Monday, October 19, 2020

SPX Update -- and More

Off-topic from the immediate market, but very much on-topic for the long-term market:  What should you do when you see your society is floundering?  What should you do when you see your society embracing destructive ideals under the guise of "good"?

Should you stand aside quietly, and hope the ship rights itself?  Or hope someone else addresses it?  Or hope it just goes away on its own?

Or should you speak up and risk upsetting someone?

I've decided I should speak up.  Not that I want to.  I absolutely do NOT want to.  Especially in the current environment, where division is rampant, where everyone is on edge, and where a certain percentage will shut down (intellectually/emotionally) the instant I wander outside the boundaries, and some percentage will make no effort whatsoever to understand what's being said.  They may even choose to take offense.

But I believe I see at least part of the reason division is increasing (hint: as with most things, the problem is not what "the majority" are telling us it is.  If the majority had it right, then I wouldn't even need to discuss this, because they'd have already fixed everything.).  

And I believe that unless this trajectory is halted soon, division will continue to increase until we devolve into irreconcilable tribalism.

I thus believe I have to speak up.  I've already put it off for about six months.  The world isn't getting any better, though.

Where to begin?

Should we start with the Central Banks?  What have they encouraged for the past couple decades?  Rampant speculation, certainly.  But more than that.  We need to get below that, to the root.  The roots give birth to everything.  The reason "unintended consequences" take the masses by surprise is NOT because you can't spot those consequences ahead of time -- you typically can spot them, if you look two or three levels deeper -- it's because most people look at the surface of the issues.  You won't find meaning, and you won't find the future, at the surface.  You'll find it at the roots.

Ignoring human action and motivation is folly.

Let's draw an example using the aforementioned Central Banks.  When the Fed punishes savers by keeping interest rates artificially low for an extended period of time, what behavior are they encouraging?  What mindset are they encouraging?  What mindsets and behaviors are they punishing?

For one, they are punishing people who are conscientious.  Those who try to "save for a rainy day," those who try to minimize risk, and plan for the worst life might offer, are punished.  Meanwhile, those who engage in risk-taking are rewarded to an unnatural degree.  And more importantly, those who maximize risk-taking never seem to have to face the consequences of their malinvestments.  They are bailed out -- they are thus never "punished."  

The Fed has created an unnatural environment, one that punishes thrift and rewards high-risk hedonic behavior.

If we were to think in Darwinian terms, the Fed has creating a playing field that is now selecting, promoting, and propagating an entire generation based on specific traits.  Managers who take on exceptional levels of risk are rewarded; managers who practice caution are punished.  

So yes, on one hand, it's "just financial" -- but it's more than that, isn't it?  The Fed is handing success to people who will not fare very well in more "typical" environments (where high-risk behavior often results in high losses).  And this is driving the people we'll need (in the future) away from being promoted.

So who has been rising to the top for the past couple decades, in this environment?  What type of personalities will be in control when the seemingly-endless party finally ends?

That's right:  The exact WRONG people to deal with a risky environment.

When the party ends, we're going to want cautious, conservative, and conscientious people in charge -- but those people have been driven out.  They have been out-competed based on the current environment.

This is what I mean by looking at the roots.  We can't just look at the surface (what most people do), we have to examine and anticipate the epiphenomena as well.  In this case, the Fed is doing more than creating an unnatural environment -- they are unnaturally altering the hierarchies of the future environment.  And not for the better.

But our problems don't end there.  They probably don't even start there.

Our problems run deeper.

Because a strong society can recover from financial blunders, grow, and become stronger.  A weak society will not.

What is society?  In a sense, it's a contract, not unlike (at the micro level) a marriage.  We all agree to behave in certain ways -- for example, I agree not to light your house on fire, and you agree not to shoot my dog -- and we all further agree that people who break those rules should face some sort of punishment.

There are other rules in society that are not legal, but are spoken or unspoken social contracts.  Such as: It's probably not illegal for me to cut in line at the supermarket, but nobody is going to be too happy with me if I do, and it may even lead to a physical confrontation from someone behind me.  That's a pretty meaningless example in the grand scheme of things, but there are other things happening now that are not so meaningless.

One of those things is the stifling of free expression.  Did you know you can now get fired for "liking" the "wrong" thing on Twitter?  And I'm not talking about liking something crazy, I'm talking about liking something that would have been considered commonly-accepted knowledge a mere decade ago.  (It's gotten so ridiculous that I'm quite sure I can't even give an example without offending someone.)

So, once again, what are we (as a society) rewarding?  And what are we punishing?  Because through this we can discover:  What are we teaching our youth?

Well, for starters, we're teaching them that the world is something other than it is.  Beyond human beings, the world is actually quite a hostile place, in the middle of an incredibly hostile universe.  Life isn't "safe."  Prior to the last 120-odd years or so, humankind spent most of its energy struggling just to survive against the constant onslaught of nature.  People were routinely killed by bacteria, by heat, by cold, by wild animals, by unexpected weather, and so on.  

As one example, antibiotics have only been in use since about 1936 -- that's only the span of one human lifetime -- and prior to that, a massive 30% of all human deaths were caused by bacterial infection.

We seem to have forgotten how powerful nature is, though, and how truly humble we are in the face of its reality.  We forget that at any moment, something as common as a single comet could wipe out most life on Earth.  We forget that a coronal mass ejection could take out the North American power grid for (according to FEMA) a decade.  We forget that a pandemic could wipe out a massive percentage of the population (we got lucky with Covid-19, which has a better-than-99% survival rate -- even so, according to the Wall Street Journal (Aug. 20, 2020), a virus with the spread of H1N1 and the mortality rate of Covid would likely have resulted in 2 million dead.  So we got lucky in several ways.).

Point is:  We have managed to impose order on the world for a few generations, but we have not done this "by ourselves" -- we've managed this only because nature has been extremely accommodating.

We are currently living in what is objectively the safest, most prosperous time in human history -- yet from 1999 to 2017, the U.S. suicide rate increased by an astounding 33%.  Clearly, we are failing to pass some key pieces of wisdom, some key coping mechanisms, forward.  In fact, given that suicide is not simply holding steady but increasing, it appears likely that we are actually doing the opposite, and teaching our youth at least some ideals that must be very damaging to the human psyche.

In future pieces, I may attempt to examine what some of those ideals might be.  (Even though it's pretty much guaranteed that I'm going to offend someone.)  As I said, I don't want to do this -- I'd rather just make jokes about Jay Powell and not risk offending anyone (well, besides Jay Powell) -- but I feel this is too important.

I'll leave it at that for now.


Looking at the charts, we can see that the market must have read the prior update, as it stalled perfectly at the first overlap (thus keeping all options open for now):

In the prior update, I wrote:

As we can see on the chart above, bulls have not yet overlapped any key levels, so it is still technically possible for the bounce to be a fourth wave.

That remains true, for now.

Stepping back, we can see that the rejection at the first overlap (above) then led SPX down to the bottom of the red trend channel (below).  It's going to open this morning with a bounce off that support level:

In conclusion, everything discussed in the prior update remains active today.  It's worth noting that the decline from Friday's high to Friday's low is only three waves down so far (meaning it's a POTENTIAL abc) -- so, using ES as our guide, that suggests that the ~3470ish zone (cash) is the first downside warning zone for bulls, while Friday's high (the first overlap) remains the first upside warning zone for bears.  Trade safe.

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