I’m officially changing the way I present my thesis. Instead of focusing on time frames and expectations, I will begin focusing on the approach and completion of events. I began employing this format in my previous thesis update without officially noting the change. This in no way means that I’m changing my thesis, past or present. I continue to be confident that the growth that we are experiencing is nothing more than a giant reflation experiment which will end in failure. This growth is not sustainable. The situation does not lie in the accumulation of more debt plain and simple.
With regards to the new format, this is how I intend to use it.
—-An example: I expect consumption growth to weaken as home prices begin a second leg down. Wage growth will remain constrained as today’s source is primarily due to a falling savings rate (which is obviously unsustainable). When consumption will actually weaken is very difficult to nail down, which is why I’ll be focusing on on mini-events leading to the final call; a decrease in consumption growth. A large supply of homes, coupled with the withdrawal of important stimulus would create headwinds large enough to lead a second leg lower in prices. Since real estate continues to be a very important part of the economy, lower real estate prices would no doubt lead to added credit constraint (from the banking sector) and an overall increase in consumer uncertainty, at this point, we would begin to see weaker growth. I’ll be "Keeping an eye out" for certain pieces of the puzzle to fall in place, which would be more effective in sniffing out the trend.—-
In essence, I’ll be looking for headwinds and/or tailwinds that lends (or refutes) my thesis. I will not overlook clues that may refute it. My approach will be balanced as my skin is in the game.
The reason I’ve chosen this approach can be seen in the following example. Looking back on 2006/2007 when the crisis was beginning to bud, an investor who had a prepared thesis done with careful due diligence, would have begun looking for clues instead of trying to time the final event; things can stay irrational longer than you’d think. Lower mortgage applications as well as weakness in the home building sector in 2006 would have informed the alert investor that his or her thesis was on the right track. It was over one year after the peak in real estate that the stock market finally began to realize what the consequences were. Careful technical analysis leading up to the peak in 2007 would have yielded observations of decreasing breadth with a classic head and shoulders pattern to mark the top, not to mention a slew of other red flags. These would’ve been signs that the investor’s thesis was becoming realized. Using this approach, along with dollar cost averaging into your trade would have yielded incredible results.
I believe that employing this method will result in superior outlooks.