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Trace Routing the Markets: Big Bad Wolf Ahead

Trace Routing

Below we look at trace routing principles to make common sense out of a senseless market.

As of this writing, the dips (i.e. dip-buyers) are back, enjoying the obvious “sugar-high” of what are now undeniably Fed-driven markets on their last hurrah of just shamelessly un-natural support from a centralized market leaping past an economy on its knees.

We trace-route this disconnect between markets and Main Street below with a blunt warning as to how it all ends. Hopefully, you are not falling for this latest head-fake from the Fed, as the fallout from such extreme “accommodation” ends badly–unless, of course, the Fed simply takes over the stock market and buries Capitalism in Section 50 of the Arlington Cemetery while Main Street waits for a $1200 check.

The Dominoes Are Falling

In my recent report on the unlimited dangers of unlimited QE, I chose the image of falling dominoes for a reason.

As massive price declines (“deflation”) in everything from retail, hospitality and banking stocks continues in a global lockdown “cure” whose deadly economic impact spreads virally among sectors as quickly as COVID-19 spreads through global zip codes, one industry’s fall tips the fall of others—alas: Like tumbling dominoes.

Contagion, after all, takes many forms. Trace Routing, discussed below, helps us track this economic contagion far more honestly than the CDC tracks viruses.

That is, all sectors impact (and infect) each other like a tightly interconnected chain of financial dominoes, each made “wobble-prone” by over a decade of inexcusable debt binging, unethical stock buy-backs, pandemic earnings-distortion and bogus accounting tricks.

Such grotesque sequencing began with a debt party made possible exclusively on the back of a low-rate experiment handed down to us by a fraudulent Fed, one whose so-called “recovery” policies from the Great Financial Crisis of 2008 merely served as an obvious yet media-ignored set-up for the next (and current) crisis.

No surprise here. As we’ve warned countless times: One does not solve a debt crisis with more debt.

The extraordinary melt-up which historically unmatched debt bought the markets was as easy to foresee as the extraordinary meltdown which followed.

Still Think the Fed Has YOUR Back?

And in case any are still wondering if the Fed is putting YOU ahead of the banking system they serve, let us consider a few other signals of common sense.

Having already tossed trillions at the broken repo markets to keep discount windows open for banks, or hundreds of billions per day to keep yields and rates down for corporate bonds and Treasuries that serve DC and Wall Street, Washington’s best idea for Main Street was a few $1200.00 checks and a tax extension.

Seem fair to YOU?

As corporate America enjoys yet another cheap-debt handout wherein banks can borrow at practically the zero bound to buy (and earn interest on) Uncle Sam’s ever-increasing list of IOU’s, have any “emergency credit measures” been passed against usurious lenders to protect US citizens paying upwards of 18% on over 480 million credit cards in circulation just to pay a grocery bill?

Still think the Fed and its protected big banks have YOUR back?

As we’ve warned over and over with blunt speak, in this rigged-to-fail system, the Fed’s priority is Wall Street and her markets not Main Street and her denizens.

But as I argued months ago here, even the Fed can’t “print away” a recession from the top down, when our real economy is already rotting from the bottom up while the architects and beneficiaries of this failed system are hiding from COVID-19 in the Hamptons.

Not Even Close to the Bottom

And folks, this melt-down has only just begun, despite over $10 trillion in desperate support which the Fed and DC are throwing at this latest disaster in a transparent effort to slow the monster of losses which they alone created.

How do I know we are still long way from the bottom?

Again, no crystal ball—just basic math, history and common sense.

Trace Routing 101

As to common sense and basic math, billionaire Chamath Palihapitiya, in a recent and lengthy interview on The Pomp Podcast, spelled this out rather elegantly through a simple description known as “Trace Routing,” which is similar in its economic principles as dominoes are to the basic principles of physics.

To illustrate Trace Routing, think first of the following sectors and ask yourselves how you think they are fairing in today’s global shutdown:

Oil & Gas?



Transportation and Logistics?


Movie Theaters & Entertainment?

Yep. You guessed it, each of these industries and sectors (and there are many more), are tanking. TANKING.

Furthermore, this is not merely a temporary tanking.

The tissue damage already done to our financial system will leave it crippled for years as the Fed now centralizes its control over our economy as the bank not of last resort, but of only resort.

Even if COVID-19 vanished this afternoon, the harm done to each of these and many other sectors has already been so severe that no quick recovery is coming, even on the back of trillions in “stimulus,” which most of us know is desperation, not salvation.

This is because the debt and earnings-loss Rubicon has already been crossed in each of these financial settings. There’s no turning back from the pain to come.

COVID-19 was merely the straw that broke their credit-soaked-backs, as these sectors were already debt-drunk (i.e. “weak-backed”) long before the Coronavirus.

As importantly, these and so many other industries do not rise and fall in a vacuum.

Instead, they are dangerously interconnected (i.e. “trace-routed”) in times of crisis—i.e. when the hangover follows the debt-binge.

Think, for example, about trace routing the retail sector. Or even the restaurant and entertainment sectors. No MBA or chart is needed to surmise how they are faring or impacting each other…

Do you think these businesses are buying a lot of point-of-sale software solutions out of Silicon Valley start-ups right now?

Or how about the hospitality sector? Are they hiring more construction companies or commercial developers to build out more sites?

Are laid-off workers in this inevitable and now obvious recession going to be buying more homes? What does that mean for face-shot real estate brokers? Furniture companies? Landscaping crews?

You get the point. By trace routing all of these industries, you see they are well on the same road (or route) toward a collective “oh-oh.”

Despite the surface of things, businesses and lives are heavily intertwined, from software geeks north of Marin to Applebee’s restaurants in Georgia and Michigan, or from struggling real estate brokers in DC to unemployed hotel developers in Dallas, each industry’s pain spreads to pain in other industries and sectors.

Or to use a more familiar metaphor, as one domino falls in sector A, the Sector B domino falls in turn, followed by sector C and dominoes D, E and F etc. etc.

This, again, is otherwise known as trace routing, and one only needs to follow the bread crumbs to foresee how the current disaster will play out.

All Bread Crumbs and Dominoes Point to the Fed

As for trace routing our current disaster, again, the first bread crumb—indeed, the entire loaf of bread —begins with the Fed.

By handing markets over a decade of low-rate, easy-money debt steroids, Bernanke through Powell have set the current domino chain in motion with unprecedented and historical elan.

Easy credit leads to credit bubbles, which always pop and always lead to credit disasters which the Fed is now trying to solve as it always does, this time with unprecedented levels of money and debt and handouts.

Seem like a good long-term plan to you?

Or does it seem like the definition of insanity—namely, doing the same thing over and over yet expecting a different outcome?

There’s really no shocker how this ends—just follow common sense, sanity and history, three topics upon which the Fed may wish to brush up.

More Trace Routing…

Consider the oil and gas sector. The vast majority of those energy stocks are BBB or junk-status credits who have been surviving almost entirely on low debt for years. I began shorting them months ago.

And now that an inevitable “shock” has hit our markets, those debt zombies are tanking with predictable speed.

Given the fact, moreover, that over 60% of our US bond market is composed of junk, high-yield and levered loan credits, there is and was no room for error even before the virus hit.

In short: The credit system was already ill.

Will more lay-offs to come in the energy and numerous other industries lead to more retail shopping or non-discretionary restaurant outings? More first or second home purchases?

Again, just trace route how one industry impacts another, and answer this for yourself.

As unemployment slowly climbs in lock-step with every recession-depression, do you think 15-25% unemployment will boost or hurt the stock at Ford or GM? Tesla?

If we trace route the dominoes, the future is not hard to predict. One industry after the next falls in sequence.

What’s Ahead?

As more dominoes fall across our economy and markets, the only near-term solution out of DC will be familiar.

Print more money, issue more debt.

To make those debt payments, the Fed will use banks as a pass thru to buy the Treasury Department’s bonds and thus effectively pay our national credit card with more printed money.

This official Ponzi-scheme (aka “Quantitative Easing”) will work only for so long, as debt monetization (or MMT) only works when inflation is low or absent.

Unfortunately, inflation will return, as inflation always follows deflation.

For now, however, the Euro Dollar shortage will keep the Greenback ironically strong, despite the insane money printing to come.

The Fed, of course, will manipulate and compress rates and misreported inflation for as long as possible, buying Uncle Sam more time as Main Street stagnates.

Tanking pension funds will need to be bailed out, which if we trace rout that pain, means states and municipalities will in turn be stretched to their maximum limits, and thus more money will be printed and more debt issued to buy more time.

It’s just simple trace routing.

As the Fed prints more and more dollars, other countries will be forced to do the same. Again, just more currency trace routing.

However, these other countries don’t have the luxury of being the world’s reserve currency, and thus emerging markets and currencies will suffer the hardest first, followed by Asian and European currencies and countries, who will begin their own trace-routed race to the bottom as the fiat system starts to fail slowly at first, and then all at once.

For now, those investors expecting a V-shaped recovery will be punished, and those playing the long-game (in cash and precious metals) will survive, and thrive.

Basic needs will be re-priced, and luxury, discretionary goods will fall in price.

Subscribers in Brick Houses

Subscribers to Signals Matter already know this.

They’ve known it for years, and were already in a brick house of cash rather than a mud house of top-chasing before this meltdown kicked in and the big, bad Corona Wolf huffed, and puffed, and blew the market house (of cards) down.

How did we/they know? Simple: We (and thus they) track market signals, yield curves and debt markets, not the financial media.

In this way, we didn’t even need COVID-19 to warn us of the risk ahead, as well as the opportunities to follow.

As our subscribers have known for months: Real wealth and real opportunity comes from waiting for, and then buying at, a market bottom when all assets are repriced at massive discounts.

Again, it’s just this simple (yet so ignored): Money is made at bottoms not tops. We made this clear exactly one year ago here.

As for now, we are not even close to that bottom yet, and for those of you who want to exploit this generational opportunity and follow our advice and precise signals, simply sign-up here and join our circle of common sense and smart signals.

We’ll see you on the other side, where the patient money is made and signaled. In the interim, and as always, stay informed, and stay safe.

Sincerely, Matt & Tom


3 thoughts on “Trace Routing the Markets: Big Bad Wolf Ahead”

  1. Matt & Tom,
    Great job on conveying your message. Common sense is not very common in the world right now. I love how you try to simplify your warning to something as simple as that. You guys have the skill to convey what many of us have been thinking for years, but did not have the ability and/or the platform to do it. So, Thank you.

    A few questions, please. Say, (1) an investor follows your advice and moves everything to cash and gold in anticipation of scarfing up heavily discounted investments after the coming deflation, and, (2) inflation always follows deflation. Are you saying there WILL be time to use our hoarded cash portion to pick up the investment bargains before the buying power of our cash is ravaged by the daily impact of daily fiat money printing? I can see gold as a relative store of value versus the eroding dollar, but why wouldn’t our cash stash effectively (though silently) be simultaneously losing its buying power each day along with the daily fiat money printing? So, will there be some sort of disconnect, or time lag, or period of opportunity to give us time to convert our cash to something “real”? Thank you so much!

    • Hi Kevin, thanks for your comments and kind words. As to your questions, here are my thoughts. First, we are NOT advising our subscribers to go FULLY into cash and precious metals. If you check your dashboard on the subscriber side of the site, you’ll note we also make opportunistic portfolio recommendations with the remainder or non-cash components of the portfolio. In times as unprecedented as these, large allocations of cash are advised for all the reasons we’ve explained in prior reports. Precious metals in general, and gold in particular, is also recommended as a long-term investment, but not to be overly-concentrated beyond percentages discussed in our various gold reports published over the years. As to your second question, yes, inflation always follows deflation, though the Fed can and will do everything in its ever-growing (and entirely disturbing) powers to contain inflation, which they have been doing since the late 70’s. We are certainly no where near the inflation sequence now, and thus bide our time watching the market indicators rather than date-stamping inflation’s arrival moment. Keep in mind, however, that actual, rather than reported, inflation is already closer to 10% than 2%, so in many ways, we are already in an inflationary setting. For more on this, I recommend you consider our reports on inflation as well as our report and book, each entitled “Rigged to Fail.” And yes, even before inflation becomes obvious to the public and the global markets, there will still be time for those who have patiently held cash to benefit from a true market bottom, and we are not there yet–not even close. The real bargain hunting is to come, as despite even today’s “sugar high,” the Fed can’t explain or even defend a soaring market when earnings and GDP reports tank in the coming months. Fundamentals, as obsolete as they are becoming in this new absurd era of centralized market “intervention,” still have some sway in security pricing. The dollar will remain relatively strong for awhile, as the deflation to inflation process is slow, even in this absurd QE backdrop. This is due to the USD’s global status as a reserve currency, the Euro Dollar markets and dollar illiquidity, a topic which I also recommend you consider in our prior report on this issue. The issue of balancing the dollar’s eroding future and gold’s currency protection is not something the media will signal or that we can time today–again, it’s just a matter of historical processes that evolve over time, and again, the Fed is fighting these natural processes with every weapon in its distortive arsenal. For informed investors, this balance is a lot like riding a clutch and will require carrying both dollars and gold until the inflection point becomes signaled, which we will do for subscribers when FX, bond and M2 signals so inform us. The USD will remain the best horse in the global glue factory for now, but the disconnect will come when printed money becomes diluted money, and we’ll do our best to track this process over time. For now, holding the right amount of cash (dollars) as well as the right amount/percentage of gold and also investing conservatively (rather than hog wild) in the right sectors as market conditions warrant is the smartest play now, especially given all the undeniable uncertainty in these entirely uncharted markets. For now, the majority of uninformed investors still think the Fed is all-powerful rather than just powerfully desperate. Desperate works until it doesn’t, but the end-game is clear for those willing to face it and patiently navigate its many tacks and turns. We do our best to help in this navigation and hope this helps.

  2. Matt,
    Thank you for taking the time to answer my questions. Very helpful. I have been and will continue to follow your signals. Your signals matter. Kevin

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