Complex Systems, Feedback Loops and the Bubble-Crash Cycle

nasdaq ^ | 1-12-2016

[Citizen Zed]

Our expectations for a global economic downturn, including a U.S. recession, have hardened considerably in the past few weeks, with a continued expectation of a retreat in equity prices on the order of 40% to 55% over the completion of the current cycle as a base case.

The immediacy of both concerns would be significantly reduced if we were to observe a shift to uniformly favorable market internals. Last week, market conditions moved further away from that supportive possibility. As I've regularly emphasized since mid-2014, market internals are the hinge between an overvalued market that tends to continue higher from an overvalued market that collapses; the hinge between Fed easing that supports the market and Fed easing that does nothing to stem a market plunge; and the hinge between weak leading economic data that subsequently recovers and weak leading economic data that devolves into a recession.

We continue to observe deterioration in what I call the "order surplus" (new orders + order backlogs - inventories) that typically leads economic activity. Indeed, across a variety of national and regional economic surveys, as well as international data, order backlogs have dried up while inventories have expanded. Understand that recessions are not primarily driven by weakness in consumer spending. Year-over-year real personal consumption has only declined in the worst recessions, and year-over-year nominal consumption only declined in 2009, 1938 and 1932. Rather, what collapses in a recession is the inventory component of gross private investment, and as a result of scalebacks in production, real GDP falls relative to real final sales.

[Citizen Zed]

[posterchild]

Does anyone have any favored 2X or 3X bear ETFs?