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I remember being pitched to at my trading desk in London in early 2007 by a young, freshly-minted MBA. I was heading up commodities but had drawn the short straw and had to look after the grad interns. He was adamant the bank should be selling Credit Default Swaps (CDS) against these triple-AAA rated mortgage packages. Easy passive income, no risk... I wasn't so sure but knew I was getting older. I was only 34 but he was 20-something and he had the buzzwords. I knew that selling derivatives into a low volatility market was asking for trouble. We didn't do it and several months later those who did were staring at huge losses as the credit crunch swallowed them whole.

Since then I've managed to slow down and enjoy life in Hogsback, living according to Aristotle's mantra that "Happiness belongs to the self-sufficient". Of course I trade every now and again and the below chart should scare the pants off anyone.... It was inevitable that we would get here of course, such is the nature of momentum. And it may not even be that bad, but it sure is not going to be a rosy 2018 for equities. The vol we're seeing now is just the start of it. Basically, a monthly chart on the Dow is showing short-term momentum having broken below medium term momentum. This is like the wind blowing against the current, causing choppy sideways conditions. Of course this has happened before, in July 2011 and Feb 2015, but those occasions weren't too bad.

Something inside feels different this time. Never before in the course of human history has so much passive money been thrown blindly into the market, expecting outsized returns. In 2011 and 2015 the Fed was in the throes of QE, now it is easing, and rates are starting to shoot up. The trusty 2-10 year US Treasury spread is almost negative again, a sure sign of recession to come. The US is firing on full employment but no-one is any richer, and US citizens are about to start feeling a lot poorer, as the dopamine effects of zero interest wear off.

I'm not predicting a crash, just a lot of sideways bouncing around for now. The crash will come when the US can't refinance its $21-trn debt, even at 5% interest. And at 5% guaranteed interest, what investor is going to want to be in uncertain equity markets moving sideways? The markets sense this already, and are jumpy. Because when the short, medium and long term money all start pulling out the market together, it will be mayhem.

There will always be market corrections economies are cyclic it just depends whether there is a significant event whilst the economies are going through bull territories. I was in banking in 1969 when there was a major correction and have been through all highs and lows since then. In 2007/8 the fall in the markets was substantial some bourses showed drops of 30% in a day but by 2009 most of the markets had recovered whilst others were in recovery. By 2010 my share value was back to what it was prior to the collapse and my portfolio dropped R .5 million over 4 weeks. To my mind our market has already suffered a partial correction - the ALSI has dropped from a high of 61684 on 23/1/2018 to its current level of 55254.67. Markets are to say the least skittish but we would need a major event to get back to a 2007/8 type market crash. There was a graph which released about 18 months after the 2007/8 crash and it showed how quickly the markets recovered after the event. It also illustrated that since about 1903 after each major correction markets tended to achieve higher highs but didn't ever achieve lower lows. Also if I recall correctly if you took the worst crashes versus the peaks still over the period back to 1903 the market improved by 18% over the period in real terms
So the market is a bit scary at the moment and I do believe we will have further short term corrections, should one sell one shares and exit the market - I don't think that's wise. One way of hedging your bets is to sell portions of your holdings and then consider buying back when the prices have dropped to a level you are comfortable to enter the market again
   

Look, I'm completely biased as I'm living the good life, off-grid in Hogsback. I love getting back to nature and have satisfied my travel bug long ago. I tend to agree with Simon Black of Sovereign Man that we all need a Plan B. The financial system is creaking, too many chiefs and too little Indians earning too little. There will be unrest, US debt defaults, bank failures etc. All the easy money has flowed into assets that can revalue to nothing in days. Humanity has created a global system that needs growth at all costs every year. Extrapolate that forward and you reach a breaking point where the man in the street can no longer afford bread. And we can't make it ourselves because we've forgotten how in the quest for economies of scale with super farms, long logistics chains, massive warehouses and giant stores. It's goddamn awful. I don't know when the system will break, but I think it will happen in my lifetime still. It will make the 1930's depression like a walk in the park. Meanwhile I will trade and invest alongside everyone else. This volatility is awesome. I buy deep out the money straddles and sit long gamma, allowing me to easily sell at or near the peaks, and buy the troughs. It's like taking candy from a baby. One last thing, it's amazing how much more successful one is at trading when you're cutting down a tree, cobbing a wall or milking our cow. It's like the universe rewards those who believe and then just let go... Stress creates losses. Don't understand it, but I can easily recommend the Good Life to anyone.

Thanks for sharing some very wise words Bevan. Would love to one day do what you have done, stepping off the rat race.

Reminds me of something I read recently.
Einstein's definition of happiness...

"A calm and modest life brings more happiness than the pursuit of success combined with constant restlessness.“