1) Why do bears always seem smarter than bulls?
This is a question James Altucher posed a few weeks ago. Itâ??s an excellent question and he had some great thoughts on it, but I wanted to provide my own opinion. First off, Iâ??ll admit it â?? bulls get a bad rap. For centuries the bulls have been right and they donâ??t get a whole lot of credit. In research circles parmabears have cult-like followings. Personally, I donâ??t think itâ??s due to any great brilliance. It actually strikes me as uniquely stupid to be a permabear. The truth is, economies grow and expand over long periods of time because human beings are evolving, growing in numbers and generally becoming more productive. Fighting these trends over a multi decade period is almost always going to be a losing endeavor.
But this doesnâ??t mean that secular bear markets canâ??t occur. As weâ??ve seen over the last decade persistent weakness in equities can and does happen. Economies can become overextended and bloated with excesses that take time to work off. I donâ??t like the fact that I am a believer in the current secular bear market. I know that it hurts millions of people. I know that America is worse off right now because of this environment. But I also know that this too shall end. So while I am a believer in this secular bear I honestly look forward to believing in the next secular bull. I am hugely bullish on America in the long-run.
But why do bears always seem smarter than bulls? Because, as I said above, it takes some gumption to stand up in front of these secular trends and proclaim that they will stop working in the near-term. Anyone can go on TV and say â??stocks for the long-termâ?. Personally, I think investors appreciate the alternative perspective. We are force fed so much nonsense from the Wall Street sales machine every day that itâ??s refreshing to see a well thought out alternative perspective. People respect it and honestly, I think itâ??s a great service to provide an alternative to the constant â??buy, buy, buyâ? mentality that has come to dominate Wall Street.
In a culture that has become epitomized by reckless spending, lending, and borrowing itâ??s refreshing to see that more and more people are returning to the idea of risk management and prudence. In sum, itâ??s not that bears are smarter â?? itâ??s simply that investors appreciate their uniqueness more than they appreciate the â??stocks for the long-runâ? mentality that has failed so many for so long.
2) I havenâ??t been net short since the month before the flash crash occurred.
I believe there is a disequilibrium building in the market currently. â??Buy the dipâ? and David Tepperâ??s â??win winâ? market has come to dominate the market on a daily basis. Why am I bearish?
A) I believe the market is severely misinterpreting the Fedâ??s ability to generate inflation and economic recovery via QE. In fact, the historical evidence shows that there is no reason to believe that the Fed can generate an economic recovery via QE.
B) Most investors believe the upcoming election is a net positive for the market. They refer to some silly chart that shows past periods of gridlock and automatically conclude that this period will be no different. This reminds me of when youâ??re watching a sporting event and you hear the announcer say: â??The Durham Bulls are 150-0 when leading in the bottom of the 9th with 2 outs.â? Any logical person would say: â??but wait, those 150 wins were accomplished with entirely different teams and unique situations.â? There is absolutely no reason to believe that this period of time will be similar to any past period. In fact, I have argued that this period (balance sheet recession) is highly unique and therefore all back testing must be thrown out the window.
In a balance sheet recession the private sector will remain weak as they pay down debts. This has been proven true over the years by the weak PCE data. If government does nothing to bolster the economy there is a high probability that growth will contract. This is best visualized with the following graphic from Goldman Sachs:
With the inventory cycle ending and stimulus becoming a net drag on economic growth there is a very high potential that the consumer will fail to carry the economy out of the doldrums. Why does the election matter? Because gridlock will almost guarantee budget reductions and reduced government intervention. We can quibble over the effectiveness of government spending, but one thing is positively true over the last few years â?? government has been good to the market. The removal of government via gridlock increases the risk that the private sector will be exposed as weak as it was in 2007 and 2008.
C) Earnings have been very strong again and are largely reflected in equity prices at these levels. In each of the last 4 earnings season we have seen the exact same trend. Companies top analystâ??s expectations and equities rally into and throughout earnings season and then sell-off when the catalyst subsides. This earnings season is setting up just like the last 4.
3) QE WORKS!!!!!
Itâ??s become popular to cite the recent market rally, dollar decline and commodity rally as evidence that QE works. Of course, most of these investors forget that this rally did not start with QE (in fact, the market fell in August in the face of QE rumors). This rally started with the August ISM Manufacturing report that came in well above expectations. The market sentiment at the time was very depressed, deflationary and generally expecting a double dip. But better than expected economic data and strong earnings have largely alleviated these fears (in fact, they have been flipped entirely as investors are very bullish and believe inflation is right around the corner).
If QE has had any impact in recent weeks it has been 100% psychological. How do we know? BECAUSE THE PROGRAM HASNâ??T EVEN STARTED YET! How can anyone say that QE2 is driving the market higher when we know for a fact that QE2 is only having a psychological impact? In other words, investors have been readjusting portfolios in recent weeks on better than expected news and EXPECTATIONS that QE2 is some sort of wonder drug. Iâ??ve argued that this is misguided and based on misconceptions that QE is inflationary (a misconception that a sitting FOMC member has finally admitted).
Thus far, there remain many question marks regarding QE. But the two things we can confirm thus far is that QE has not created one single job and that the marketâ??s recent advance (if at all attributable to QE) has been due to gamblers betting on a positive economic outcome courtesy of the Fed. If QE actually works we wonâ??t know it for several quarters. Unfortunately, QE has already failed in Japan, the UK and here in the USA. After all, if QE1 had created sustained economic recovery there would be no need for QE2.
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being about the most 4-year-out-pessimistic here, i too am bullish on America after that.
three-things and annaly capital consistantly the best reads hereâ?¦.and believe me, Cullen, that is saying something.
Very nice post TPC!
About bears: I think there are â??establishment bearsâ? and â??real economy bearsâ?, who are still bullish equities like Marc Faber, because their bearishness leads them to expect (hyper-)inflation. Yo also mention the secular bear market bears (e.g. Barry Ritholtz), who is currently bullish (and I guess he is an â??establishment bearâ? as well).
Fed to market: How Much QE2 Would You Like?
This is unbelievableâ?¦
http://ftalphaville.ft.com/blog/2010/10/28/385921/fed-to-market-how-much-qe2-would-you-like/
How long until we follow the BOJâ??s lead and implement corporate debt purchases? Apparently the BOJ is also getting ready to start buying ETFs & REITs.
Ben Bernakosan?
Brian Sackahito?
http://www.bloomberg.com/news/2010-10-28/bank-of-japan-to-buy-lowered-rated-corporate-debt-to-spur-economic-growth.html
Cullen, Please post about this absurdity of Banana Ben asking the markets how much QE would they like. Whatâ??s next, a quarterly survey from Banana Benâ??s Fed on where markets would like the SPX, DJIA and NDQ to close each quarter?
We need visibility on the fraud that is Banana Benâ??s Fed
TPC
Another idea: Why not post a summary along the following points regarding QE:
1. What the Fed states officially 2. What the Fed thinks in reality 3. What the Fed hopes the market will think
I will try to give some answers:
To 1: - QE lowers yields -> raises asset prices artificially (->wealth effect) / enables more capital spending / lowers USD (->more exports) To 2: - QE to act as a hidden bank bailout - QE to enable more deficit spending To 3: - Market will misinterpret the true effect of QE and will thus raise inflation expectations and stock speculation (-> good for bank stocks and potentially nominal GDP).
Maybe I got it wrong and maybe my classification is wrong, but to put these things in order will help a lot the thinking process of us all and will avoid misunderstandings (e.g. with the ones like non-economist).
Balanced and pragmatic view. Excellent post as usual.
I think the biggest question is, when will the balance sheet deleveraging end? The pace of deleveraging has declined which has been a boost to macro numbers. While many economists say household budgets â??shouldâ? deleverage more and while we know that many people will be forced to deleverage, we also know that the cost of carrying the current debt is much lower then its peek.
Not soon. http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q22010.pdf Most of the reductions are from bankruptcies. While the overall debt is smaller, the consumer balance sheet has not improved at all.
â??BECAUSE THE PROGRAM HASN'T EVEN STARTED YET!â? ? ?
Didnâ??t the Fed reinitiate QE in Augsuts w/ the $250B excess from QE1 agency paydowns?
QE2 just adds to this, they have been running alot of POMOâ??s since mid-August.
I have no way of quantifying it, but it sure feels like the QE/POMO that began in mid-August has had a significant short-term effect on asset prices and the dollar rather than it being all about expectations. Longer term, things should be different when the market realizes it doesnâ??t work
This is true. But again, QE â??liteâ? has been very small compared to what the actual QE2 program will amount to. Likely 5X+ larger. I think itâ??s still safe to argue that anything that has been priced into the market from QE2 is psychological. After all, does anyone really think $20B in bond purchases in the last month is having some monumental impact on a $15T economy?
I thought the recent purchases were bigger. I just did the math from the Fedâ??s site and it looks like the total has been $62.3B ($9.3B in Aug, $27.5B in Sep and $25.5B in Oct). What surprised me was the submitted vs. accepted ratio w/ a median of 7.1x, certainly alot of sellers showing up. Surprising that interest rates are still lower.
Yes, theyâ??ve been about $20B a month. The actual announcement should be at least 5X. The most important thing here is that this is all psychological though. These operations are nothing new and from a purely technical perspective there is really no reason for them to influence markets at all (except for a marginal int rate move which I have shown does not last).
Net net, I still think QE is one big non-event. But itâ??s herded lots of people all over the place. Psychology has changed. The economy hasnâ??t. Problem is, I donâ??t think this is making people more confident in the economy. If anything, it is making people think that the Fed is fraudulent.
I completely agree that QE has no positive impact on the real economy, but remain unconvinced that is does not raise asset prices. I believe there is some change in portfolio composition going on with the UST sellers, leaking into more speculative assets vs. the treasuries that were just tendered. I canâ??t believe the banks are just tendering their treasuries and then turning around and buying T-Bills or more US Treasuries with all the proceeds. Some portion of those proceeds are finding their way into more speculative assets. Always open to new ideas or to be convinced otherwise though. Thx for all your work here.
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