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Market Lab Report - 1925-45 vs. 2005-2022: A Comparison; If cash is king, shorting is a deity; Patience vs. Overtrading

Market Lab Report / Dr. K's Crypto-Corner

by Dr. Chris Kacher

The (R)Evolution Will Not Be Centralized™



1925-45 vs. 2005-2022: A Comparison

If we compare 1925-45 with 2005-2022, both periods produced a lot of debt growth, big wealth gaps, and bubbles that popped when there were tightenings. This is why we have been saying over the last decade that the Fed and other central banks have painted themselves into a corner. Any tightenings led to rises in short rates that led to severe debt and economic downturns that led to big easings that drove short-term interest rates down to 0% and negative rates in other countries. The debt was and is being financed by both raising taxes on the wealthy (see chart set 9) and monetizing the debts that were being created (see chart set 2). The low interest rates spurred by QE drove up the prices of most everything, most notably gold (see chart set 6) and stocks (see chart set 7).

Nevertheless, the charts below are some months old. Inflation globally has spiked to levels not seen in years forcing the Fed to tighten. Whenever they try to tighten their balance sheet by any material amount, the U.S. stock market major averages have quickly sold off to typically around -20% before the Fed is forced to step in and calm the markets by saying they will once again loosen monetary policy a la QE 1, 2, #, Operation Twist, etc. But this time is far worse thus the NASDAQ Composite has already fallen as much as roughly -30% and the S&P 500 roughly -20%. 

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(Image courtesy of Ray Dalio) 

If cash is king, shorting is a deity

In any event, staying on the sidelines made the difference between surviving the bear market along with all the dead cat bounces compared to crippling or bankrupting one's trading account in 2014 and 2018. Such is happening again in 2022. More importantly, my metrics have called every major top and bottom in bitcoin within a few weeks since 2013 in real-time trading. I published reports on sell signals in bitcoin starting in Dec-2021 then repeated in Jan-2022 as Powell made it clear he had become hawkish first by removing the word ‘transitory’ as I discussed in Nov-2021 across webinars and reports then some weeks later, that numerous rate hikes were on the way. I wrote that the length of any correction will depend on Powell starting to find any excuse to start printing money again. Typically, -20% corrections in major stock market averages have been the "uncle" point for Powell, but today's situation suggests the S&P 500 could correct well beyond -20% before Powell postpones or reverses rate hikes. 

I have never shorted crypto until 2022 because the crypto exchange platforms were illiquid and suspect in 2014 and 2018. Today, the cryptospace has plenty of reliable exchanges from which to buy futures contracts which gain when crypto falls. Plus, one's principle accrues interest when the funding rates are positive which is much of the time, in which case, longs pay shorts. In consequence, it is nice to be up over +50% so far in 2022 with profits accrued purely from shorting. Shorting is a tough animal in terms of timing things right, so I dont provide such suggestions in the Crypto Picks list on www.selfishinvesting.com. Also, the mathematics works against you. The best one can do is double their money if the crypto goes to zero, highly unlikely. And pyramiding on the way down is not suggested because the dead cat bounces can be sharp and short-lived. Going long on the other hand can bring many-fold gains in weeks as we have seen many times in 2017, 2020, and 2021. In consequence, the Crypto Picks list remains empty as I suggested that members take profits in most all names in Jan-2022 then the few remaining in early Feb-2022. 

Patience vs. Overtrading 

Patience is key here. Staying on the sidelines teaches patience. In observing traders both in stocks and in crypto, it seems the need to trade even during poor conditions remains one of the largest causes of big sums lost or giving back all of one's profits. Most traders will always find reasons to see major bottoms which prove to be illusory as excuses for what turn out to be dead cat bounces. 

Because crypto exchange shorting platforms carried big risk and were largely illiquid in 2018, I was mostly on the sidelines for just over a year from Feb-2018 to Feb-2019 except for a small core position in bitcoin and even smaller positions in 2 other coins. I did similar in 2014. As for stocks, I sat out the post-dot.com bubble for 3 years from Mar-2000 to Mar-2003 except for a handful of tiny trades which made my 2002 slightly profitable as my KPMG audit shows. So while my profits rose exponentially from 1995 to Mar-2000, my profit/loss curve went mostly flat until Mar-2003. **Three years of nearly no trading.** I have always heeded Jesse Livermore's advice that more money is lost by traders who cant stop trading during bad times which brings to mind the legendary millionaire man in the mountains story who would only come down once in a blue moon to trade once he saw everything was set up just right. 

That said, I had to learn the hard way during some turbulent crypto bull markets that patience prevents overtrading and temperance prevents overleveraging in futures contracts. Just because I had mastered greed in stocks did not mean I mastered greed when it came to cryptofutures. The astounding gains made in a short time evaporated because I had never encountered such wild gains in my trading account. 10-fold or greater gains made in just a few weeks in certain long leveraged futures contracts were quickly reversed. Contrast this with 1995-2000 when I achieved triple digit percentage returns 6 years in a row, tiny by comparison, so greed of holding on too long to being too quick to take profits never became an issue. Indeed, as I have always said, I am a permastudent of the markets as the markets will never stop throwing new and unexpected challenges that force each of us to examine our weaknesses. 


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