This past week solidified my belief that when the correction comes it will wipe out large swaths of traders.  Of course in every large down market I have been a part of, some investors leverage too much or are heavily long and they of course get wiped out.  But usually, the average investor, the average trader, even the average investment advisor is able to bounce back relatively quickly.  Even more importantly, they have assets to bounce back and they have the hope that it will bounce back.  I believe this time is going to be very different.

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Every market cycles emotionally cycles through hope and despair, euphoria and depression, as investors respond to short term data and (incorrectly) extrapolate and project that data for the long term.  However, due to the multitude of events over the last 6 years, the populace of investors has operated in a world where traditional responses to risks have been turned upside down.  Let's look at a couple of things that have happened and how the normal response was replaced with a false manufactured response.

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• The attack on Israel was just one of the numerous geopolitical events that have occurred over the last 6 years.  If you recall, the news of the attacks hit on Saturday and Monday, the market did not sell off.  Many will say this is because there was a coordinated response by Central Banks and policy makers to support the market.  The problem with this is that there is no evidence of any response.  No Central Bank announced temporary liquidity injections, a common response by governments in times of conflict.  I believe that the market did not sell off because the public has been made completely insensitive to any major geopolitical event.  In fact, I do not believe this was entirely done on purpose.  If you think about the massive increase just over the past 5 years of the amount of information you are exposed to every day, it makes sense that your brain has developed methods to screen out most of the data that it deems unimportant to you personally at that moment in time.  Furthermore, I believe an additional result of the explosion of real time global information is that people have become even more insular: if it does not affect their lives immediately, the event is ignored.  Couple this with the fact that people do not know what or who to trust for truthful information and it is easy to see why it nothing appears to shake investors' confidence.  This is truly dangerous because at some point, the markets will revert back to it's historical behavior and those investors that have only been trading since 2008 are going to be completely overwhelmed because their eyes will be opened to a market that responds to every major geopolitical event.  But they will not sell because they have been trained to buy and hold.​

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• Perhaps the single most important dynamic that has driven the market has been the enormous amount of liquidity that has been injected into the market.  In the most simple terms: the market's run up after recovering off the Covid lows has been entirely due to all the stimulus that world governments have put into the economy.  When this stops it will completely remove the unnatural hand that has been constantly pushing this market higher.  This is not a theory it is simple math.  And I don't think most investors have any idea what a market trades like that is recovering from temporary and artificial support.  As with most things in life, the market will over correct it's errors and this will cause a period of hyper vigilance of possible market moving events.  The market, simply, will become hyper focused on risk.

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As the two examples above illustrate, the average investor has never emotionally or psychological experienced a market that was not artificially supported almost like it was an underlying policy of the market itself.  Furthermore, people have been trained to ignore global events and this will also prove to be a very difficult habit to overcome.  If, for the past 16 years, whenever something happened somewhere else in the world, or in the US for that matter, the market still went up, what do you think the thought process will be going forward?  The same.

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Many current investors are going to lose a lot of money and what will make that even worse is that they will not understand why until it is too late.  Making money in any market is difficult but if all you have seen is largely a market that only goes up, naturally you are going to eventually assume that, that is what markets do.  Until it is too late.

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What makes this situation even worse is that this thought disease has infected everyone: politicians, world leaders, professionals - people that would normally know better.  I fear for when truth makes itself painfully apparent reaffirming that no, this time is not different.  Risk does matter and there is a limit to even what Central Banks can and will do.