In this weekend’s article, I want to discuss the very long-term picture, and what I believe are the two basic options for where we may be at within that picture.

When we account for the phenomena we see in the markets today, it is in our nature to look to history for some kind of guide to help us through the present. And given the nature and length of the decline in equities this year, it is natural to look to prior bear markets to help us to understand what this one might be like. Most of us have lived through and experienced the dot-com bust or the GFC (or both). And so those are our two most natural guides at hand.

And yet, the macro-economic forces today aren’t necessarily a good match for either of those two times. I had, for instance, at one point looked to the dot-com bust as a guide, but I’m not so convinced now as I had been. We certainly had a tech bubble inflating in the present day. But, when you look at almost all of the growth stocks that had enormous run-ups (ARKK, etc.), they already look now like the dot-com bust stocks looked at the end of that bear market. Totally gutted. And yet the major U.S. Indices remain relatively strong by comparison.

And we have inflation. And what do we do with that? I am inclined to think that Russell Napier understands the situation well (you may read an important interview he recently gave here). He predicts that governments are going to use inflation as a vehicle to solve the debt crisis. If he is right, this is a process that may take quite some time. A period of tightening and weakening policy, allowing sticky inflation to persist for maybe even 10-15 years until metrics such as debt-GDP normalize.

In the past, after the enormous debts from World War II were accrued, and additional expenditures of the Cold War mounted, those debts were normalized in the 60s and 70s through waves of inflation. And, the great irony today of course is that while Jerome Powell tells us the Fed aims to avoid those very mistakes, that may actually be exactly what he is intending to replicate. And if it’s not what he intends, it may then be what the US Treasury intends, and in the event of conflict, that is a fight the Fed will lose, as the Sovereign is all powerful, and among them, the US Sovereign is the most powerful among the global Sovereigns. Not Powell (nor his successors) can resist the will of the Treasury in the end. And neither will we be able to. And it is not a partisan issue. It’s not “those damned Democrats” or “those damned Republicans.” Both will aim to solve the problem in roughly the same way.

Now, given all of that, which I find persuasive, what in the hell could that even look like on the S&P 500? A somewhat carefully managed period of tightening and loosening policy is probably going to look like a huge consolidation. Fortunately for us, consolidations like this are often large 3-swing moves typically involving one “nest,” giving them the look of a 5-swing move: down-up-down-up-down, maybe even triangle-like (A-E). It could roughly resemble this:

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