Market pullback hints at ‘the bends’ to come

Tuesday, 13 February 2018
Melbourne, Australia
By Bernd Struben

  • Plumbing new depths
  • Look what happened to bitcoin while no one was looking

Scuba divers — or fans of Jacques Cousteau — will be familiar with the bends.

It’s the colloquial term for decompression sickness (DCS).

Having made over 900 dives myself, I’m happy to say I’ve never suffered from this painful, potentially fatal, complication. But I know a few divers who have.

The bends gets its name because victims tend to bend over in an effort to relieve the pain in their joints. While this may ease the discomfort, the only treatment is spending hours, or days, in an oxygen rich pressure chamber. No fun, that.

The bends comes from the nitrogen bubbles in your blood stream. We all have tiny gas bubbles in our blood.

Scuba divers get the bends by spending too much time under too much pressure. The deeper you go, the heavier the pressure. This compresses all those bubbles, allowing them to join up and still pass easily through your system.

This isn’t a problem until you need to head for the surface. At that point the bubbles begin to expand. Divers who’ve gone too deep or try to surface too quickly can have those bubbles lodge in their joints, their hearts, or even their brains.

It’s not a pretty realisation to have when you’re 40 metres deep. Your tank only holds so much air. You can’t stay underwater forever. But returning to the surface is going to be intensely painful.

In today’s world you can think of the stock market as our intrepid diver. And leverage — debt — as the depth. And like the air tank, there is a limit to debt’s capacity.

There was a time when the market was happily snorkelling along on the surface. But over the past decades its gone deeper and deeper. And since 2008 it’s no longer bothered to check its depth gauge at all.

All that easy money has compressed numerous market bubbles, much like the nitrogen bubbles in a diver’s blood stream.

But as we’ve seen over the past weeks, the mere hint of tightening that easy money — heading for the surface — was enough to see the market twinge in pain.

When the debt bomb finally implodes, and the market reaches the surface gasping for breath, those bubbles could go straight to its heart.

(For Vern Gowdie’s plan to escape without suffering the market bends, go here.)

Markets

Overnight, the Dow Jones Industrial Average closed up 410.37 points, or 1.70%.

The S&P 500 gained 36.45 points, or 1.39%.

In Europe, the Euro Stoxx 50 index finished up 42.26 points, or 1.27%. Meanwhile, the FTSE 100 gained 1.19%, and Germany’s DAX rose 175.29 points, or 1.45%.

In Asian markets, Japan’s Nikkei 225 closed up 134.12 points, or 0.63%. China’s CSI 300 is up 2.13%.

In Australia, the S&P/ASX 200 is up 29.60 points, or 0.51%.

On the commodities markets, West Texas Intermediate crude oil is US$59.38 per barrel. Brent crude is US$62.59 per barrel.

Gold is trading for US$1,324.67 (AU$1,684.69) per troy ounce. Silver is US$16.57 (AU$21.07) per troy ounce.

One bitcoin is worth US$8,946.27.

The Aussie dollar is worth 78.63 US cents.

Plumbing new depths

With a nod to our scuba analogy, global markets largely breathed a sigh of relief following Monday’s US led bounce.

The Dow was up 1.38% at the close on Monday. And it gained another 1.70% on Tuesday, overnight Aussie time. That leaves the index down only 7.5% from its record high of 26,616 points in 26 January.

The Nasdaq’s 1.56% gain even saw the tech focused index return to the black for 2018.

What’s driving the turnaround?

You’ll hear a dozen pundits give a dozen different reasons. But I think the primary driver is the realisation that the US government has no plans to end the debt party.

This headline from Bloomberg gives a good indication, ‘Trump’s $4.4 Trillion Budget Boosts Defense With More Red Ink’.

Trump’s proposed budget is unlikely to pass in its current form. But Congress has already shown its willingness to turn a blind eye to cutting the deficit in passing the US$1.5 trillion corporate tax cut.

The Bloomberg article continues:

The budget shows the 2019 deficit nearly doubling from projections last year, to $984 billion. The red ink would total $7.1 trillion over the next decade, the national debt would rise to nearly $30 trillion, and the budget would not balance. That assumes Congress adopts all Trump’s proposals, including spending cuts, and the economy doesn’t suffer a downturn for at least a decade.’

The graph below gives you a great visual of just how quickly the debt promises have blown out.



chart image

Source: Bloomberg
Click to enlarge

This kind of ballooning government debt will put a lot of pressure on the Federal Reserve to reverse course on its planned interest rate rises. And it will mean a lot more spending from the world’s biggest government.

Even if this stokes inflation and nominal interest rates do bump up, the real cost of borrowing (interest rate minus inflation rate) could remain at historic lows.

Meaning easy money may continue to flow into equities.

Warranted or not, if the pace of the bounce back in US markets continues, the Dow and S&P 500 will be back into record territory — and nosebleed valuations — by next week.

That may not happen. But if it does, ‘the correction we had to have’ will have come and gone in the blink of an eye. Leaving markets sorely in need of another correction.

At some point that correction is going to turn into a full blown market rout. And with the amount of debt sloshing around the system, the fallout could be horrendous.

No one understands this better than market veteran, Vern Gowdie. In his must-read book, The End of Australia: The Real Story Behind Australia’s Coming Economic Collapse and What You Can Do to Survive It, he details exactly how we got into this mess.

And he explains that Australia is not just facing one bubble, but two. A bubble in stocks. And a bubble in the economy itself.

Most Australians are wholly unprepared for the potentially devastating results if both bubbles burst.

Now, I’m not saying that will happen this month, but it could.

If you haven’t read up on Vern’s five wealth protection steps yet, I recommend you check them out today. You can find all of that here.

Look what happened to bitcoin while no one was looking

Throughout the final months of 2017 and into January 2018, you couldn’t escape the latest news about bitcoin.

It went from an obscure virtual token few had heard of and even fewer understood, to daily front page news. We spent a good bit of digital ink on it ourselves.

In 2017 it was all about bitcoin’s meteoric rise. In the final weeks of the year and early weeks of 2018, it was all about its massive crash.

Yet following the crash, the financial media has gone oddly quiet on bitcoin. Even the general public appears to be losing interest.

As the graph below shows, google searches for bitcoin (black line) are down roughly 60% since mid-December.



chart image

Source: Bloomberg
Click to enlarge

Now have a look at the following graph. It shows the one week price action for bitcoin.



chart image

Source: CoinDesk
Click to enlarge

As you can see, bitcoin was trading for a low of US$5,947 on 6 February, one week ago. At time of writing it’s fetching US$8,946.

That’s a gain of 50.4%…in one week. Yet I couldn’t find a single headline trumpeting its rocketing price.

If there’s a lesson here, it’s that you can’t depend on the mainstream financial news to put you ahead of the curve. Or in this case, even keep you in the middle of the curve. At best you can expect a belated report if and when bitcoin breaches US$10,000 again.

The best way I know to stay atop bitcoin and the wider crypto market is with our in-house crypto experts, Sam Volkering and Ryan Dinse. They each run their own premium crypto advisory services.

But they work together on their introductory service, Secret Crypto Network. It provides a wealth of information you won’t get from the mainstream, including regular new crypto recommendations.

And it’s an absolute bargain.

Find out for yourself here.

Now before you sign off, have a look at the following…

In Today’s Australian Tribune: ‘You Won’t Believe Where Duterte Told His Soldiers to Shoot Women

Philippine President Rodrigo Duterte is at it again. And he’s reaching for new lows.

The arguably psychotic president is best known for unleashing a violent drug war in his nation. One that has claimed the lives of thousands of drug users, alongside hundreds of innocent civilians.

But Duterte is not one for apologies…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd