The end of a Bubble Whose Outcome is Pre-Ordained
Posted at 6 Aug by Shalin

Shalin here…

A quick post during these manic trading days (even though we’re systematic, we do have a business to run!)…

I am pretty sure it’s safe to say that Q4-2018 marks a seminal point in U.S. market history. Never before have we seen such extreme financialization of the economy; never before have we seen so much ‘value’ trapped in financial assets. Indeed, for many, gains from asset inflation can often outpace gains from wages.

I am not saying it’s an entirely bad thing – after all, we too at Bodhi Tree make our living off the financial markets, but at least we know if you live by the sword, you die by it. Is it really that unreasonable for us to posit that the more levered individuals have become to the financial economy, the more negative on the macroeconomy the wealth effects of a bear market could be?

The following graph published by the Federal Reserve Bank of St. Louis nicely depicts just where we believe we are in the wealth creation portion of this cycle. For your amusement, I’ve marked it up with conclusions from my conversations with investors over the years and today.

Make no mistake about it, we have been engulfed in a massive asset bubble – perhaps the largest in human history. Moreover, given the longevity of the post-financial crisis Central Bank inspired inequality cycle, the more accepting many have become that the environment we live in today “just is.”

As such, the conclusion of this Bubble will be like the prior two before it – a fait accompli. Indeed, few people have the tools to understand how to manage their portfolios around the coming environment and even fewer understand how to prosper from it.

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