The shocking reason the market crashed this week

Summary: stocks tumble as investors update their models of policy rates, inflation, buybacks, bond yields, DCF models, refinancing hurdles, italian banks, Emerging Markets worries and trade wars

Thought of the day: how nimble and smart they are, investors!

What the pros are saying

WSJ, CNBC, Reuters and other news outlets have explained in detail the last two days why the stock market is crashing:

-Investors realized inflation is gaining momentum, and that the US Fed and other central banks will have to counter with rate hikes. Higher policy rates and less QE (money printing) feed into higher market yields for bonds, which in turn acts as both an alternative investment in a TINA* world, and a higher discount rate in investors’ Discounted Cash Flow models. The latter is particularly important for tech stocks that are expected to make most of their profits far into the future (if ever).

Not least investors took just 24 hours to realize that with inflation looming and interest rates rising into the low single digit space (the horror!) will become more difficult to finance the outlandish projects that warrant current double digit P/S valuations, as well to re-finance the already hugnormous piles of debt lingering from past stock repurchase programs — not to mention future stock buybacks that might very well have to be cancelled.

Can you imagine a world where corporate investment budgets shrink from year to year, and where dividends and stock purchases have to be financed with free cash flow stemming from profits rather than free bank money?

Finally, many models were swiftly updated with new currency prices and trade tariffs, as well as the endgame result of recursive doom-loops (government-bank insolvency and runaway financing rates), triggered by recent Italian bank bankruptcy jitters.

  • TINA = There Is No Alternative To Stocks


That Is Not How It Works!

No, no, no! No!

That’s emphatically not what happened this week. That’s not how the market works. There are hardly any investors left that take time off their days to think about thing s like that, and certainly not in that manner.

There are but a few fundamentally inclined outfits that do meet once a week to discuss similar things. However, A) they have not had their meetings yet this week, and B) they are quite few compared to passive funds, momentum investors, CTAs, daytraders, index huggers etc.

Ask yourself: Do you know anybody who claims they sold for the reasons listed above? That they updated their models and sold due to inflation gaining steam and all or any of the variables and repurcussions? I didn’t think so. There probably are quite a few talking about why the market sold of, why others sold, whether it’s thoughtful and smart of others to sell for those reasons, but just about nobody went through the calculations above and concluded it was time to sell this week. Nope.

The butterfly effect

If you stretch conditions far enough, e.g., with debt upon debt, derivatives upon derivatives, ever higher valuations on ever higher adjusted, manipulated numbers, based on unsustainably low costs for debt and wages, and resulting unsustainably, historically perverse margins…; then any little flap of the wing can set off an avalanche.

Do you know anybody

who claims they sold for above reasons

I’m not saying the last few days is an avalanche, an earthquake, a tsunami, the beginning of the big one. I mean, the small correction, which isn’t even a correction, let alone a “crash”, is hardly visible in a stock chart.

I’m just saying the conditions are already there for a massive re-set of stock markets and bond markets alike. And that means no other reason is needed for stocks to fall… or crash for that matter.

So, no, investors aren’t cooly and rationally updating their excel models with new assumptions and recent data publications, or discussing said inputs during partner meetings. Nope, they are selling because somewhere in the market someone’s sell order pushed one stock below a level that made somebody else sell – on a hunch, as a stop loss, a machine learning model, some esoteric and spurious correlation between normally unrelated instruments; I don’t know and it doesn’t matter – and that in turn made somebody else sell that or some other instrument.

Enough debt, enough leverage, enough trend following and passive investors, high enough valuations, too few short positions, too little cash reserves in big mutual funds and so on mean at a certain point there are no value based buyers left to mitigate the selling.

Again, whether this proves to be just a two day mini downturn, or the beginning of the worst bear market since the 70’s, doesn’t matter. The point is that nobody really knows what set off the selling. It wasn’t Powell, Trump, treasury yields or cash flow models. It was simply one eager seller too many — and that seller was baked in the cake since several years back, just being temporarily on hold due to increasingly deranged central bank policies.

Happy trading!

P.S. Bookmark my site, subscribe to my newsletter by entering your e-mail address, and finally DO CHECK OUT my recent podcast interview with the one and only Erik Townsend of Macro Voices (you can find the interview and Future Skills podcast on any podcast platform… and here).

Why the government fears deflation and you shouldn’t

“Deflation – what’s in it for me?”

I guess that’s the first thought in the morning for most people. And rightly so.


  • For one, it’s coming (well, unless we get inflation instead – or more likely: both).
  • Second, it has everything to do with your job security, savings, loans, investments, wealth and future living standards; in short your life.

If you thought (not) chasing the stock market at highs was unnerving, deciding on buying gold or not was stressful, or that increasing automation and the death of jobs sounded scary, wait until you understand deflation.


  • Falling prices are not bad
  • Avoid debt
  • Deflation is actually the remedy
  • You can expect higher real income
  • Negative profit margins and cheap stocks
  • Cycles cycle
  • Huge public debt spells catastrophe and depression
  • Who wins? Make sure it’s you

deflation inflation sprezzaturian

4 reasons the government wants you too to fear deflation

  • Exacerbates debt. Deflation makes public debt repayment more difficult (debt is nominal and fixed, and if the price of everything else rises, then tax revenues increase too).
  • Can’t be taxed. Another way of saying that is that a wage increase can be taxed, regardless of your real income trend, whereas falling prices and constant wages can’t.
  • Lowers GDP. Deflation reduces nominal GDP (lower prices of everything produced) while debt (nominal, remember?) stays the same (actually it most likely rises quickly due to the typical budget deficits during deflation, stemming from less tax revenues and higher stimulus expenses). Thus the debt/GDP ratio rises in deflation, and with it the risk of higher interest rates and default.
  • Ruins banks. Just as the real value of public debt increases during deflation, private debt does too. Your mortgage keeps growing in relation to your (falling) wage. Sooner or later first you and then the banks become insolvent.

inflation deflation 3

Consumption is not postponed due to falling prices

You often hear people say that deflation makes people postpone purchases, which in turn reduces corporate revenues, leading to layoffs and yet less consumption.

In the real world, however, we all know that falling prices on cell phones, computers and other electronics, e.g., stimulate even more sales and earnings. Despite absolute certainty of rapidly falling prices, we line up during iPhone launches and beg to buy at the most expensive prices possible.

In addition, the things we want and need to consume we buy anyway: food, clothes, transportation and so on. However, investments, in particular speculative “investments” and luxury might and should be postponed.


Asset prices will fall and that is good

What does happen is that the prices on assets like stocks and houses fall in a deflation – first from frothy levels to normal, and then sometimes undershoot and become cheap.

What should you as an investor or consumer think of falling prices? Very good, of course:

  • Cheaper housing? You can buy a bigger one.
  • Cheaper stocks? You can buy more of them and then earn dividends for several decades, as well as see prices increase to normal and even expensive levels after you bought cheaply.
  • Cheaper gold and other commodities? You can buy more jewellery, more of the products that are made from iron, oil, grain, sugar etc.


Those with too much debt deserve what is coming

…unless you bought with too much leverage of course. If you let evil and greedy politicians and ignorant central bankers fool you into borrowing to buy overpriced assets, then you’ll be in trouble – or at least you’ll be stuck with whatever assets you already have.

Newcomers and other unleveraged people, however, will be able to invest their savings in cheap stock or buy living quarters at firesale prices.

deflation inflation sprezza


Okay, so what’s in it for you… reading this article, I mean, apart from being a little more knowledgeable, a little better prepared and inoculated vs. the deflation is bad propaganda?

Here is what I want you to take away from this post:

Falling prices are not bad. You know this in your heart. It’s only if you are too indebted it can be bad. Or, possibly if you are looking to scale down from a large house to a smaller, then the difference will be a little smaller too.

Hence, avoid debt to the extent that it will chain you to your current asset base. As long as you have unencumbered assets left after the price falls you should be able to scale up and then ride the comeback with more than you had going down.

Deflation is actually the remedy for a sick economy. Deflation should be welcomed. It punishes speculative borrowing and investing, while making prices more reasonable for the poor (but debt-free).

Higher income? It is difficult to ask for a raise, even in a strong economy (not least in these death of jobs and automation galore days), but it’s even harder for an employer to lower your wage for a normal non-performance related job – even in a deflation. Actually, if enough people fall below a certain standard of living (due to their own mistakes) and have no more venues for borrowing left, they will demand and get wage increases(!), which will cut deep into the currently bloated corporate profit margins. If you are debt-free you can still tag along the potential wage increase train among falling prices.

Negative profit margins and cheap stocks. Also, remember that, if you are looking for cheap stocks already. Many companies will lose money sooner or later due to less sales and higher wages – that can be difficult to remember at the peak. On top of it all, a wage spiral can turn into a rate rise spiral making life for both lenders and debtors even more difficult. Don’t be that guy.

Cycles cycle. However, as difficult as losses are to think of at the peak, record margins are far from mind at the trough. If you have cash ready, bargains should be plenty at the bottom. They usually are, even if it’s been unusually long since the last time. Fortunes are made or lost depending on your correct anticipation of the inherent cyclicality in most things.

Just one thing – debt! There actually is one very big drawback of deflation. If debts are already (too) high (public debt, corporate debt, household debt, stock market margin debt, bank leverage, hedgefunds/Private equity leverage) and a large part of the economy depends on stock brokering, fund commissions, loan administration, housing etc., then a lot of people will soon find themselves unemployed and with unemployable skill sets.

Depression. That will cause lower tax revenues, increase state and federal costs (food coupons…), cause civil unrest, calls for higher tax rates, not to mention make selling products and services to all those people all but impossible. Retail chains, restaurants, travel agencies, airlines, taxi drivers, you name it… Everyone will feel the pain. And you too, because the ones mentioned will have second order effects on your employer or your business or you directly almost no matter how far you are from the epicenter in the money business.

Who wins? It’s not the end of the world though. Even in Spain and Greece life goes on, more or less as before, despite 25% unemployment (>50% youth unemployment). People still have to eat just about the same number of calories as before and preferably buy their food as cheaply as possible and cook it themselves, so farmers and groceries should prosper. I’m sure you can come up with several more industries to hide in, no matter how deep the crisis becomes. Alcohol and tobacco? Water and electricity utility companies (oh, no,… loaded with debt unfortunately).

This article also ties in with the post on negative interest rates I wrote in February. Check back on it for a few quick points on education, mortgage and stock market strategies in a NIRP world.



  • Plan your debt level to not get crushed in the coming deflation (or high inflation and surging interest rates)
  • Be ready to pick up bargains (e.g., keep a Quatro Stagione investment portfolio now – including cash, physical gold and possibly attractive but undeveloped land), by having unencumbered assets or cash and a basic idea of what industries and single stocks you dare buy when there’s blood in the streets
  • Make sure you are self sufficient or have employable (preferably non-financial) skills.
  • Be prepared to argue for higher wages, even in a deflation. People will lose their jobs, but the valuable ones will keep theirs, and with higher pay (if needed to cover living costs)
  • Think critically. I don’t have the exact answers. Keynes definitely didn’t. Yellen and Obama certainly don’t have a clue. Neither do academics, your teacher or Nobel prize winners. Howard Marks might. Raoul Pal too. Maybe Marc Faber can weigh in, or Kyle Bass, Jeremy Grantham, Peter Schiff, Steve Keen, Vitaliy Katsenelson or even John Mauldin, Fred Hickey or John Hussman.
    • Search for and read the works of these guys, or just bookmark and subscribe to my newsletter and I’ll help you as best I can to stay up to date.
  • We are in a grand experiment right now; the biggest money printing experiment ever. I’d say the last big one was during the last days of Rome*. That was fun. Whether we’ll end up in a devastating debt-deflation or a likewise ruinous high-inflation environment remains to be seen. Quite likely both.
    • *Oh, don’t forget Germany in 1923, Zimbabwe recently and right now Venezuela and Argentina, among others.
  • Uncertain technology. Layered on top of this debt fueled oligarchical and nepotistic economy is an accelerated technological evolution, possibly leading to a productivity boom never seen before, or an automated hell and death of jobs.


May you live in interesting times

Unfortunately you do, whether you like it or not.

The economy is in a transition phase from one semi-steady state to another. It’s payback time after 100 years of the US Fed with increasing money and gold manipulation and a belief in central planning. Thus, the coming 10 years will probably be very difficult and stressful. After that however, humanity might be facing a new spring and golden era, powered by the Singularity enabling technologies: nanotech, biotech, robotics and AI (or GAIN = Genetics, AI, Nanotech).

inflation deflation technological singularity depression

Life was pretty simple there a while: Make a reasonable effort in school, get a job, work yourself upward, borrow a little to buy a house and pay back the loan in a few years.

That life is no more. Education doesn’t guarantee a good job, robots are (slowly) taking over, low interest rates (and thus elevated prices) mean you have to borrow huge amounts just to pay for school and a house, becoming a debt slave for life and risking bankruptcy at even a tiny increase in interest rates.

Money printing, budget deficits and run-away derivatives markets cause systemic risks that could wipe out the dollar, lead to gold confiscation, increased taxes, lower welfare and so on.

I’m not trying to scare you, just open your eyes to a few possible adverse outcomes of a number very long trends that are simultaneously reaching critical states. 

Sounds complicated? Why don’t you just subscribe to my newsletter instead and future-proof yourself that way? Simple.

However, you are still the one who ultimately will have to manage your debts, skills, income and investments. Don’t trust the government, don’t trust your banker, don’t trust me. Trust no one. (Retard’s Playbook)

deflation inflation

Death of money

For further in depth reading I recommend Jim Rickards’ book The Death Of Money. It’s a bit heavy here and there (when reading around midnight I often fell asleep after just a page or two), but most of it is very informative, exciting and inspirational.

The last few chapters with 3 scenarios to ponder, 7 signals to watch and a few pieces of investment advice are particularly good.

To prepare for the coming deflation/inflation/social unrest, watch out for disorderly hoarding of physical gold and changes in the price of gold and the dollar, structural changes in the IMF, system crashes, the Chinese trust Ponzi scheme unraveling and a few others.