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Financial Markets Brace for Epic Collapse

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ARMAGEDDON WATCH
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Today, this is what you should invest in, ordered below by current preference in the bearish community:

Long Gold
Long Agricultural Commodities
Short U.S. Stocks
Short U.S. Bonds
Long Emerging Markets Bonds
But Short Emerging Markets Stocks

Short China
Still Short Real Estate

Short Japan Because It Will Never Recover

That's pretty much it. Or you could buy a bunch of farm land. But wait, when the dollar collapses and the Treasury bubble implodes, the government is going to seize your farm land because that's when the new fascist regime will take over -- at the citizens' request, of course -- to ensure domestic tranquility. Fortunately, you will have all your physical gold to get through those tough times. Except the government will also seize all your gold, remember, and if you are squatting and trying to grow crops on your now-government-owned farm land then armed FDA enforcement troops will come and destroy them because they infringe on corporate-owned copyrights held by Monsanto.

I'm being slightly facetious, but only slightly because there are people out there who really believe such a scenario is going to unfold. Ratcheting down my rhetoric here, I am trying to think about what macro scenarios would have to unfold that do not spell the end of financial markets? I can't think of any. But everyone knows by heart the following macro scenario:

Fed fails to stop deflation, Treasury yields go to all time record lows, Fed panics, goes to QE 3,4,5,6,7 etc. etc., then we get inflation, followed by bank holidays, and so on. Also, peak oil. Consumer will stop buying anything but canned goods, baby formula, diapers and whiskey, because inflation expectations have vanished. And there will be some kind of world war. WalMart and microwave ovens are the new soup lines. Unemployment is structural and civil unrest will begin to creep up as food shortages and power grid infratstructure failures put people on edge. You know... all that stuff.

All of that has pretty much happened before. And will again, so bears get to be right, as they have been, and bulls look foolish for a few months or a couple of years, as they did in 2008, and then something happens no one expects and a new bull market emerges. Today, that is what is interesting to me.

I couldn't care less if the S&P 500 (which will actually be the S&P 400 due to the much-predicted defaults, delistings and reverse IPOs) falls to 400. Or even 300. What I want to know is what happens after it gets to those levels. I suspect that, just as we spent around 10-11 months below 1000 in 08-09, we'll spend considerably less time below 500 if stocks go down as everyone predicts. But that's an index. I don't have to buy an index to invest in stocks. I heard on Friday morning Jim Bianco, whom I greatly respect, say that stock-picking is dead and that macro themes now run the market, which is true, and which is also why I now want to focus on stock picking.

For the first time since 2000, there are some stocks, not many, but some, that are beginning to diverge from the all-one-market theme. I am seeing stocks begin look very different according to DeMark indicator counts I use, and that is the first time this has happened in nearly 10 years. At one point a few years ago, every financial instrument looked the same --if you covered up the name, it was impossible to tell if you were looking at a chart of soybeans, Apple, Sara Lee or crude oil. The counts I follow now are beginning to change and even within sectors there is divergence appearing.

It's now universally acknowledged that we are but one black swan event away from Global Economic Collapse Pt.2. But black swan events need not be negative. They just need to be unexpected. What might a positive black swan be? Well, it's much harder to come up with that than it is to come up with the negative black swan, and that in and of itself should tell us something.

This year I've become, if not outright bullish, then maybe the least bearish I've been in 10 years. The irony of the present situation is that the higher stocks go right now, meaning today, this week, the more bearish that is in the short-term, while the lower they go the more bullish. It's difficult for people to wrap their heads around that. Longer-term, we've already had a pretty damn good bear market. It's probably the late innings of this one, but to read commentary and hear people talk it hasn't even happened yet. Typically, each morning I spend some time reading financial commentary by other folks and after 10 minutes I just want to stop and kill myself. It's that negative out there.
POSITION:  No positions in stocks mentioned.

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