Markets do not care about you. They don’t care about your family, your feelings and they particularly don’t care about your wallet. With record deficits, QE2, 9.4% unemployment, continuing stimulus and 0% interest rates many are still baffled by a surging stock market. What gives says the Main Street investor? Clearly, there’s still an enormous disconnect between the market and reality. I know, there are a lot of positive signs out there, but the fact remains – Main Street still doesn’t feel like the recovery is headed their way. But the market isn’t the economy. Main Street isn’t Wall Street. And the market is a heartless beast that desires one thing and one thing only- PROFITS!
Although we live in a world of the Bernanke Put and endless government bailouts the markets remain the last bastion of natural selection in the modern world. When allowed to truly function on its own capitalism is a cruel, heartless, but remarkably efficient bitch. The weak ultimately perish and the strong survive. For the strong the rewards are great. For the weak the losses are insufferable. And in this world of cruelty you must never forget that the system has no sympathy for you or your emotions.
The equity market is priced based on future profit expectations that are often right, but more often than not prove to be wrong. As we saw in 2007 those expectations were high, investors believed economic downturn would be thwarted and the environment ultimately surprised substantially to the downside. As the waterfall decline ensued we experienced the inverse reaction in 2009. Markets and expectations overshot to the downside. Expectations for profit growth became far too low and classic mean reversion ensued. As the economy stabilized in 2009 the economy remained stagnant at best. But the economy’s loss had become corporate America’s gain. The massive cost cuts made these corporations lean and mean. Corporate America’s diverse revenue stream kicked in as the global economy strengthened and leveraged up these lean balance sheets. Despite persistent weakness in the US economy profits continued to rebound through 2009 & 2010 even as US unemployment continued to climb. That heartless bitch did not care about the unemployed, stagnant wages or l-shaped recoveries. She cared only for the bottom line and the bottom line was robust – particularly when compared to expectations.
Over the years I have attempted to measure this disconnect between perception and reality using my Expectation Ratio. The metric was bearish since 2007 and was then bullish throughout the majority of the recent bull market. If I have made one mistake in recent years it has been focusing on what should be good for an economy (job growth, fair markets, organic growth, etc) as opposed to what the market desires (higher profits no matter how they come). But much like an approach to trading, your approach to conducting research must be unbiased, flexible and mechanical. Ultimately, the purpose of research is to generate investment profits. Connecting the dots between this research and actionable ideas is vital to success. If you allow the emotion of a macro outlook to infect your work your results will suffer. Remember, the market is not the economy. The market does not care about the emotions of the unemployed or the suffering. In fact, she feeds off the negative emotion and it is often not until you have become comfortable and complacent that she will turn her back on you and break your heart again.
As investors we are always learning, evolving and honing our skills in order to avoid the pitfalls that cause so many to self destruct. Few investment cycles have been as great a learning experience as this one. We live in a renaissance for economic thought, economic theory and investment. It’s unlikely that we will experience as many beneficial learning experiences as the most recent cycle. And while this environment continues to cause great pain there are also great lessons to be learned.
From an investment perspective, there has been no greater lesson than the fact that has been burned into my soul from the last 24 months – the market is not the economy and the market has no sympathy for you, your family or your emotions. She desires one thing and one thing only – profits. And those profits will often come at the expense of everything we wish for in this world. That’s the cruel reality of the capitalist system in which we reside. It might not be fair, it might not be right, but it is what it is. In the end, capitalism continues to be the most dynamic, innovative and productive system in the world. But make no mistake – that system does not care about you and anyone who forgets that will be devoured by it. ——————————————————————————————————————————————————
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icBrokerWidget('pragcap', 600, 55); Comments phsmithYou think this is capitalism? Bahhhaa! Capitalism does not involve massive gov’t bailouts, pomos, suspension of accounting rules, etc… This is not capitalism – this is central planning and “wealth effect” manipulation. Capitalism involves failure, pain, clearing of the system – this ain’t capitalism, not even close.
Reply 01/11/2011 at 1:37 AM SSThis is the never ending excuse made by bears. How can you honestly say there have been no losers? I’m so tired of hearing that. We’ve seen more banks fail since the S&L crisis. Look at corporate profits. Tell me this isn’t capitalism at work. This system doesn’t care about your free market propaganda.
Reply 01/11/2011 at 1:51 AM AnonymousThe guys who deserve mostly to fail (Citi, ML, BoA etc.) not only did not fail but got record bonuses. It is capitalism for the poor and powerless and communism for the elite.
Reply 01/11/2011 at 12:40 PM LVGThe USA has always had some level of central planning. It was the breakdown of government regulations that caused this crisis in the first place so spare us with your central planning fear mongering.
Reply 01/11/2011 at 1:54 AM AnonymousThe central planing or deregulation both served one purpose – make the elite more money at the cost of everone else. It is not regulation or deregulation that is the problem, but capture of government by special interests.
Reply 01/11/2011 at 12:42 PM jeffWhy can’t I borrow interest free “reserves” from the Fed to repair my personal balance sheet? And than buy long bonds with the proceeds.
If that is capitalism…please sign me up Ben!
Reply 01/11/2011 at 2:03 AM Cullen RocheAs much as I wish we had a purely capitalist market (lord knows I’ve complained about govt intervention to no end in the last few years) we have to accept that the USA has a long history of intervention in markets (via interest rates or other mechanisms) and we’re widely considered to be the epitome of capitalism in the world.
We can either quibble over the level of capitalism or accept that we might never be a pure capitalist economy and move on. I’d love to get rid of the Fed as much as most people, but there’s reality and there’s dreams….
I think referring to it as central planning or otherwise is more politically driven than anything else. If this is central planning then we’ve always been central planners. The facts don’t lie. Just look at the growth (or lack of) in govt employees and govt expenditures over the last 60 years. We’re not doing anything that out of the ordinary right now:
Reply 01/11/2011 at 2:18 AM eludogCullen, that is the first time I have seen those graphs. I’m really shocked. Thanks for posting those.
Reply 01/11/2011 at 8:40 AM DimmThanks for posting these. They deserve a separate post though. It seems that TPC finally provides data about “Obama’s big government”. What the graphs are missing is an overlay of the population growth … After all that big bad government hires teachers, police officers, firefighters, etc. and surprisingly(for some) you need more of those to govern a bigger population.
Reply 01/11/2011 at 9:22 AM blacklotusI’d be interested to see how the first figure changes when overlaid with US population growth over the same period. That way you can tell if the size of the government has been growing faster (bad) or slower (good). For example, if the US population had been shrinking over the past 50 years, then an average ~3% change of the number of government employees isn’t all the spectacular.
http://www.google.com/publicdata?ds=wb-wdi&met=sp_pop_grow&idim=country:USA&dl=en&hl=en&q=us+population+growth+rate
Eye-balling the chart from the link above, it looks like the % change has been around 1-2% each year. I guess it’s in the same ball-park…
Reply 01/11/2011 at 1:40 PM nottpcThe market would thrive on 99% unemployment in the us since americans are too expensive. Corporate profits would explode and per mmt the govt can just do 2 or 3T tax cuts and stimulus plans every year to keep money in the pockets of the unemployed so they can consume. Well I guess with 99% unemploym/ent tax cuts wont be so useful. But 750B a quarter stimulus works fine ..our gdp would be roaring and without demand for loans we could QE forever, get the stock market to dow 45000 and everyone could just shop rather than workl.
Reply 01/11/2011 at 2:27 AM AnonymousSounds like the idea of communism, only that they tried to use their own population to work (too expensive) instead of cheap Chinese.
Reply 01/11/2011 at 12:47 PM yourejammingmeupi agree with ph, this isn’t capitalism, it’s bells and whistles smoke and mirrors make your way through the dark maze to find the cheese capitalism, and it gets only harder as the age of info continues to unfold because your sources become so varied.
Reply 01/11/2011 at 2:35 AM RL44TPC, surely “capitalism” is, as you kind of imply, where the strong survive and prosper and the weak fall by the wayside?
How can we call this “capitalism,” in any form, when the weak get bailed out and prosper yet the strong miss out on the opportunity to bury the weak, those who made all the mistakes?
(Otherwise, good read. To trade the market you need to be, now more than ever, a psychologist rather than a genius).
Reply 01/11/2011 at 4:08 AM Obsvr-1not a psychologist, an insider.
Reply 01/11/2011 at 12:32 PM Martin SPlease Mr Cullen,
http://pragcap.com/where-does-all-the-money-flow
We are a few still confused on the flow front!
When I-bankers are talking about NET in- and outflows from equties etc… how does is fit in the picture there is always a buyer behind a seller and vice versa (even if they agree on the trade on a much higher or lower price)
Many thanks
Reply 01/11/2011 at 5:42 AM goodfriendbasic reminders yet even though i know them i still have intellectual issues to go l ong when real economy is not so well…i need a cure !
Reply 01/11/2011 at 6:20 AM Ajit KumarCapitalism is self correcting mechanism inspite or despite of anything or everything. I for once am in complete agreement with you TPC. “Price is Right” if you think its not then earn the arbitrage, if it is, please gracefully accept it. Market has humbled many a great pessimist, optimist, I-know-all beings. And if you get a familiar feeling that fed is the one behaving i-know-all , before long, it will too be humbled or humiliated.
Reply 01/11/2011 at 7:22 AM GLHIn a democracy government is supposed to protect the weak against the strong. Unfortunately, our government is owned by the strong.
Reply 01/11/2011 at 7:31 AM chrisinteresting that you post this commentary today, at the beginning of another earnings season that promises to be one largely of outperformance; as one frets about the “wrong” macro moves, it’s always good to keep one’s investing eyes on the prize: improving profits, balance sheets and earnings visibility.
Reply 01/11/2011 at 8:00 AM Cullen RocheWell look who it is
Reply 01/11/2011 at 12:29 PM phsmithThe article suggest the market is cruel and heartless. In reality, this market is managed and quite predictable. We have a Fed which is telegraphing every pomo offer for explicit profiting of primary dealers (they even sent out a survey to the PD’s to see what would be “just the right amount of QE2″). We have an explicit Bernanke “put” that makes the Greenspan “put” seem too restrictive. Its a warm, fuzzy, low volume drift up market that feels confident in its gentle climb under Bernanke’s guiding hand. The Fed’s all out push for the “wealth effect” via stock market influence is now explicitly stated as a policy tool. Its not a Bear vs Bull debate. We are only a thin veneer away from the Fed simply buying this market outright. With the Fed’s unlimited balance sheet (in theory), why don’t they just come out reveal what’s behind curtain #3 – open and outright massive purchasing of indexed futures in a bold bid to make everyone feel better. Go long America! Ben’s got your back.
Reply 01/11/2011 at 9:07 AM brIf the Fed had not been bailout and supporting the market, and the Govt. stops meddling in the so called “free markets”, the stock market would have already collapsed by now. And we would be celebrating the first or second anniversary of the crash (to be followed by more crashes). Calling it Capitalism is perhaps the best way to “hide” all this deception. Call it Bailoutism. In a truly free market, people (economy) decides what the best price should be that is “fair” to everyone involved. So their emotions, fear etc are all “included” and not ignored like the way capitalism, as you describe it, works. Enough said.
Reply 01/11/2011 at 9:16 AMPost Footer automatically generated by Add Post Footer Plugin for wordpress.
icBrokerWidget('pragcap', 600, 55); Comments phsmithYou think this is capitalism? Bahhhaa! Capitalism does not involve massive gov’t bailouts, pomos, suspension of accounting rules, etc… This is not capitalism – this is central planning and “wealth effect” manipulation. Capitalism involves failure, pain, clearing of the system – this ain’t capitalism, not even close.
Reply 01/11/2011 at 1:37 AM SSThis is the never ending excuse made by bears. How can you honestly say there have been no losers? I’m so tired of hearing that. We’ve seen more banks fail since the S&L crisis. Look at corporate profits. Tell me this isn’t capitalism at work. This system doesn’t care about your free market propaganda.
Reply 01/11/2011 at 1:51 AM AnonymousThe guys who deserve mostly to fail (Citi, ML, BoA etc.) not only did not fail but got record bonuses. It is capitalism for the poor and powerless and communism for the elite.
Reply 01/11/2011 at 12:40 PM LVGThe USA has always had some level of central planning. It was the breakdown of government regulations that caused this crisis in the first place so spare us with your central planning fear mongering.
Reply 01/11/2011 at 1:54 AM AnonymousThe central planing or deregulation both served one purpose – make the elite more money at the cost of everone else. It is not regulation or deregulation that is the problem, but capture of government by special interests.
Reply 01/11/2011 at 12:42 PM jeffWhy can’t I borrow interest free “reserves” from the Fed to repair my personal balance sheet? And than buy long bonds with the proceeds.
If that is capitalism…please sign me up Ben!
Reply 01/11/2011 at 2:03 AM Cullen RocheAs much as I wish we had a purely capitalist market (lord knows I’ve complained about govt intervention to no end in the last few years) we have to accept that the USA has a long history of intervention in markets (via interest rates or other mechanisms) and we’re widely considered to be the epitome of capitalism in the world.
We can either quibble over the level of capitalism or accept that we might never be a pure capitalist economy and move on. I’d love to get rid of the Fed as much as most people, but there’s reality and there’s dreams….
I think referring to it as central planning or otherwise is more politically driven than anything else. If this is central planning then we’ve always been central planners. The facts don’t lie. Just look at the growth (or lack of) in govt employees and govt expenditures over the last 60 years. We’re not doing anything that out of the ordinary right now:
Reply 01/11/2011 at 2:18 AM eludogCullen, that is the first time I have seen those graphs. I’m really shocked. Thanks for posting those.
Reply 01/11/2011 at 8:40 AM DimmThanks for posting these. They deserve a separate post though. It seems that TPC finally provides data about “Obama’s big government”. What the graphs are missing is an overlay of the population growth … After all that big bad government hires teachers, police officers, firefighters, etc. and surprisingly(for some) you need more of those to govern a bigger population.
Reply 01/11/2011 at 9:22 AM blacklotusI’d be interested to see how the first figure changes when overlaid with US population growth over the same period. That way you can tell if the size of the government has been growing faster (bad) or slower (good). For example, if the US population had been shrinking over the past 50 years, then an average ~3% change of the number of government employees isn’t all the spectacular.
http://www.google.com/publicdata?ds=wb-wdi&met=sp_pop_grow&idim=country:USA&dl=en&hl=en&q=us+population+growth+rate
Eye-balling the chart from the link above, it looks like the % change has been around 1-2% each year. I guess it’s in the same ball-park…
Reply 01/11/2011 at 1:40 PM nottpcThe market would thrive on 99% unemployment in the us since americans are too expensive. Corporate profits would explode and per mmt the govt can just do 2 or 3T tax cuts and stimulus plans every year to keep money in the pockets of the unemployed so they can consume. Well I guess with 99% unemploym/ent tax cuts wont be so useful. But 750B a quarter stimulus works fine ..our gdp would be roaring and without demand for loans we could QE forever, get the stock market to dow 45000 and everyone could just shop rather than workl.
Reply 01/11/2011 at 2:27 AM AnonymousSounds like the idea of communism, only that they tried to use their own population to work (too expensive) instead of cheap Chinese.
Reply 01/11/2011 at 12:47 PM yourejammingmeupi agree with ph, this isn’t capitalism, it’s bells and whistles smoke and mirrors make your way through the dark maze to find the cheese capitalism, and it gets only harder as the age of info continues to unfold because your sources become so varied.
Reply 01/11/2011 at 2:35 AM RL44TPC, surely “capitalism” is, as you kind of imply, where the strong survive and prosper and the weak fall by the wayside?
How can we call this “capitalism,” in any form, when the weak get bailed out and prosper yet the strong miss out on the opportunity to bury the weak, those who made all the mistakes?
(Otherwise, good read. To trade the market you need to be, now more than ever, a psychologist rather than a genius).
Reply 01/11/2011 at 4:08 AM Obsvr-1not a psychologist, an insider.
Reply 01/11/2011 at 12:32 PM Martin SPlease Mr Cullen,
http://pragcap.com/where-does-all-the-money-flow
We are a few still confused on the flow front!
When I-bankers are talking about NET in- and outflows from equties etc… how does is fit in the picture there is always a buyer behind a seller and vice versa (even if they agree on the trade on a much higher or lower price)
Many thanks
Reply 01/11/2011 at 5:42 AM goodfriendbasic reminders yet even though i know them i still have intellectual issues to go l ong when real economy is not so well…i need a cure !
Reply 01/11/2011 at 6:20 AM Ajit KumarCapitalism is self correcting mechanism inspite or despite of anything or everything. I for once am in complete agreement with you TPC. “Price is Right” if you think its not then earn the arbitrage, if it is, please gracefully accept it. Market has humbled many a great pessimist, optimist, I-know-all beings. And if you get a familiar feeling that fed is the one behaving i-know-all , before long, it will too be humbled or humiliated.
Reply 01/11/2011 at 7:22 AM GLHIn a democracy government is supposed to protect the weak against the strong. Unfortunately, our government is owned by the strong.
Reply 01/11/2011 at 7:31 AM chrisinteresting that you post this commentary today, at the beginning of another earnings season that promises to be one largely of outperformance; as one frets about the “wrong” macro moves, it’s always good to keep one’s investing eyes on the prize: improving profits, balance sheets and earnings visibility.
Reply 01/11/2011 at 8:00 AM Cullen RocheWell look who it is
Reply 01/11/2011 at 12:29 PM phsmithThe article suggest the market is cruel and heartless. In reality, this market is managed and quite predictable. We have a Fed which is telegraphing every pomo offer for explicit profiting of primary dealers (they even sent out a survey to the PD’s to see what would be “just the right amount of QE2″). We have an explicit Bernanke “put” that makes the Greenspan “put” seem too restrictive. Its a warm, fuzzy, low volume drift up market that feels confident in its gentle climb under Bernanke’s guiding hand. The Fed’s all out push for the “wealth effect” via stock market influence is now explicitly stated as a policy tool. Its not a Bear vs Bull debate. We are only a thin veneer away from the Fed simply buying this market outright. With the Fed’s unlimited balance sheet (in theory), why don’t they just come out reveal what’s behind curtain #3 – open and outright massive purchasing of indexed futures in a bold bid to make everyone feel better. Go long America! Ben’s got your back.
Reply 01/11/2011 at 9:07 AM brIf the Fed had not been bailout and supporting the market, and the Govt. stops meddling in the so called “free markets”, the stock market would have already collapsed by now. And we would be celebrating the first or second anniversary of the crash (to be followed by more crashes). Calling it Capitalism is perhaps the best way to “hide” all this deception. Call it Bailoutism. In a truly free market, people (economy) decides what the best price should be that is “fair” to everyone involved. So their emotions, fear etc are all “included” and not ignored like the way capitalism, as you describe it, works. Enough said.
Reply 01/11/2011 at 9:16 AM rhpMartin S.
I believe the answer lies in where the boundaries are established. “Sidelines” implies a playing field. Hussman and TPC establish a “playing field” that is an aggregate of the entire system. If the “playing field” is subdivided, then “eagerness to buy” (Hussman’s term) may change the relative amount of cash devoted to each sub-playing field, while the aggregate remains unchanged. At least that’s what I think……..
rhp
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