The Beginning is Near

By: Gordon Long | Wed, Jan 9, 2013
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Abridged from the January 2013 Trigger$ Edition


2013 - The Beginning is Near

When water turns to ice, or vapor turns to water, we have what is referred to as a Phase Equilibria change. It can be slow or it can be instantaneous. Whichever occurs, a new and completely different state of reality then exists.

The markets are about to transition through such a Phase Equilibria. We have reached the End of the Beginning and a New Beginning is Near! Unfortunately the new beginning is the Beginning of the End of the Secular Bear Market Counter Rally. It isn't imminent, but it is near!

Once complete, the Bear Market that started in 2000 in real terms, will resume even in nominal terms. The End of the Beginning of the Secular Bear Market has arrived and now the truly ugly part of the bear market emerges .


Old Phase: Recovery & Hope

Since the financial crisis of 2008 the US and world have been in the "Recovery and Hope" phase. This phase normally starts with Triage to "stop the bleeding", then moves to Operations "to fix the problem", then finally to the Recovery or " convalescence " stage. All perfectly normal, if the diagnosis of the problem was correct, the operation successful and there are no complications during the recovery.

Unfortunately, through monetary malpractice the doctors screwed things up!!

Monetary Malpractice

 

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Every metric of good health and success is flashing that a dead economic body is being kept artificially alive, except for one measure... the stock and bond markets. These measures, which are now the financially engineered creations of 33 Liberty Street and modern Goldman Sachs algo computers, are no longer a measure of the health of the economy, nor main street America. Unfortunately, the perception is that they are and that the omnipotent doctors at the Federal Reserve have things under control.

The stark reality of the gravity of the situation, the serious of the malpractice, is about to realized.


New Phase: Reality & Fear

Instead of the patient now heading home from a convalescence center, the patient is about to be pronounced dead, to a startled family who have been led to believe everything was ok. Reality is about to set in.

When Reality sets in, Hope Turns to Fear!


Reality - These are the kind of things you will hear in the NEW PHASE when reality sets in:

  1. It was a Structural Problem not a Cycle Problem!
  2. The Fed is not omnipotent!
  3. The System is broken!
  4. The system is fundamentally flawed!
  5. "The King has no Clothes"
  6. "The Cupboard is Bare"
  7. We have been duped, fleeced ....
  8. The government screwed up
  9. Our promised Entitlements are gone!
  10. The "Greatest Ponzi Scheme" in history
  11. .....


Quantitative Easing - Increasingly exhausting its impact and showing diminishing returns:

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It may seem like a rhetorical question, but may the Fed be pushing a bit too aggressively at this stage ? The chart below from Citi shows monetary policy (defined as the funds rate and the Fed's balance sheet) vs. a "market health" index comprised of economic factors, systemic risk metrics, and valuation metrics. Historically the two have tracked well, but not recently. The health index is firming, but policy is getting easier, not tighter. Is the Fed out of its depth here, or do they know something we don't?

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The market reaction to QE4 was surprisingly lethargic. It is likely that the near term action is only the normal post election euphoria we normally see along with a weak Santa Claus rally.

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The above chart is not a picture of a bull market! In a bull market, the opposite happens. Volume should be going up during the entire period, and it should be declining every time the market corrects. But we're getting exactly the opposite situation. People have started ignoring volume because bears have been talking about declining volume ever since 2010. But it is extremely important. Volume overall has been shrinking ever since the market's low of March 2009. Volume is a critically important momentum indicator that many are ignoring.


Transition: The "Oh SH#&T Moment!"

Transition - These are the kind of things you will here in the Abrupt Transition Phase:

  1. From "Uncertainty & Complacency" to Shock
  2. Disbelief
  3. What's happening?
  4. How serious is this?

An "OH SH#&T MOMENT" is likely ahead if history is any guide.

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We have endless "divergences" that must be closed if history and trend are any indication. The following is only a short list. It is the NUMBER and the DEGREE of divergence which creates the "Oh SH#&T Moment".

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THE SET-UP FOR AN 'OH SH#&T' MOMENT - Is likely between Option Expiration in January and Quadruple Witch in March


Macro Surprise Index Has Peaked

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APPLE and HY (High Yield) is telling us something, if we care to listen.

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Long Wedges Are Good Indicators For A Phase Change In Attitude

Rising SYSTEMIC FRAGILITY increases odds of "unexpected" breakdowns

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Market Example: 1987 Crash

I chose 1987 to the right, but almost every major "shock" I have witnessed, in watching the markets for decades, demonstrates a protracted rising wedge or ending diagonal characteristic.

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Beginning Is Near: A Right Shoulder (Head & Shoulders)

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A Unique Pattern - There is a lot of technical information in the following pattern.

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Conclusion

An "Oh SH#&T Moments" Is Near, but there is still a little more to go. The following chart of election year averages gives us a clue. Note the Year End and the first quarter correlations. I expect this chart analogy to breakdown after the "Oh SH#&T Moment"

 


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Gordon Long

Author: Gordon Long

Gordon T. Long
Publisher - LONGWave

Gordon T. Long

Gordon T. Long has been publically offering his financial and economic writing since 2010, following a career internationally in technology, senior management & investment finance. He brings a unique perspective to macroeconomic analysis because of his broad background, which is not typically found or available to the public.

Mr. Long was a senior group executive with IBM and Motorola for over 20 years. Earlier in his career he was involved in Sales, Marketing & Service of computing and network communications solutions across an extensive array of industries. He subsequently held senior positions, which included: VP & General Manager, Four Phase (Canada); Vice President Operations, Motorola (MISL - Canada); Vice President Engineering & Officer, Motorola (Codex - USA).

After a career with Fortune 500 corporations, he became a senior officer of Cambex, a highly successful high tech start-up and public company (Nasdaq: CBEX), where he spearheaded global expansion as Executive VP & General Manager.

In 1995, he founded the LCM Groupe in Paris, France to specialize in the rapidly emerging Internet Venture Capital and Private Equity industry. A focus in the technology research field of Chaos Theory and Mandelbrot Generators lead in the early 2000's to the development of advanced Technical Analysis and Market Analytics platforms. The LCM Groupe is a recognized source for the most advanced technical analysis techniques employed in market trading pattern recognition.

Mr. Long presently resides in Boston, Massachusetts, continuing the expansion of the LCM Groupe's International Private Equity opportunities in addition to their core financial market trading platforms expertise. GordonTLong.com is a wholly owned operating unit of the LCM Groupe.

Gordon T. Long is a graduate Engineer, University of Waterloo (Canada) in Thermodynamics-Fluid Mechanics (Aerodynamics). On graduation from an intensive 5 year specialized Co-operative Engineering program he pursued graduate business studies at the prestigious Ivy Business School, University of Western Ontario (Canada) on a Northern & Central Gas Corporation Scholarship. He was subsequently selected to attend advanced one year training with the IBM Corporation in New York prior to starting his career with IBM.

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