advice - this is meant for speculation and entertainment only!
-Victor Cobra
I like to think of the market as a breathing organism holding its breath for longer and longer. At some point, it runs out of oxygen and needs to exhale. The longer the breath is held, the less healthy the market becomes and many cells become deprived of oxygen. Once it finally exhales, life is pumped back into the cells and it can begin creating new life and sustaining again. This is why I think a big market crash needs to happen in order for smaller businesses and individuals to start regaining a foothold in the economy again. All that pent up energy in the stock market has taken it from elsewhere --- from arts, culture, education....these things are hardly accessible anymore. If someone wants to be an artist, they better come from wealth first because they surely can't afford art school, and they surely can't afford to spend years making art for zero income until they get their big break. You might say sharing art has become easier with the Internet, but with this comes a lot more competition, and many more barriers. It's always been hard to do these things, but right now we're experiencing a crunch where it's A LOT more challenging. Many refuse to accept or see this, though they do feel that there is something inherently wrong, hence why w're getting unrest on both ends of the political spectrum.
The fact that people can't agree on why things are this way tells me something else needs to happen. Not even a pandemic could snap people out of it, and this is because it largely affected those without wealth. So ultimately something will need to happen that affects the wealthy, and something that unites people under a more coherent narrative. if not, I'm quite afraid for what our society will look like in the next 20 years. Probably something out of a dystopian sci-fi novel. I mean, it's already looking that way.
Here is my original post about the "great depression fractal" from 2018:
It's a bit outdated, and I've learned a lot since then. But this is an idea I've been thinking about for quite some time, as you can see. My other follow-up posts are linked at the bottom.
Everyone with wealth is running away from the dollar. But people also have extraordinary amounts of debt. Eventually the demand for cash returns as people realize they need to pay back their debts, and that goes for governments and institutions as well. I think trimming some risk from assets at this point isn't a terrible idea. I finally did this with some of my crypto, as I mentioned in my last Bitcoin analysis, where I successfully called the recent top. I think the next generation of wealth will be made in the aftermath of the next great depression, NOT right now. This is only my opinion. Maybe I'll be wrong. Maybe I'm really just living in my own world.
In any case, it's very interesting how history rhymes; we got decades of wars and technological innovation, followed by a pandemic, and now a roaring 20's for the stock market. A hundred years ago, we got decades of industrial growth, the first world war, a pandemic, and then a booming period of heavy borrowing and spending on credit.
Now to the technicals
Zoomed in, you can see a bearish divergence on the monthly chart, and also how high I think the Dow can go before the crash:
I think upside will be somewhat limited by that long term rising trendline overhead (red). From there, it can drop back down to retest the broadening formation (orange), and if that falls, it should confirm our Great Depression II, meaning potentially an 80-90% drop for the entire market. And of course, it could always drop before it even gets towards the $50k target.
The bearish divergence on the monthly chart for SPX is still there! This divergence is what allowed me to call the market crash prior to the COVID panic, even before COVID really had started to scare investors.
But the questions remain: What causes people to realize it's time to pull out? And why can't the dollar just continue its decline to zero? After all, currencies do tend to be replaced...eventually. Interestingly, we are in an economic crisis rivaling the Great Depression, as a result of COVID-19, but asset prices aren't reflecting the real economy. Why? It has a lot to do with currency, as mentioned above. The amount of money printing has been absolutely insane. With this much printing, you'd think that the dollar's valuation would be at zero already. But observe this chart:
This is the S&P 500 versus the M2 money supply. What you can see here is that it's currently trending sideways, meaning that the stock market is actually not gaining in real value, and that actual growth has completely stagnated. The only reason stocks have been rising over the last couple of decades is due to this money printing and currency devaluation. This might change at some point. We do not know if this chart will break up or down, from consolidation. That's the true mystery here, and again why this post is entirely speculative. What would happen if this chart broke to the upside, for instance? It would mean that the market is generating real value. The last innovation bubble was the dotcom boom, and you can clearly see it on this chart. It still hasn't gotten even close to those levels. Right now, this is telling me that dollars will probably be printed again during the next crash. But what if it's not enough? Then this chart would break down, the dollar currency index might skyrocket, but the oversupply of dollars could ultimately lead to massive inflation.
I'm also seeing some hidden demand for real dollars, as DXY has broken the long term downtrend and held it as support:
I also think we're reaching a point where federal monetary policy will need to swing towards taxing the wealthy more heavily. We have not seen highest nominal tax rates this low since prior to the New Deal. To me, this is a signal that policy will likely shift in another direction. Even something as simple as that can cause a crash. Policy aside, although assets now belong mostly to an elite class, the 99% needs real dollars to pay their expenses. They will do whatever they can to get ahold of more cash, and that brings me to my next section.
The Revenge of Retail
What causes demand for dollars? Debt needs to be repaid. Limits will be imposed on borrowing, which means consumers will need real cash to enjoy life. The average consumer has spent the last year hardly spending anything on entertainment, travel, dining, and drinking. Once the pandemic ends, people are going to rush to live again. And many will need to borrow in order to make this happen and not miss out. Interest rates will need to go up again. Profit-taking from the stock market combined with the return of asset prices to Earth can cause DXY to break out. This is a possibility, and why I've taken my initial risk out of the crypto market after purchasing at lower levels. I still hold the majority for the long term, but if I see more signs of sustained weakness I might take more profits and increase my cash position.
What we see today in the stock market is clearly mania. What's fascinating is that we're seeing retail traders fleece hedge funds, which shows the danger of borrowing and money printing. It also exposes how arbitrary stock valuations have become, and how manipulated they can be. It also proves that the 99% does indeed have power over institutions. Forcing out failing companies by shorting them into the ground while deepening the pockets of cannibalistic tech companies has been the name of the game. But the game stops here (see what I did there?). Nothing goes up forever, especially not like this. I'm concerned about the future, definitely. But I think a crash would offer the next great opportunity.
Optimistically, I see a green energy and infrastructure revolution, sustainability, more robust mental healthcare, and flourishing arts as what could rise from the ashes.
Or, the status quo will continue without any large market crash, the wealth gap will continue to widen, and society will become incredibly boring. What we're seeing during the pandemic right now, especially in big cities like New York, is an incredibly boring world. Things continuing as they are, I think, would go against human nature. Humans naturally want to create, connect, and support their communities. Are we really leaving these vital elements behind? If not, I think we will see some massive shifts over the next decade in financial markets. I'm just preparing myself psychologically for something ridiculous.
I'm having fun exploring possibilities, and I hope you are too. This is not financial advice - this is meant for speculation and entertainment only!
-Victor Cobra
Commentaire:
The SPX/M2 chart really puzzles me because it implies that stocks can just keep going up against the USD. In terms of Moving Averages, it looks primed for upside. So in this case, we may not actually see another "great depression" for stocks. This chart has me somewhat hopeful, because it means great depression or not, we could see some real industry growth (maybe in green energy and infrastructure), post-pandemic.
