Peak Complexity and Impending Reversion to the Mean
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, December 14, 2015.
If you were to ask everyday people out there today if life was getting too complicated for them, it's my belief they would come back with a resounding consensus of 'yes'. And it's not hard to see why. In the first place the nanny state has put critical thinking by most people to sleep, where unfortunately far too many literally don't know their collective 'ass from their elbows' anymore. But what's worse, this taming of the mob by the psychopath's in charge has now redirected people's thinking away from healthy traditional values to embrace the capital vices as a way of life - life in the West - and is why American's have become the unhappiest people in the world. (ex. if we continue down this path expect to see increasing violence, mass murders, etc.)
I bring this up because to understand the logic loop of why people are engaging in increasingly insane behaviors - it's because at a 'core level' they are becoming increasingly unhappy - and are largely unhappy because life is becoming increasingly complex. (i.e. and for this reason - dangerous - and in many ways [psychological, physical, etc.]) And of course because of this they are not having their base needs fulfilled, where again, looping back to why people are acting increasingly insane, is manifestation of their unhappiness. They are rebelling. They are rejecting the imposition of unnatural order. They are not happy about how the psychopath's are using increasingly complex technologies to invade their civil liberties and capitalize on this - which is why Donald Trump might end up being the next President of the United States. And if not him - Jesse 'the body' Ventura as an independent - anything but more statue quo - which in America today means increasingly predatory and dishonest complexity - and is why we have peak complexity - because it cannot continue.
This is why Donald Trump intends to simplify things for the American people with good doses of truth, reality, and order - at least that's what he says he's going to do (and assuming he's not assassinated before he gets to the White House) - which again - as per above, is what people want at their core - they want a return to core American values - the good life, liberty, and freedom. Unfortunately with his intension to strengthen the US military and policing, such an outcome is not likely (to say the least), however it should be recognized such folly would be too little too late anyway because the situation is far too complicated - more complicated than any mortal aspirations in this respect. Basically, it's all up to Mother Nature now - and the Donald might just unleash her in a profound 'catch -up episode' - because we are way ahead of ourselves. This means an attempt to return to simpler ways - which is at the core of what people think they are getting with Trump - is likely coming.
So if complexity, as a symptom of increasing decrepitude (think peak people), is the problem, what might happen as an unintended consequence of attempting to unwind our whimsical ways? What might this involve? Consider this hypothesis - the modern financial markets are the manifestation of peak complexity - and the stock market is the poster child. And the status quo is now completely dependant on the stock market bubble(s) remaining inflated, because they have replaced so much of the income producing economy with asset dependency, and that system failure will result with an 'accident'. Thusly, the status quo is throwing everything they've got at keeping the bubbles inflated while they rape, pillage, and plunder the public with increasing viciousness - every trick in the book - to the point stock valuations have never been further removed from reality. This is why if Trump is chosen as the Republican Presidential Candidate next year the bubbles will come under pressure for reasons discussed above (assuming he's not JFK'ed along the way), because he's not beholding to special interests, and would act for the benefit of the public. Julius Caesar tried this kind of thing at a comparable point in the republic's history - and we know what happened to him.
And make no mistake about it, the Washington establishment is scared stiff the party is over for them (especially after Trump's latest poll results reflecting his views concerning Muslims in America); again, because the Donald intends to stop them in their pillaging tracks. Weather he knows it or not, serving the needs of the people would necessitate smaller government, smaller bureaucracy, and less power (think money) for the bloated American colossus, another feature of his brand the status quo fears, you can be sure of that. The list of repercussions goes on and on, not only would Congressional insider trading privilege be threatened, but what's worse, decomplexification (simplification) of the larger trading environment would mean the very dominance of America over global markets would quickly unwind as well - think stocks, debt, and currencies included - as the larger decentralization process accelerates. The high frequency trading (HFT), algorithmic theft, derivatives trading - all the games would be challenged as the decentralization process accelerates. Donald Trump is simply a reflection of this, as he is a reflection of the desire of people to return to simpler times - less corrupt times - so let's hope he's not like Obama concerning his election promises - a serial liar.
Because people have had enough of the lying - I won't lie to you. And I won't lie to you about the implications of what such radical change implies either. Present developed country standards of living will suffer as what all this means is we must eventually strive to live within our collective means - notice here I use the word 'strive'. I use the word strive because once the mob realizes a simpler life requires austerity you can expect profound blowback in this regard, which is when the parasitic classes will enjoy resurgence. Just how it all turns out in the end is of course unknown, however one thing is for sure, it all has to do with the credit bubble (CB) from an economic perspective, because once the CB that has been blown up over the past eight-years under Obama begins to unravel in earnest, there will be no stopping the deluge. It should be no surprise this process is well underway (see here, here, and here). But at the same time, given the insanity gripping shakers and movers today, don't be surprised if the collapse process continues to drag well into next year. (See Figure 1)
How long can it go on for? If Amazon is the poster child for the craziness, making no money but 'growing' on credit', then the answer to this question is about $100 worth - the Fibonacci resonance signature target denoted above. By this logic, if the stock market continues to narrow, like the year 2000, even if we see noticeable weakness in the equity complex early next year, with the CBOE Volatility Index (VIX) regularly vexing levels above 20, we should expect to see Amazon lead the large cap tech darlings to one more capitulation high (for the shorts), possibly in March. So the Dow can essentially top in January and then chop sideways, but if we are to relive the insanity in tech witnessed in 2000, then new highs in NASDAQ (and S&P 500 [SPX]) could be witnessed later on (March?) if this observation holds any merit. In terms of the SPX, as you can see below, the upper boundary resides in the 2200 area, which is long-term channel resistance. In not knowing just how crazy things will get next year, or sooner, whenever this resistance is hit the smart money would sell (they already are). (See Figure 2)
Because who knows, maybe the SPX hits the mark (2200) by year-end off speculator reaction to a rate hike this week, and then feels the gravity associated with the Fed's quandary. The dollar($) is the ball you see - it's everything. So, in addition to reasons outlined in our last commentary, the Fed might be forced into a tightening trend (unstated policy change) next year just to protect the $, because the foreign money is critical in supporting the bubbles. Raising administered rates is one thing (which is bad because budget deficits will explode higher) - but losing control of the bond / stock market is worse. The Fed is between a rock and a hard place in this regard - there's no way they will be able to avoid the ramifications of their neo-Keynesian folly moving forward - and once the market figures this out (in conjunction with speculator exhaustions) - profound secular trends (down for stocks / up for precious metals) should reassert themselves. As you can see below, in terms of gold the bottom is essentially in despite the big picture for the $, that being the synthetic short that will need to be covered as foreign creditors are forced to buy in once the global deleveraging trend takes hold. (See Figure 3)
In the things that could make stocks and bonds going down next year department then, and in contrast to the 'everything is great' talking head narrative, this is 'number one'. This is what is causing contagion in the junk bond market to spread, emerging markets weakness, and now core market weakness as well. All that said, and whether the Fed raises rates or not this week, you can bet the greedy corporate psychos will have their minions out buying right into year-end - Merry Christmas and a Happy New Year you middle class losers you. So again, as possibilities outlined above make apparent, don't be surprised if new highs in stocks are witnessed in the first week of the New Year - not to mention what's possible later on if my observations concerning Amazon prove germane. These guys are the modern day bourgeoisie. So what we need to clean things up is the equivalent of a French Revolution.
Can this happen? Some degree of this can obviously happen. Donald Trump's success in unhinging the status quo is evidence radical political changes are coming. Trump is not beholding to tyrannical special interests, and will not bail out the bankers again. Process in America will be slow however, where Trump is actually a transition phase to a far more mercantile oriented global picture as decentralization from the US centric monolithic world accelerates towards more regionalized organizational frameworks that will dominate global political economy moving forward. This is the reversion to the mean referred to in the title of this piece, where it should be understood by the concerned (of which there are not many), that while as a race people are likely not destined to return to the stone age anytime soon, life should get a lot simpler moving forward, not so much because this is what the mob consciously wants, but out of necessity. It's either that or we kill each other.
I'm hoping for the former in terms of outcomes, not the later; however history colors those taking such a view seriously naïve.
And while this is only personal conjecture on my part, the situation in Syria and or Iraq could spiral out of control at anytime given Turkey appears hell bent on escalation (Erdogan is out of control), which could become a 'big deal' quickly now that US (CIA, Corporate, oligarchy, etc.) policy has become transparent to so many new audiences. (i.e. even the little guys are catching on to subversive US policy.) This is why the Russian's will not take anymore guff. This could be a real problem for the world, markets, etc. given the nut bars that are currently running things in the States. This is all just Cloward-Piven Strategy and empire building to them. Gotta keep those bombs dropping to have credit expanding, banks solvent, the status quo, etc. That's all that matters.
Back to the stock market, the question then arises, is the SPX putting in a rounding top, calling for a lower top post Christmas, or is this view naïve? Put / call ratios across the equity complex (including high yield JNK and HYG - see here) are not supportive of a rally (they are following prices lower) going into expiry this Friday; so volatility could actually pick up until then, again, especially with the high-yield credit meltdown, currencies, and the Fed's quandary setting up a possible catch-up move for stocks lower. Because while like in September, crashing stocks pre-meeting could cause the Fed to pause, which in turn causes a short-lived Santa Rally, afterwards (starting in January) things should get ugly for reasons discussed here.
We are still expecting a year-end rally in stocks post expiry, but the question now is from what level(s)? Again, if stocks drop substantially early this week, the Fed might not move, which would take the probability of new highs for stocks in the new year down substantially because the $ could fail. This might bring a level of simplicity back into the picture for speculators sooner rather than later, where a final surge higher in the $ under such circumstances would telegraph the $ carry-trade party is over. It should be noted this is exactly what happened prior to the 2007 credit meltdown. The $ will catch a bid because of the collapse, not because the US is strong. (i.e. the synthetic short.)
Any way you stack it - the net result of all the speculation and mal-investment is life is going to get a whole lot simpler for most at some point in the not too distant future no matter what happens in the near-term, because we do not live in a consequence free world, which again, is a call for our collective reversion to the mean. And as John Rubino put it last year in his piece Full Spectrum War, Peak Complexity, and Real Assets, "the proper response to peak complexity is hyper-simplification via gold, silver, and farmland".
And we could not agree more.