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The article today, 21 Feb 20 was written by
Charles Hugh Smith of
Here are excerpts of his article:
One often overlooked characteristic of the current
stock market bubble is the extremely small exit for sellers trying
to avoid becoming hapless bagholders. Bubbles always present small
exits because once sentiment turns, buyers vanish and so price goes
over the waterfall and crashes on the rocks below (accompanied by
the screams of all the punters who reckoned they'd exit at the
But modern markets have characteristics which have
diminished the exit to a tiny hole in the wall. These
1. The dominance of index funds. When shares of
the index are sold, every constituent stock gets sold. This
triggers cascades of selling that overwhelm "buy the dip"
2. Computers do most of the trading, and the
algorithms are set to follow trends with extreme ferocity. Once the
trend is "sell," the program selling will self-reinforce the
3. Central banks have generated a mesmerizing
moral-hazard propaganda field that implicitly suggests "we'll never
stocks go down again, ever!" Yet the only way central banks can
causally intervene is to buy stocks directly in size, i.e. in the
trillions of dollars. (Recall U.S. stocks are around $35 trillion,
global stock markets about $85 trillion. Yes, buying futures
contracts through proxies works in stable markets, but not so much
in panic cascades of selling.)
Beneath the illusory stability, modern markets are
extremely illiquid, meaning that when the bubble pops and
punters/money managers try to sell, there are no buyers at any
Liquidity in a crash depends on "buy the dip"
bagholders. Once they've been destroyed, there are no more buyers
at any price. The "buy the dip" crowd will be wiped out after the
first spike higher fails, and then nobody will be left who's
willing to catch the falling knife.
Hapless bagholders have two options: buy the dip
and be destroyed, or hang on hoping for a reversal and be
destroyed. Bubbles always burst, and the confidence that "this
isn't a bubble" and "the Fed has our back" are counter-indicators
of just how crushing the pop will be: the greater the
confidence/euphoria, the greater the crash.
All those drunk on "the Fed has our back" punch
might want to ponder the Fed's balance sheet: nine weeks of going
12/25/19 $4.165 trillion
1/1/20 $4.173 trillion
1/8/20 $4.149 trillion
1/15/20 $4.175 trillion
1/22/20 $4.145 trillion
1/29/20 $4.151 trillion
2/5/20 $4.166 trillion
2/12/20 $4.182 trillion
2/19/20 $4.171 trillion
Sober up, people. All bubbles pop, and the higher
the extreme, the greater the crash. Only the first sellers will
escape; everyone who hesitates or "buys the dip" will be crushed at
the bottom of the waterfall.
remember markets will not go straight down. saying you have one
chance to get out and that's it is folly (did I just use that word?
LOL. Go look at the worst bear declines in history, 2008,
some of those 1970s decline, and the famous 1929 - 1932 bear they
all went down in waves over time.
Important reminder. Thank you.
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