Mixed Thoughts on Markets – Part 1

Capital markets have been swinging wildly and amongst all this chaos it is difficult to focus and spot trends. There is a lot of noise out there. Here are some thoughts that should help me to structure my thinking:

This post is about the Stock Market. Thoughts about inflation and commodities to follow later, even though all of these are connected, which makes my head spin. Let’s start with the stock market nevertheless.

The stock market is down 50% since its high. Or you could say, 50% of the gains of the bull market that started in ’82 have been eliminated. I see a lot of comparisons of this market decline to other bear markets, including the bear market during the Great Depression. Compared to the Great Depression we would have to go another 78% down from current levels to reach the low. It seems to be in the human nature to look for patterns and compare in order to understand. But are these comparisons valid or interesting? I do not think you can make a decision on the direction based on those past bear market charts.


I think more a long these lines:

1. Negative Feedback Loop

Is the economy getting worse than already expected or not? I think we will see more negative surprises. And those will come from outside the US. January exports in Japan fell by 45% (!) creating a trade deficit. That is pretty shocking. Similar numbers across Asia and Europe. It shows how hard consumers are clamping down on spending. And this hits those export orientated economies (China, Japan, Germany) that were a bit removed from the financial turmoils. This will lead to a further hit on domestic consumption in these markets as people will get laid off leading to shrinking consumption there as well. All markets are connected – no decoupling anywhere in sight. I think we have a negative feedback cycle right here. And no local stimulus package can address that easily. So without going into more details, I think that this has not been factored into corporate earnings.

2. D-Process

Here is a link to Ray Dalio from Bridgewater. I fully agree with him. While most recessions are triggered by either supply shocks or monetary policy to fight inflation, we are today in a process where we have to restructure nearly all economic sectors, because they are over-leveraged (and some are just bankrupt): Banks, Corporations, Consumers, Governments. This de-leveraging process takes some time and will bring us to lower stock market prices.


These two effects will bring us to lower stock market levels – slowly and steadily. I am short with an unlevered (!) ETF ($SH)for long-term holding (Never hold an leveraged ETF for more than 48h if you do not want to get bitten by compound performance effect). However, there are as well factors that will lead to higher stock market (at least nominal) such as inflation. The whole inflation topic is related to the policies implemented in regards to the D-Process but I feel this post has been too long already. Eventually the stock market will recover, when the negative feedback loop has been reversed, earnings expectations have been adapted and the D-Process has worked its course (but before it is finished).

By the way: Follow the stock market, and my inverse ETF $SH with Alerts4All – Real-time alerts. Real Simple.


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