The Top Of The Ponzi Scheme

Pundits are already making predictions for 2025, because no one told them it's still 2024.

"You never count your money while you're sitting at the table, there'll be time enough for counting when the dealing's done"

For the past decade the market has been locked in a 1930s-style alternating sequence of bull markets and bear markets as we see in the chart below. However, this most recent two year back-to-back sequence of up years has broken that sequence, with two back to back 20%+ up years - something that hasn't happened since the Dotcom bubble. Now at this overbought juncture stock gamblers are running on Crypto glue fumes thanks to the election of the Crypto King. So for 2025, Wall Street has told investors to go ALL IN ahead of the imminent decriminalization of fraud. And they have.

I will leave it to today's media pundits to decide the direction of the next 15% squiggle on the chart above, based upon the myriad unknowable variables that will affect markets in 2025. For my part, I am more interested in the direction of the next 50%+ market move. And to ascertain that we need to consult not the future, but the past. Because it's not about predicting what is going to happen, it's about knowing what already has happened, which informs what is MOST likely to happen next:

Coming out of 2009 the U.S. was locked in a Japan-style deflation requiring 0% interest rates and constant monetary policy support from the Federal Reserve. That deflationary paradigm went on seemingly forever, until Trump was elected in late 2016 and "reflation" came back into the picture. Or so everyone believed. 2017 was a big up year but the broader market peaked in early 2018 with the rollout of Trump's tax cut. Trump's version of reflation was actually highly deflationary for the working class since they don't make enough money to pay taxes and benefit from the tax cut. Meanwhile, the Fed took the opportunity of the tax cut in order to raise interest rates, which is the equivalent of a tax increase on the working class. So, the whole gambit imploded into deflation by the end of 2018. By the middle of 2019, the Fed was cutting rates again back towards the zero bound. In other words, at best Trump-o-nomics was a cyclical reflation bump within a secular deflationary paradigm of 0% interest rates.

What changed the deflationary paradigm on a structural level was the pandemic. The pandemic caused the Fed to double their balance sheet and create the largest asset bubble in human history - Neither of which have been normalized back to their pre-pandemic levels. At the same time, supply chains had collapsed and employees were paid to "work from home" or not work at all. Supply and demand were out of balance, so inflation came back from a four decade free trade vacation. So what to do, the Fed normalized interest rates all the way back up to 5.25% for the first time since 2007.

Which gets us to the chart below.

Unfortunately, I believe that the pandemic-driven Fed tightening has FINALLY brought the U.S. economy out of Japanification at the end of the longest economic cycle in U.S. history. Which means that Trump is getting elected and creating all of this excessive market enthusiasm at the worst possible time in the past 15 years since 2009.

And that historical synopsis informs what is MOST likely to happen in 2025.

What no one on Wall Street sees coming.

Again.