“Only when the tide goes out do you learn who has been swimming naked.” Warren Buffett
Two weeks ago, our last post that the Second Shoe of the great reset was About To Drop. Since then, stock indices weakened almost immediately, and have been falling into this writing on March 13th. The Dow fell 1800 points, and lesser quality stocks in the Russell 2000 have fallen more. How did we know this would happen? Truthfully, we didn’t. But, our proprietary DSE algorithms, which search the past 300 years of market price behavior for high probability IF/THEN scenarios, sniffed out the likelihood that something big was about to arrive. Now, one has. Within the past week, the tide has gone out and the second and third largest bank failures in US history occurred. The largest was Washington Mutual in 2008, during the Great Financial Crisis (GFC). In that February 28 post, we took the bold step to post a graphic that suggested the indices could experience a 50% crash in the coming 9-15 months, if not even deeper.
So what happened in the past two weeks? It actually doesn’t matter, as the reasons are always attached in retrospect, and often incorrectly. What the DSE allows followers to do is forget the reasons, the subjective opinion, and the speculation, and focus on the conditions. It does so in a very sophisticated series of conditional statements that simultaneously mine historical data to identify similar highly correlated scenarios. Once any are found, the near, intermediate, and long term forecasts can be probability ranked. This works because the markets are the manifestations of the crowd’s collective mood, feelings, and emotions. When the crowd is happy, feeling safe and secure, and not under stress, it expands, buying things, and takes risk. When that same crowd mood is sad, feeling threatened, and stressed, it contracts, refraining from buying, and usually sells things, and avoids risk. This is human nature, and has been part of our DNA since we were cavemen and cavewomen. Our existence was determined by how well we applied our flight or fight instincts. The same is still true, but instead of dealing with saber tooth tigers, we deal with finances.
The good news for DSE, which tracks this mood, is that until we figure out how to stop acting according to human nature, and avoid using our ancestral DNA, we will continue to act in a predictable way when confronted with surprises. The failure of the two banks definitely surprised the crowd, as did the failure of Lehman in 2008. Trust and certainty have been shaken, which means liquidity has a new meaning.
This chart is the longer term version of the one from our last post. While that chart anticipated the potential slide in SPY from 420 to the 240 zone, a 42% crash, this larger degree of trend can allow crash of historic proportions, with 1800 (-57%) to 800 (-80%) as possibilities. I know, shocking isn’t it? Well, that’s because most investors haven’t studied history enough to know that major crashes, and this will be one without a doubt, have the potential for astounding declines. From the 1929 peak, the Blue Chip Dow crashed 89% by 1932. And, from the 2000 peak, the Nasdaq crashed 78% by 2002.
So, here we are in early 2023, having seen the bear market begin in early 2022, and the S&P 500 fall 25% in the first nine months of the decline, with the Nasdaq falling 35%. Bear markets usually last an average of 26 months, suggesting there could be further trouble for another 12 to 18 months. Banks are being seized by the government, interest rates are rising at the fastest pace in history, and we’ve already seen two consecutive quarters of negative GDP; the acknowledged definition of an official recession. What’s the risk? Unknown, vast, and potentially catastrophic.
Corrections typically come in waves. Down big, up small, then down either an equal amount as the first wave, or around 1.5 times that size. These are typical moves. In extraordinary times, like these, after extraordinary bull markets like the one from 2009 until 2021, the corrections often become crashes. This chart shows the historical potential of what can arrive next. We believe in full disclosure and complete honesty. We have no reason to sugarcoat anything, as we have no financial incentive telling our clients anything other than what our DSE probability ranks as future paths for various assets; stocks, bonds, real estate, Bitcoin, metals, commodities, etc.
If you’re not getting this same courtesy, or if your 2022 was not an experience you’d like to repeat, please let us know.
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