The Market Going to Work

by | Jun 3, 2022

Spend decades suppressing the natural process of forest fires in dry, mountainous terrain and underbrush builds up.

Build expensive mountain communities in those over-managed forests and property values skyrocket.

Toss in droughts and that underbrush becomes an even drier pile of tinder.

Add a spark from among thousands of potential sources and, whooom, you not only get a raging inferno burning hotter than the forest was designed to withstand but property destruction measured in the 100s of billions of dollars.

Now, you could argue that man was responsible for such a disaster. That’s a reasonable conclusion. After all it was their policies that encouraged dead and dry matter to linger much longer than it should. And the artificial stability that arose from suppressing nature encouraged civilization to spread further than it otherwise would.

But when it comes to clearing out that excess, it’s not man that does the work. It’s nature.

And what nature does to the forest, market forces are currently doing to the global economy…

The Underbrush of Dead Capital

The market tried to clear out economic dead weight in 2008 but the Fed wouldn’t let it happen. The bailouts prevented it and companies that should have burned during the Great Financial Crisis still linger.

The next 12 years of quantitative easing spurred growth and investment that only made sense when capital was cheap. Under more natural conditions, many of those companies would never have been ventured.

And for the last two years $6 trillion in COVID emergency spending did nothing more than keep an economy accustomed to 40 years of globalization on life support.

So long as the pile of money rose, stability reigned. But market forces can no longer be contained.

Pandemic, war, overzealous green energy initiatives, and everything else is throwing off inflationary sparks. That pile of money has begun to burn. And while the Fed is busy tamping down the flames with rate hikes, the more unsustainable parts of the economy — those fancy cabins in the woods — find themselves in the wrong place at the wrong time.

The market isn’t broken. It’s just going to work undoing what man has done. And it’s your job to work with it.

Not In a Bear Market Yet

Believe it or not, for all the pain the market is doling out, we’re still not in a bear market. But we will be in one soon. And it’ll be a big one.

Expect the S&P to drop at least another 1,000, probably to 2,800.

But focusing on how far and how soon is besides the point. What you need to focus on is trading like you’re in a bear market.

Which means when faced with an opportunity to go either long or short, all else equal, go with the short. It also means you want to let gains on your short positions run but don’t linger on your longs.

Otherwise, you could find your portfolio getting burned along with everything else that no longer works.

P.S. If you haven’t joined us over in the Prosperity Pub Telegram group, you’re missing out. We talk about the markets, the global economy and how to protect yourself in the new market climate we find outselves in. Heck, sometimes I even drop a specific play in there for you to consider.  Click here to join us.

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