A Thoughtful Email

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I get emails from Slopers around the world every day of the year. Some of them stand out as particularly erudite or insightful, and the one below is one of them. The writer kindly gave me permission to share his email anonymously with all my readers (the boldface emphasis is my own):

One of the posts over the last few years, that really resonated with me was the one where you refused to make money on the long side of the market which you felt was “dishonest”. I thought that the post was so powerful that I stood up in applause on my work station. And I would have written commending you on the post had I not been neck deep in shit at that moment.

The main protagonist in the Austrian Economics induced way of looking at the world is the Entrepreneur (In the broadest sense, not the hackster frauds running amok in Silicon Valley these days). An entrepreneur, to quote, “hates false prices”. He or she then proceeds to benefit from these false prices by delivering the same economic good with a better utilization of resources. In the market context, our hero is the speculator who enables better allocation of scarce economic resources. That is why market prices matter. But all this turns to dust when the central bank gets involved, artificially setting prices, saving failed speculators and introducing moral hazards (aka: the last 7 years). Economic resources are by definition scarce (unlike fiat credit, which is unlimited) hence the shell game has to come to an end one day. In theory anyway.

This brings me to your latest post. It is brutally honest as usual. You admit to being uneasy. Being a bear for the last 7 years has been being like being in an abusive relationship. Hopes have been dashed so many times that any semblance of normalcy feels like a false dawn and immediately makes us suspicious and defensive. But we know that one day this bullshit has to end. What if this is the big one?

The way that I understand the market is as follows: The bears are mostly extinct, whatever few remain are mostly near death. The bulls on the other hand, especially institutional bulls, have been skeptical of the rally since 2013 (Uncle Carl Icahn has been especially eloquent, Ben Hunt makes this point in his missives). Nobody really trusts this rally but being out entails huge career risk. And some of the most mentally feeble amongst us call this “the wall of worry”.

What both these camps have in common is that they both need a meaningful bounce. So that the bulls can get out and the bears can get short. My experience has been that the Mr. Market moves in ways which maximizes pain for the maximum number of participants. So if indeed this is “the big one”, the market may not bounce before a deep, swift initial correction which wipes out most of the fraudulent gains of the last 2 years. That would be poetic irony (for the bears being right, not making money), righteous vengeance (for the bulls as they are unable to hang on to the easy gains of the last few years) and divine comedy (the juvenile faith in central bankers will evaporate) all at once.