Looking beyond the fresh Trade War shots below an excerpt from Mr. Bassman.

History does not seem to repeat (or rhyme) because our fates are pre-ordained by the Almighty. Rather life moves in cycles because humans are social beings whose flaws of greed and ego never whither.

Described as hubris by the Greek playwrights, like lemmings over the cliff, we simply cannot help ourselves. Thus mankind’s advance from the cave to the stars in a mere few score thousand years has been marked by a recurring pattern of a few steps forward followed by a small step back.

This is as true for prices in the financial markets as it is for the weaving (and tearing) of our social fabric. Over the fullness of time, one can discern the rhythmic regularity of such waves; this is in contrast to their perceived uniqueness (“it’s different this time”) when one is between the crests. Hold this thought, as I now suggest it is time to grab your surfboard and head to the beach; the next wave is coming.

 Quipped Dave Rosenberg recently: “Cycles die, and you know how they die? The Fed puts a bullet in its forehead.”

Bassman discusses further:

Let’s take a moment to reflect. The cycle starts with the Fed reducing interest rates to spur the economy. Lower borrowing costs increase business activity (earnings) that elevates the stock market; this also tightens credit spreads as default risk is lessened.

Lower rates propel CIOs to reach for yield, so bond covenants can be eased; this, in turn, encourages CFOs to buy back stock with cheap debt. Bullish stocks allow greed to dominate fear, and thus the VIX declines.

In sympathy to a lower VIX and CDX, the MOVE rate volatility index declines.

Finally, this virtuous cycle is turbo-charged with expanding P/E ratios as future earnings are discounted at a lower rate. When this wave crests, the virtuous cycle becomes vicious; and all these risk vectors reverse course.


For the entire article, “Catch a Wave”,  click here.