My View on the Markets and the Economy

History didn't begin in 1945: comparing the great recession to any post-WWII recession and/or recovery cycle does not make sense and means you believe the origin of time is 1945. It obviously isn't, as we are only in first few years of the Greater Depression.

Once-in-a-lifetime events do occur once in a lifetime: Keeping on mentioning that the 2008 crash was a once in a lifetime events and won't happen again for another generation is misinterpreting what happened in 2008. Deflation seems to be happening in cyclical way and the time between major credit deflation seems to be the time it takes for everybody to forget the previous crisis, and get very comfortable with taking on debt and loading up on risk on their personal balance sheets. The previous one happened in the late 1920s, and the current one is 80 years later: the time it took for most of those who lived the first one to disappear from the surface of the earth. The 2008 crash was the first major down leg of the Greater Depression, and we are now very close in my opinion of the second one, similar to what happened in 1932. The once-in-a-lifetime event here is not the crash, it's the credit deflation, which will be accompanied by several major crashes.

The past 30 years cannot be considered as the norm:

  • Since 1980, the western civilization has been living the biggest bull market of all times, fueled by the biggest credit bubble in the history of mankind. Valuations have been completely outliners if you look at the past 200 years, and so have been profit margins. Reversion to the mean means that these valuations and these profit margins are not coming back and will actually drop substantially.
  • The biggest speculative mania of all times will end the same way that any mania ends — in tears. Unfortunately, it will probably lead to many personal and family disasters, including suicide, and also wars. So believe me, I'd rather it would end differently. Most people have been speculating in stocks and real estate and see that as the only of getting rich, since income have been stagnant but optimism high enough to keep them going. Banks have been producing 30% of the GDP and government spending about 20-30% of most western economies. This is not sustainable and won't be sustained.
Emerging economies consumers are not the reason why the S&P 500 or the Dow are rising, speculation is: I've been hearing many many times that even if the unemployment is high in the US, large US companies are doing well thanks to demand from emerging economies and that's the reason behind a 100% rise of the major indices since the bottom in March 2009. This is yet another fallacy: if is was true, the Russell 2000 containing stocks from small caps which local and making net losses after net losses wouldn't be making new all time highs. You would have seen a decoupling between the two.

China, Australia, Canada, India are propelled by major credit bubbles as well, and will crash, like any other bubble economy.

Bullishness is still extreme, however you slice and dice it:
There has been no economic recovery in any way in the US, nor in any developed economy, most of the Eurozone economies are the verge of collapse and several have already been downgraded to Junk, yet equities are at multi-year high and the Euro is also. Any disastrous news is welcomed by the market who believes there is absolutely no risk in the market, trusting that Bernanke will save them — where were they in 2008 and 2009? During any decline, analysts and market commentators ask to buy the dip and do not believe in any meaningful drop — this happened in the earthquake+tsunami+nuclear disaster in Japan, and just a couple of weeks ago as well, during the economic soft patch worry.

These are just a few signs (among dozens others) of extreme complacency and greed, not fear.

Am I a perma-bear? I was bullish on equities until 2007, then got bearish and started this blog. Made lots of profits on the short side of equities and commodities in 2008 and early 2009 then made lots of profits in being long commodities and stocks in from the bottom of 2009 until early 2010. At which point I stopped seeing any values in the shares and commodities — too early indeed — but does that make me a perma-bear? Would you buy the Dow in 1931? or the Nasdaq in 1999? So why do you buy the S&P in 2011? I believe the stock market is headed for a 70% drop from here, over the course of the next 3-5 years, and so is the commodities market, silver and oil included, in USD terms. So I prefer playing the short side from here, unless tremendously oversold markets, which hasn't happened a single time in the past 2 years.


Tiho said...

When I look at world equity indices, it looks as if we are close to some type of a major correction or a even bear market.

Here in Australia, the ASX 200 is looking very weak. While Japan is looking better than most, KOSPI in Korea has recently failed to make a new high. Korea is highly leveraged to China, so this is not a good sign. Hong Kong continues to look weak, failing to hold that 22,000 level. Nifty 50 in India is also looking weak with the support at 5,200 holding so far, but the market is failing to make any new highs since November 2010.

In Euroland, CAC 40 in France and even FTSE 100 or DAX 40 from England and Germany are starting to look very heavy. Bulls are failing to make any new highs and the supports are barley holding. MIB in Italy has recently crashed through the primary support, but managed to barley rally above it.

In the US, the S&P 500 continues to outperform Emerging Markets and Europe. Usually this happens at the last leg of the bull market.

Equity markets might soon drop of 10%, 20% or more. But I don't think we will drop 70% or 90% or some crazy figures you talk about. Bernanke has stated last night that he will print more money if and when this occurs.

I'm not selling my commodities however, because just like in 2008, commodities kept going higher while stocks went lower! I agree that eventually even commodities might correct lower, with Crude Oil falling below $90, Silver below $33, Corn back to $5.00 a bushel and Gold definitely correcting as its very overbought, lets not forget that commodities are in a secular bull, and after the down-leg they will go higher again. (I dunno what targets, I'm just picking random numbers lower than today)

So you should buy more commodities because Bernanke will print more money and debts will get even higher! They will not default, but just inflate... I'm not overly optimistic about stocks in inflation so that is why I invest in commodities, but as I keep saying all the time, when it comes choosing between to cash, bonds and stocks, as a fund managers I rather be a pessimist on bonds or cash!

pej said...

I think ultimately, the real bottom will be hit when markets have dropped between 80 and 90% from their all time highs. This doesn't mean it will happen in one straight move, it will take many years, specially with the likes of The Bernank and his fellow central planners around the world.

One thing that you don't realize, is that the bernank only monetizes new or old debt that is fully backed the US government. There's a limit to what he can do, and he has probably reached it on the short term. On the medium term, he will have the backing and support for more printing only when the next major leg down has occurred. This means that he will always be too late, too slow.

Moreover, there are other road blocks they will face:
- the current debt ceiling masquerade is showing
- the threats from other central banks and investors in treasuries
- the public opinion and actions of libertarians like Ron Paul