Anatomy of a market crash
Y’all asked for it. Here we go
The anatomy of a market crash
Before I begin, it is important to remember that the following is not financial advice. I am not a financial advisor. I do not provide financial advice. I am a dude pretending to be Jim Carrey on the internet with this tattoo. You’d be silly to take financial advice from me. The following is purely educational and for entertainment purposes.
It’s hard to pick a place to start, but for the sake of the meme I started with, let’s go with 2008. What happened? Big banks began giving mortgages to anybody who signed up. Really. Nothing down. No proof of income. NINJA loans (https://www.investopedia.com/terms/n/ninja-loan.asp). These loans had attractive short term conditions, but after a certain period of time, interest rates skyrocketed. People took out multiple mortgages, and then suddenly couldn’t afford to pay them.
How do people not paying their mortgages crash the market? Well, Wall St in their endless greed created mortgage-backed securities (MBS). They created bonds, which the government rates up to AAA based on how “safe” they are, and these bonds were filled with the bad mortgages. The more junk mortgages in the bond, the lower the rating. At least, that’s how it was supposed to be. What actually happened is that the upper tiers were filled, in part, with the lower tiered bonds too (eg AAA filled with AA, AA filled with A, etc). It was an inverted pyramid of the worst mortgages you could imagine. As soon as the bottom fell out, it was over. If that’s not bad enough, enter the derivatives (options) market. Each and every ticking time bomb of a mortgage was leveraged a ~ g r o t e s q u e ~ amount in the derivatives market.
The thinking was “who doesn’t pay their mortgage?” A fatal flaw of the detached, greedy people on Wall St was not realizing the answer was “people who can’t afford to.” As history came to show, once the banks realized that all of their MBS were worthless due to the inability for the mortgage to get paid, they artificially inflated things to try to exit their positions as much as possible before the algos finally broke.
Now, it’s important to remember that an inherent part of market mechanics is that price action can not trade lower IF PEOPLE ARE NOT SELLING -stares in retail-. However, if the value of the underlying asset depreciates, the relevant derivatives will usually follow suit. At least it does in a properly well-regulated market, GARY.
Another thing to consider that you may not have thought of before is what price action is showing us. Yes, price discovery, but what is price discovery in human words? Emotion. When you are charting price action, what you are getting information on is how humans react at certain levels. That’s why being emotionless in your trading is key to profitability.
What we saw in 08 was a circumstance where the banks were irresponsibility over leveraged into an asset that imploded, and instead of handling it the right way, they each prolonged the inevitable in an attempt to make it out alive, which not everybody always does. Unfortunately for retail, big banks get the bail out at your expense. Do not go to Jail, collect $200(B).
This is the pattern you regularly see. Major players in the market dangerously abuse new securities and the leverage it’s based on vaporizes, causing forced panic from the big guys eventually making its way to the general public. By the time the average Joe goes to save his portfolio, it’s already been stolen by the market makers.
2018 had Bitcoin futures
2000 was the dotcom bubble
1986 was the introduction of trading algos aggressively hedging
You get the point.
It’s not that retail didn’t cause this. Retail COULDN’T cause this. Retail doesn’t have access to the assets, leverage options, or rule exemptions that allow banks to be so uniquely irresponsibly positioned.
While still a major factor, once you step beyond the banks in a crash, you start to see the effects of emotion. Volatility increases and stocks better respect psychological levels because that’s where “normal” people are putting their limit orders.
Unfortunately, most people are conditioned to fearlessly buy the dip, and this is actually HOW the market crashes. Let’s take a quick step back and analyze this a bit.
Major players find themselves over leveraged on an asset, and for one reason or another, need to exit that position, but in the market you don’t just exit a position into the ether. Buys are matched with sells, so the only way a large player gets OUT of a position is for somebody to be getting IN to that position. Now, let’s put ourselves in the shoes of this market maker. When you go to exit a position, there are a few potential options to whom you can exit: 1) your wall st buddies, 2) the fed, or 3) retail
You could dump your bags on your wall st buddies, but you run the risk of damaging your relationship by pitching or selling them something you KNOW is effectively worthless. You could call Powell and see if you can convince him of a bait and switch. Give that a try and let me know what he says.
So what’s left? Retail. Retail are the only ones left to dump the bags on.
First, MMs use their exemptions and exorbitant amount of assets to over leverage themselves into risky positions.
The underlying of the risky position implodes and MMs suddenly find themselves needing to exit and a mass amount of liquidity to do so.
Ripples from the asset implosion causes responses in other securities. Should these ripples result in the exiting of long positions, this added weight on the market can put additional pressure on the over-leveraged MM still trying to realize their rapidly decaying profits.
It’s easy to see how, in the right circumstances, this could capitulate the entire market. How greed won in 2018. 2008. 2000. And almost every single major market event since it’s inception.
Go read this investopedia article that goes into the causes behind each historic and contemporary market crash (https://www.investopedia.com/timeline-of-stock-market-crashes-5217820)
Let me address a couple points about the above article as well.
First, you’ll find that every single crash falls into one of three categories:
1. Extreme greed from banks/market makers
2. Reckless fiscal policy from the government
3. Extreme emotion
Of these, the only time retail is even truly contributing to the problem is when extreme emotion kicks in, but these incidents are often short lived flash crashes that big money treats as a dip buying opportunity manufactured by their greed and manipulation.
Second, if you were to further research some of the more “unknown” causes to some of these events, in particular the 1929 crash into the Great Depression, you’d find that uncouth fiscal intervention occurred before that had measurable affects on the market that even generated retest levels in the charts.
Hopefully now it’s a little less shocking and surprising that this is happening. Again.
So let’s take a closer look at what’s happening here and now. Again, it’s hard to pick a place to begin, so let’s start at the point of no return: COVID.
Before COVID, there were a handful of questionable policy decisions that gave me pause for concern, and I very vividly remember learning about 3x Bear ETFs in 2019 preparing for some kind of major correction. However, COVID brought with it unprecedented fiscal policy: banks and MMs could borrow at a 0% interest rate.
As we discussed above, when given the chance to violently abuse assets to the point of existential destruction, they do. And so they took the money that the government gave them to invest in American businesses and keep a pandemic-affected economy flowing.
Instead of trying to promote the American economy, as they were tasked with doing, many greedy people on Wall St decided to position themselves to maximize their leverage. The goal, in part, was to be able to short companies they felt wouldn’t survive COVID. The benefit, should these businesses go bankrupt, would be that these greedy Wall St people wouldn’t have to pay taxes on their gains.
If you’ve been in the market very long, you know there are many unhealthy elements. One of which is predatory short sellers. Good and hard working companies facing a tough environment can be put out of business should predatory short sellers drive the price down sufficiently. Toys-R-Us is a famous example of this.
Another element to consider is the implementation of Quantitative Easing. The Fed bought $120B worth of bonds per month for well over a year. This was the feared “tapering” you heard about: the Fed no longer providing that market stimulus each month. Remember those just massive green candles you’d see in the middle of the day on the whole market? That was our buddy JPow. Unfortunately, this is a bill that must, and has, come due in the form of Quantitative Tightening.
Let’s also not forget what’s gone on with the housing market. Big banks started buying up houses left and right. People were offering $50,000 over asking price to have their offer considered. Now, call me crazy, but wouldn’t you want to be a SELLER when people are slapping $50k over the ask? For people like you and me, absolutely! I’ve begged people for months to not buy a house right now. It’s not the housing “just go up” as we will soon be reminded.
So why WOULD you secure as many properties as these banks have? Well, when you own half a neighborhood, YOU set the median home value. Now, that doesn’t necessarily mean they all have to sell for the value of your assets to be appraised as such. You create an environment of scarcity and high competitiveness, and you suddenly get retail home buyers overpaying for this house you priced so that when those folks actually buy it, you just jacked up the appraisal value of all your other homes in the area. Again, we’ve already talked about WHY a bank or market maker may wanna inflate their assets.
Now, also consider what increasing property value does for MBS and CMBS (commercial mortgage-backed securities ). More mortgages, at exceptionally high premium, being stuffed into these bonds that faced no real changes after they facilitated the 2008 housing crash.
This would be plenty to worry about if the US was operating in a vacuum, but we aren’t, and we also have to consider geopolitical issues and other global issues. We have been facing a supply chain shortage for over a year now, and now that the Russia-Ukraine conflict is impacting the global wheat, corn, and energy markets, we are facing even worsening supply chain shortages and now food crises. You should spend a minute checking out how people have historically responded to bread shortages (https://gprivate.com/5z5n9). These are the minimum longterm affects of this growing war so far. As things continue to get more and more out of hand, governments will trend more towards war as a means to reunify their countries and reinvigorate their markets through war profiteering.
Let’s also not forget the instability of the Chinese housing market, where people have already started rioting and demanding their money back and the list of top bond owners reads like a list of the top American financial institutions. Or the fact that countries like El Salvador, via Bitcoin decline, and Turkey are facing financial crises of their own.
Inflation is infecting the entire world, currencies are experiencing wild moves, and there is still the looming potential of the next major COVID wave. Banks are already discussing a recession. Civil unrest has been roiling and will only accelerate under these added conditions.
Wow. That’s a lot so far. Are y’all ready to put it all together? Let’s see what we can do.
So, we can’t have a bubble without an abused asset, particularly new ones. Have we identified any of those? I’d argue we have
1. Extreme borrowing with the intent of creating a “money tree” from shorting stocks out of business to avoid covering or paying taxes. Tax free gains.
2. The Fed. You don’t get to leave the turbo algos on to the tune of over $1T and not consider the Fed/market an abused asset.
3. Housing. Over inflated assets for leverage that will also adversely affect MBS and CMBS.
4. Crypto. The crypto market cap has lost more as of this writing than the housing market did by the time it bottomed in 2009. And we haven’t begun widespread capitulation yet.
There are more too, but these are at least the glaringly obvious ones.
“Okay, well, even if the asset is abused, there still needs to be some kind of melt up/down to severely shake the markets.” Well…
1. Crypto capitulation HAS begun. I mean, did you see what happened to UST just the other day?
2. Wheat and Nickel squeezes caused massive waves already
3. Natural gas has been MOONING since mid February
4. The whole Russian exchange shut down for a week
5. Evergrande is a shell of itself. A Schrödinger’s cat, both living and dead until the Chinese government opens the box
6. Biotech (IBB), Dow Transports (DJT), and (BKX) have started their declines, and looking at their daily charts looks like 3 stages of the same chart
7. CMBS have started correcting
8. SPY, QQQ, and DIA are strongly into bear territory
“OKAY OKAY, everything is falling apart at the seams. So what!” Well, retail still IS the lynchpin in this with some respect. Retail does have a role to play for this to all beautifully fall apart as the stage has been set.
So, we have established the conditions under which a market maker would want to violently exit a position and have shown how they are relevant now.
Before I go further, I want you to ask yourself why we are seeing things like Crypto.com Arena or commercials on TV and YouTube for QQQ. If you had a secret gold mine, would you tell anybody? No way. That is, unless the only way the gold realized it’s value to you was if you had to SELL IT TO SOMEBODY ELSE. Suddenly, you might be compelled to advertise your gold store but still definitely not how you got the gold.
If you don’t think that’s the plan, go look at the Bitcoin chart. Top was 11/10/2021. Announcement of Staples Center naming rights being acquired by Crypto.com and the name was being changed accordingly was 11/16/2021. The intention was to get more people into the market to dump their bags on. This is the purpose of every violent rip you see in the markets over multiple days. It’s all intended to get retail faked/stopped out of shorts and into more of the longs they are exiting.
You can see this play out on intraday action too. Market makers are fighting for liquidity, which results in violent chop, constantly trying to stop out retail on both sides of the market. It is not news to anybody trading regularly right now that the market is sick.
If you’re going to survive what is about to happen, it’s imperative to understand that it is important to be where the money is GOING not where it has been. My intention of this thread has not to been to scare you out of the market. That would be antithetical to my goal actually. I’m hoping I have helped educate you on the how and why this happens and shown you that the malfeasance and abuse we see in the markets (even to the upside) leaves behind bills left to be paid. As much as they may try, the banks and market makers can’t delay the inevitable forever, and while that makes the final result that much worse, it provides that window for people to educate and prepare themselves.
To summarize, markets usually crash due to excessive greed in some asset, which leaves behind an IOU. When those IOUs come due, you have three options (assuming you don’t directly short the market for whatever reasons) with how you can invest your money:
1. You can be the person helping somebody else secure the profits to pay off their loans by holding their bag and helping price action trade lower
2. You can stay cash
3. You can be where the money that comes out of the broader market is going by buying the IOUs and forcing the banks and market makers to hold YOUR bag
This is real. And you can either accept it and put yourself where the money is going or you can play the role retail has in all of this.
This time, they are trying to blame retail. Why? For a number of reasons, but one reason is, in some respect, *whispers* ᴮᵉᶜᵃᵘˢᵉ ᵗʰᵉʸ ᵗᵉᶜʰⁿᶦᶜᵃˡˡʸ ᵃʳᵉⁿ’ᵗ ʷʳᵒⁿᵍ
We established this earlier, but I saved this point for the end for a reason. This particular situation, once quantitative tightening begins after so many assets have failed already, will very obviously align Wall St and the Fed (more so than already exists). Nobody on Wall St will wanna compete with the Fed, as the Fed is the ultimate whale. So if Wall St and the Fed aren’t dumping bags on each other this time, who is left to dump their bags on? Retail, as laid out in investment scenario 1.
Functionally, this means the direction of the market will be decided between the power of Wall St + the Fed SELLING and retail BUYING. In this scenario, retail buying pressure does not come remotely close to that of Wall St and the Fed. But there, technically, IS a way.
I am telling you right now that this will not happen and will not work, but I’d feel dishonest if I didn’t at least acknowledge this.
Retail stops buying the dip. I’m not saying don’t long the IOUs or go to where the money is going. That is the ideal scenario. But if retail stopped holding the bag based on pure stubbornness with respect to the major indexes and their core components, there wouldn’t be volume for things to trade lower.
“Buy the dip” is not without regard. Ideally, it’s buy the dip at a point of support after confirming a reversal. If there is something I missed that suggests a reversal is coming that outweighs ALL of this evidence, I implore you to share it. Being prepared and having my own expectations for how this will turn out does not mean that I want this to happen, and it is that reason that I feel compelled to help educate as many as I possible can on this. Hopefully y’all now see the significance of finding what bills these banks and market makers owe, so you can decide if that’s a valuable place to put your money.
So please, recognize the small, albeit critical, role retail truly plays in this game. Protect your capital, yourself, and your families. This will be difficult, but it will provide opportunities for greatness you never imagined. Be strong. I am rooting for you.