Worse Than a Crash

Worse Than a Crash

Oh good lord…

Spoken like a true central banker. There’s nothing wrong with the economy that eggheads like himself can’t “fix.”

Central bankers — and almost all politicians apart from Ron Paul — see the economy as a machine. Push a button here, pull a lever there and you get a predictable result.

But the economy is far more complex than that. Indeed, it’s the sum total of millions of people making decisions that no model, no matter how sophisticated, can possibly account for.

And so in light of the growing evidence that the Federal Reserve broke something… and that it’s probably not “fixable”... we tease out the question of where things go from here for markets.

“This is not the ‘big one,’” Paradigm macroeconomics authority Jim Rickards told his Strategic Intelligence readers yesterday.

“A crash of 25% or more in a compressed period of a few weeks (similar to what we saw in March–April 2020) is always possible, but this correction has a dynamic that suggests it will feel for a bottom and then settle down. The ‘buy the dip’ crowd are still around and they will be dipping their toes in the water on a continual basis.”

Then again, what’s in store might be worse than a crash — even, or especially, if the market rallies hard in the days and weeks ahead. “We may be in for a long, slow grind to a new bottom that could be down 70% or more from the top.”

Jim cites the case of the Dow Industrials collapsing 80% from 1929–32. It didn’t recover the 1929 high until… 1954, a quarter-century later.

I can think of a much more recent case that might be even more applicable to the present moment — the collapse of the dot-com bubble. From a peak over 5,000 the Nasdaq collapsed 78% between early 2000 and late 2002. It didn’t recover the 5,000 level until… 2015.

“The problem with a 25-year recovery or a 13-year recovery,” Jim quips, “is that some people don’t live that long.”

For that reason, there’s always gold. “Gold has its own dynamics,” Jim says.

“Typically, when stocks crash, gold does not rise immediately. Gold goes down because weak hands sell to raise cash to meet margin calls on stock positions or simply to be more liquid. Momentum can take the selling a bit further from there. The strong hands take a beat, look for a new bottom and then jump in aggressively. The result is that gold hits new highs not long after the initial dip.”

Again, let’s revisit history from this century: Gold surpassed $1,000 an ounce for the first time in March 2008. But when the global financial crisis went critical later that year, it tumbled to nearly $700. Then it began to roar higher — reaching a peak of $1,900 less than three years later.

In the present moment, “We expect gold to settle comfortably above $2,500 per ounce on its way to $2,750 per ounce,” Jim says — “and then $3,000 or higher in the months ahead.”

As for the Fed’s next move, Jim doesn’t buy the notion of an emergency rate cut, or even a half-percentage-point cut in September.

“The situation right now is not bad enough for the Fed to intervene apart from a 0.25% cut in September. Don’t look for an inter-meeting cut or a 0.50% cut. The Fed doesn’t want you to panic but they don’t want to appear panicky themselves. For now, you’re on your own.”

But as Jim will readily acknowledge, circumstances can change between now and the next Fed policy proclamation scheduled for Wednesday, Sept. 18.

Here are the key dates we’ll be watching between now and then that might alter the Fed’s calculus…

• Wednesday, Aug. 14: The Labor Department issues the official inflation numbers

• Friday, Aug. 23: Fed chair Jerome Powell will deliver the always-ballyhooed “Jackson Hole speech” during an annual confab of global central bankers in Wyoming

• Friday, Aug. 30: The Commerce Department issues “core PCE,” the Fed’s preferred inflation gauge

• Friday, Sep. 6: The Labor Department issues the official unemployment numbers (the ones that were such a disappointment last Friday)

• Wednesday, Sep. 11: We’re back to the Labor Department issuing the official inflation numbers.

In the meantime, bear this in mind: Recessions don’t usually set in until after the Fed starts cutting rates.

That was the case with the brief 2020 COVID recession (which likely would have happened even without the virus)... the 2007–09 “Great Recession”... the aftermath of the dot-com bust in 2001… and the aftermath of the savings-and-loan debacle in 1990–91.

That’ll be some kind of fun for Mr. Goolsbee of the Chicago Fed to help “fix.” He gets a vote on the Fed’s Open Market Committee during 2025. Heh…

That’s the longer-term view. How about a shorter-term trading view?

The View From The Trading Desk

“In situations like these, the survivors will be those who can remain calm and focused when everyone else is running around like their hair is on fire.”

So wrote Paradigm chart hound Greg “Gunner” Guenthner yesterday to his Trading Desk subscribers.

Gunner has amassed one of the most impressive track records in the financial publishing industry over the last couple of years — not just during the rip-roaring bull run of 2023–24 but the punishing bear market of 2022 as well.

That’s a weighty responsibility to one’s readers. With that in the back of his mind, he urges them to stick to the trading plan. “It’s the single most important action you can take when the market goes off the rails.

“We had some rotation trades that were struggling last week. It would have been very easy to try to hang onto those plays over the weekend, hoping to claw back a few bucks. But we didn’t. We saw them slip below our mental stops, took the losses and went into the weekend heavy in cash.”

That looked very smart in light of yesterday’s carnage. Cash is what you need when the time comes to scoop up bargains.

“Next, it’s important to remember that the market doesn’t care about any of the amazing stories about your favorite investments,” Gunner continues.

“In times of panic, investors only want cash. They crave safety above everything else. You can’t argue fundamentals or growth stories with a crashing market.”

Bitcoin’s experience in recent days is a powerful case in point here. And that reinforces what Jim Rickards said earlier here about gold. Don’t be surprised if there’s a drawdown to $2,200 on the way back to all-time highs and eventually $3,000.

Don’t Just Do Something, Stand There

Above all else, it’s essential at times like these to resist the urge to “do something.”

“During ‘crashy’ markets,” says Gunner, “you’ll probably experience a strong urge to DO SOMETHING, anything, to right the ship.

“As much as I love action, we have to respect the new environment of a severely elevated VIX and assume we’re going to see punishing swings in both directions.

“I’ll be looking for ways to take advantage of the situation in a safe and effective manner, without doing anything crazy that would jeopardize our trading accounts (or sanity!)”

A similar point goes for every paid subscription you have with us at Paradigm. Don’t panic and sell everything because you’re refreshing your screen and seeing a sea of red. If the thesis behind a certain investment falls apart, the editor will tell you so you can get out of harm’s way as quickly as possible.

Otherwise, assume the thesis is still in play and hang on tight through the volatility. Subscribers to James Altucher’s new Microcap Millionaire service are getting a real trial by fire in this regard! But James and his team of Zach Scheidt and Chris Cimorelli are doing a great job of hand-holding and reassurance.

It all comes back to the words attributed to the legendary trader Jesse Livermore: “Men who can both be right and sit tight are uncommon.

“I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money… After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

To no one’s surprise, stocks are enjoying an oversold bounce after three days of nonstop wreckage. At last check, all the major U.S. indexes are solidly in the green — the Nasdaq by nearly 2%.

The warning we issued about gold earlier in this edition is starting to come to fruition. At last check the bid is down $20 to $2,389. Silver is only 12 cents above the $27 handle, near a three-month low. Copper is inching its way back to $4 a pound.

Bitcoin is clambering back from its weekend clobbering, now $56,734.

Crude is bouncing off of two-month lows, a barrel of West Texas Intermediate fetching $73.72 — as the situation in the Middle East is one of waiting for the proverbial next shoe to drop.

Paradigm energy-and-mining authority Byron King passes along the news that the Chinese embassy in Lebanon is warning its nationals to be on high alert, although it’s not yet urging them to leave. Ditto for Russia.

“Neither country is known to engage in silly theatrics when it comes to the safety of their nationals,” Byron says in an email. “Something wicked this way comes.”

Google’s Monopoly Was Already Cracking

The Google antitrust ruling seems so anticlimactic and beside the point.

When it comes to internet search, “Google is a monopolist, and it has acted as one to maintain its monopoly,” wrote U.S. District Judge Amit Mehta. You can read about the ruling anywhere; for our purposes today two things stand out.

First, the ruling is historic. It’s “the Standard Oil case of our era,” says the aforementioned Byron King. (Byron is our resident Renaissance man — a business lawyer as well as an oil field geologist and Navy flight officer.) “Break up the company into Baby Googles. Google of California, Google of New Jersey, Google of Indiana…”

Exactly what GOOG does next remains to be seen. Shares of parent company Alphabet are flat today after tumbling nearly 5% during yesterday’s sell-off.

And second…

The ruling comes at a time Google’s search monopoly is already in danger — even without government intervention.

Everyone knows Google is terrible compared with only a few years ago. It’s just that — up until now — everything else was still worse.

That is quickly changing — even for your editor. After stumbling on a tweet by the entrepreneur and former Coinbase exec Balaji Srinivasan, I took the Perplexity AI-driven search engine for a test-drive yesterday.

It turned out to be enormously helpful in fleshing out our quirky item about thefts of copper wiring connecting traffic cameras — certainly compared with the dross served up by Google. And that was just the free version; there’s a paid one too.

“Tech guys don’t use Google search anymore,” Srinivasan says. “It’s not just censored. It just sucks. Perplexity is better.” (Perhaps he has some financial or personal connection with the company founders, but that’s OK.)

Perplexity is bursting onto the scene at a time Google keeps shooting itself in the foot with its own Gemini AI platform.

Earlier this year, Gemini was so “woke” that it couldn’t or wouldn’t generate images of white faces.

This month, Google pulled an Olympics-themed commercial in which a dad leans on Gemini to help his daughter write a letter to a star athlete. “Many have lambasted the ad on social media,” says an article at The Verge, “for completely missing the point of writing a fan letter. (Which is, ostensibly, to make a heart-to-heart, human-to-human connection…)”

All of which is to say the free market is a better disciplinarian of fat and lazy monopolists than the U.S. Justice Department and 38 state attorneys general…

Reset

It’s time for a reset in our virtual mailbag.

An earnest attempt on my part last Thursday to address serious economic issues playing off of J.D. Vance’s “childless cat ladies” remark continues to go off the rails.

My citation yesterday of the military analyst William Schryver was “very insulting to Republicans and readers of your newsletter,” says a note that came in overnight.

“How laughable it is that the snowflake Republicans on your list throw a tantrum the first time you dare say anything critical of their idiot savant candidates,” counters another. [It is hardly the first time, but we’ll let that go here…]

With 92 days before Election Day, the atmosphere is becoming so toxic and polarized that there seems to be little tolerance for your editor’s “a pox on everyone” approach to matters that end up touching on politics. If I don’t offer total slavish devotion to one side, I must belong to the other. Or something.

It’s my reasoned judgment that both major-party candidates will launch new wars of aggression and accelerate the debasement of the dollar. There’s no voting our way back to “normal,” however you might define it. But evidently I’m in a distinct minority.

Anyway, the mailbag has never been a place for partisan sniping and I’m not about to make it such now. There are a gazillion places on the internet where people can fling feces at each other; we don’t need a gazillion and one. And I’d just as soon stay out of the line of fire…