Friday, April 18, 2008

Ultra-Bears: I take it back!

I have a question for the bearish readers of Accrued Interest. I've corresponded with many of you and have heard many well-reasoned arguments for a bearish future. And here I'm not talking about those who think the recent stock rally has gone a bit too far and are looking for a 2% pullback. No. I'm talking about those who think that stocks will be lower over the next 2 years, or even longer.

So here is food for discussion in the comment section. If you are this kind of bear, what would convince you that you are wrong? In other words, what evidence could reasonably appear which would convince you that your bearish stance won't work out?

I ask this out of selfish motivations. The ultra-bears have been right so far. I mean, I was dismissive of some of the worst case scenarios which people presented over the last year or so. But on the other hand, I do not believe that things are so bad that we won't get through it. And I also think that the financial markets will recover faster and ahead of the economy as a whole. So remaining short, or even on the sidelines, is a dangerous game right now. And I want to hear from intelligent people who have actual money they are using to bet against the U.S. recovering.

And I want to hear what would convince you to cover your short and potentially go the other way. Because that's the true sign of a well-thought out trade. Everyone always has a reason why they make the trade, but a good trader also has an exit plan in case s/he is wrong. Let's hear it.


Anonymous said...

I am bearish longer-term, but short-term the momentum is obviously up.

The market overall will be much lower, because the valuations are currently very high. Most P/E ratios (not for the energy sector!) are huge heights.

Either earnings need to go up, or prices need to fall to come back to historical norms. I believe this imbalance will be cured by falling prices.

Anonymous said...

Home prices are falling in SoCal 5.6% per month.
Unemployment is increasing in California at 0.5% per month.
If those rates slow dramatically, I'll cover.

Anonymous said...

I am, to the extent it is possible, 100% in European Government bonds. I am trying, when I have the time, to look very closely at Iceland Government bonds...which I admit I do not completely understand.

There are individual companies, such as Apple and Google where I am either long, want to be long, or have been long. But only on the side, as it were.

Now, to answer your question. What are my premises, and what would change them?

1) The American Consumer is in the driver's seat and he can't borrow more money and he can't get a raise...or find work. Anything that successfully challenged that idea would wake me up like a shot of epinephrine.

2) We have, unexpectedly to me, hit the wall on fossil fuels. The article on natural gas in today's WSJ was a gigantic wake-up call. Unfortunately, this premise underlines premise 1). If someone were to discover oil on Long Island, I would get hit with epinephrine.

3) The euro is going to continue to be a higher interest zone than the dollar. If Trichet suddenly lowered interest rates, I would twitch like 20,000 volts.

nick gogerty said...

money talks. lets see some amazing Q1 or Q2 earnings. My prediction is a potential dow 8,800 unless the earnings game picks up, based on historical risk premium over 10yrs.

Kicker said...

So here is food for discussion in the comment section. If you are this kind of bear, what would convince you that you are wrong?

Banks are willing and able to loan money again...
- Strong YOY growth in the monetary base.
- Banks raising new capital at reasonable rates
- Banks able to off-load loans from their balance sheets at close to par
- A strong increase in NIM and a return to sustained profitability
- Spreads on jumbos narrowing (without Government help)
- A large, RTC style bailout of banks

- A strong drop in the dollar combined with a sharp increase in long term Treasury yields.
- China AND India OR Europe running substantial trade deficits
- Core inflation trending higher even with a drop in real PCE

Household balance sheet repair..
- Strong real wage gains
- A sharp drop in oil ($50)
- PCE increasing at a faster rate than consumer debt (currently the opposite)

Odd balls...
- Central banks shifting from holding reserves in Treasuries to Equities
- Buying spree of US companies by European or Chinese firms
- Large scale income redistribution
- US Escalation of the conflict in the Middle East (Iran)

Not all of these would have the same impact (US Markets) but all of them would make me reconsider holding cash.

Anonymous said...

the S&P 500 price ratio to 10yr average annual earnings adjusted for inflation (CPI) is currently ~24X. The 120 yr average is 16X. Secular Bears tend to finish their work around 8X. Earnings are still high and are trending downward. To argue stocks are cheap at these levels is to ignore history. The retirement of baby boomers in a bear market will pull funds out of stocks and move them to bonds. The additional tax revenue needed to support the litany of social welfare (medicare/social security) and interest on the debt allready borrowed will take money away from investors. For anyone who doubts that in this age we could see a 20yr bear, i say look at Japan. They have been in one for nearly 20years. We have the same desease (too much debt / real estate bubble) that they contracted, but here it was more pervasive. These are things that are sad, but true. I wish they weren't. We may rally the spoo back to new highs, but in two years we'll be lower than we are now.

Thai said...

What is your time frame?

I think sometimes you need to be completely out of certain asset classes, and IMHO-- today dollar denominated debt is not where you want to be right now . FWIW- purchase emerging market currency (GEMS?) right now.

Anyway, most of the 'optimistic' economic projections I have seen are based on models.

The most common issue I have with these models is most assume that government debt does not crowd out private sector investment. The models assume this because there has been no evidence for the last 20 years that government borrowing does crowd out private investment in any way.

The problem I have with this assumption is I don't beleive it and suspect it is a little like the proverbial frog in the pot of hot water. He'll jump to safety if immersed in boiling water rapidly, yet boil to death if placed in cold water warmed slowly.

The reality (in my view) is that government debt does crowd out private sector investment but that it does so in a kind of non-linear fashion similar to a chemical 'buffer' (if you remember your college chemistry).

Increasing government debt is not a problem until it is... 'Voila', one day everyone wakes up and realizes "Houston we have a problem".

And we are now entering a credit contraction cycle (at least I think we are). Whereas for years we had both expansionary monetary policy followed by a credit expansion, now we have credit contraction with 'a little more' monetary expansion.

The 'spark' which might light the entire forest fire could come from any of the following 'grey swans':
1. Next administration increases capital gains/income taxes
2. Next (or current) administartion massively increases government spending to 'jumpstart' an ailing economy
3. Japan decides to finally start paying down is 200% GDP public debt.
4. Another war/conflict escalation
5. many states and local jurisdictions increase borrowing to 'get thru' current 'tight patch', etc...
6. Emerging market financiers decide to increase their own spending to offset 'global slowdown' or bow to internal pressure to increase entitlement program spending, etc...

Add to this the fact the US consumer is heavily in debt/does not save and HELOCs are slowing as a means of furnishing their lavish lifestyles ALL during a potentially major credit crunch.

Remember, if you go back and look at the history of rallies in bear markets, you will see some of the largest rallies of all time occured in the middle of bears( the so called 'sucker's rallies).

It is really a matter of 'how much risk do you want to take'?

Thai said...

Sorry, I didn't answer you main question: "what would convince you that you are wrong?"

Another 25% fall in the dollar.

Anonymous said...

What would change me from bear to bull is a world in which workers receive a truly fair distribution of income while corporate profits remain extraordinarily high. The story of the post 1982 bull market begins with the collapse of labor unions under Reagan and the elimination of the wage umbrella unions provided to (free-riding) non-union workers. This lack of labor solidarity (1) has largely eliminated wage push inflation and (2) has allowed the gains of productivity to accrue disproportionately to corporate balance sheets, boosting stock prices. This pattern may continue, but in a democracy, voters can change this in a single Tuesday in November. It's hard for me to be a long term bull when the keys to the trasury are in the hands of people who have been getting screwed for a long tme now.

Anonymous said...

I'm looking for one of two indicators before I cover:

Stabilization of housing prices

Implosion of the derivatives market

Great blog by the way.

Earl the Pearl

bobo7874 said...

I'll get bullish on stocks when they look cheap on a trailing P/E basis, using normalized earnings. Or when someone provides a compelling reason why profit margins won't revert to mean. Until then, I'll hedge my long positions.

Steve said...

Just a suggestion -- sometimes it helps to get away from the Bloomberg and have a look around. You might start thinking that a turnaround has begun when the car lots aren't overflowing with inventory. When the distribution centers for clothing chains aren't full up with idled trailers and cabs. When the rest areas on the interstates aren't clogged with truckers waiting so they don't return home empty.

Robert said...

Bearish sentiment doesn't really imply shorting the market, I wouldn't think - does anyone use the strategy of outright holding a net short position on the indexes? That seems suicidal *even if* you had a crystal ball that the fundamentals would be awful, you couldn't predict the market well enough based on that to make a "just short the market" strategy work.

Most bears I know of have some long-term strategy that allows for down markets, and they stick to said long-term strategy. Usually sensible bears argue that it's important to be *prepared* for a big loss, but they are not *counting* on a big loss.

For example I think Nouriel Roubini is just keeping his index funds, relying on rebalancing and asset allocation and the passage of time.

Or Jeremy Grantham does some tactical allocation, not sure what all GMO does, but I don't think they just short the indexes.

Or John Hussman never goes net short, but just waits for normalized valuations to be very low before removing hedges. Otherwise he earns only the risk-free rate plus or minus any alpha from stock-picking, hedging away all market risk.

Even super-permabear David Tice doesn't outright short the market, he buys gold and tries to pick specific securities to short.

These are all long-term strategies - normalized valuations predict some amount of the market price over 7-10 years, right, so it makes some sense to pay attention to fundamentals if that's your timeframe.

If your timeframe is under a year, then maybe it's just crazy to be talking about fundamentals. It's not safe to assume short-term market movements will reflect them.

4shzl said...

My outlook will change from bearish to neutral if the average U.S citizen remains politically docile for next 6 months. A long cool summer of quiet resignation to an increasingly stringent economic dispensation would be especially helpful. It would be bullish to see evangelical pastors warning their congregations that they have an obligation in the eyes of God to pay their mortgages and credit card bills -- that walking away from a debt is morally no different than marrying someone of the same sex. It be bullish if there was a rebirth of a domestic servant class, and broad acceptance of the idea that it is best to accept one's station in life. It would be bullish folks out there in the heartland started agitating for the repeal of second amendment -- and began spontaneously disposing of their firearms en masse simply because they were unable to imagine a set circumstances under which they would have any use for them.

Yes, indeed, there are lots of possible developments that would cause to to re-think my bearish outlook.

fyego said...

home prices stabilizing and 600 billion of losses having been written off - that's when we will be 2/3rd's over and hopefully if the dollar hasn't completely collapsed due to the fed bailing out all the IB and brokerages - we will be on our way to a recovery

steve said...

many well thought out and defensed comments .. most impressive. funny enough that as a fixed income manager/blogger with readers interested in fixed income mkts, we're all sitting around here pontificating about future of stocks and what would have us less bearish and using THIS logic to back INto some sort of fixed income duration stance or one would hope?

things look very intriguing in fixed income mkts right now -- some markets and relationships feel 'broken' right now. being more inclined to be long duration or a buyer on dips in the Treasury mkt, I've been thinking most recently about current situation and compared to 2001, find some very strong correlations ... funds were about 2% going to 1.75% then on HOLD for the next year. 2yr Treasuries were about 2.25% on their way to 3.75% (NOT a typo) ... before the easing kicked in once again.

I've got the feeling that you as the writer of this blog and most of your readers probably remember where they were in June of 2003, much in the same way we all remember where we saw Star Wars (original) in the theaters and who we were with at the time.

Guess my point of ranting on here in response to your very direct question is that while i'm NEVER much a fan of buying into 'things being DIFFERENT this time' ... have a feeling the burden of proof isn't on me at this point, even in the face of this past weeks hiccup.

Structure of rates very much the same but the foundation and causation seems much more intricate at this point in time.

We did learn a few valuable lessons though, this week. When Bill Gross suggests the Treasury market is the most over valued asset class in the world, bar none - we should listen. Guess who sold upwards of 20bil 2s a few weeks ago when 2/10s was over 200bps? Between him and Bobby Doll/MLAM would be more than a good guess.

Putting some hay in the barn is far from making a statement and putting ON flatteners. Can we be in for some sort of 2001 tradeable yld rally? Donno. Certainly looks possible but I'm going to be very careful with shorts and keep tight stops. Those who don't learn from history are doomed to repeat it ...

As much as I dont like ending on a question, why again are we sitting here as a bunch of bond-geeks talking about stocks, again??

DAB said...

The problem right now is simple, and you summed it up exactly in your response to my last question. It doesn't take a genius to figure out that my BB bond question relates to the company for which I work. I have heard what you said, some companies can raise cash just fine (i.e. my company) right now and some can raise none (i.e. my company again, depending on which set of execs you listen to at any given time). Then I read in the FT that 5 trillion yen or something like that worth of Samurai's were issued last month and the US didn't really participate because there is ample capital here.

I am a skeptic by nature, and I still say you fixed income people complaining about illiquidity need to trade physical power in the Southern US to learn about real illiquidity. The problem you have, and everyone else has, right now is summed up by both the motivating question for this post and mine of earlier about BB corporates. There is no transparency right now. Markets now are probably not even weak-form efficient since it would take a fair leap of faith to say even current information is reflected in any asset prices. What the **** is the current information?

That said, I am struck by another paradox. This country has had historically low employment, particularly among prime working age males, and historically low unemployment. In the current economic climate, I believe now that the unemployment rate is absolutely key. What would a spike in the unemployment rate imply? The first possibility is that the job picture worsens markedly. The second, and possibly more worrying possibility, would be that the people that have been out of the labor force suddenly reenter it (to the extent that they would be counted, and a lot would upon serious reentry)). If that causes the unemployment rate to spike, that is much more drastic since those people would be out of whatever cushion they have been living on. A steady deterioration in the unemployment rate would also be very problematic as it would be caused both by worsening employment and worsening conditions for those out of the employment picture reentering.

The rate holding steady would probably mean that the economy is muddling along, which may be as good as we can hope for.

The other question is whether the government is supplying statistics that are not politically motivated. However, I am not too worried about that notion just yet since I think demographic patterns and voting patterns will reveal the true state of the people, and that will belie government statistical malfeasance.

Just to respond to one other point, I don't subscribe to the journal, so I don't know what BS they were peddling about NG. However, I can tell you that the way for the US to fix the natural gas, and energy situation in general, is dead obvious. Sheikh Yamani himself had an excellent interview last year, I think in Oilgram, warning OPEC of high oil prices. The biggest danger to the gulf states is not the preposterous notion of peak oil (or the wall on fossil fuels, or whatever the f***), or the unfortunate reality that the world will not take climate change seriously without fundamental price signals (sadly the US, China and India won't), but that the current price of oil is providing price signals. The signal is "Build Nuclear". The US can easily double nuclear electric output at the current brownfield sites. Further there are some greenfield sites possible, even now. That and plug-in hybrids, which are about five years away, fix the dependence on foreign oil. Nuclear expanded in the cold regions with heat pumps, while not as efficient as natural gas heat, may well be cheaper...

Robert Freeman said...

Why I’m bearish:

· No real income gains for median workers since 1973
· Doubling of personal debt-to-income ratio over the same period
· 40% of Americans have a net worth of zero
· $2T in home equity wiped out so far, headed for $6T if prices only return to historic price-to-income levels and don’t overshoot (Robert Shiller, Yale)
· Commercial real estate now following residential into the toilet
· 77 million baby boomers on the threshold of retirement needing to increase savings quickly and substantially
· 10X increase in national debt over past 30 years
· 100% of current federal budget deficit funded by foreign borrowing
· $65T in “unfunded liabilities” of federal government (Lawrence Kotlikoff, St. Louis Federal Reserve Bank)
· Grossly uncompetitive economy with trade deficits at 6% GDP and growing
· Most energy inefficient economy in the world in an era of soaring energy costs
· U.S. borrowing $2.5B every day from foreigners just to keep the lights on
· $200B in recorded bank system losses from housing crisis, headed to $1T (IMF)
· Consequent shrinkage in lending capacity on order of $5-10T
· Higher risk premia for what lending does occur to hedge counterparty risks
· S&P 500 has fallen 28% on average for 6 post-war recessions; currently down 16%
· Sober voices (Larry Summers (Democratic economist, fmr. Sec. of Treas.), Martin Feldstein (Republican economist, head, National Bureau Economic Research)) saying we’re facing “the worst recession since the Great Depression.”
· Federal deficits soar to $800B in 2009 requiring huge borrowing from foreigners
· Fed monetizing bank system losses to reliquify à inflation
· Congress monetizing underwater mortgage losses à inflation
· Bernanke saying (Nov. 2002 speech) printing money is the ultimate recovery plan from deflation
· Foreigners eschew lending to U.S. for fear of being paid back in debauched currency
· Interest rates soar

In other words, an economy that cannot grow without ever-increasing debt, whose debt carrying capacity is saturated, whose debt servicing systems are frozen, and whose recourse is to print money, leading to a shut off of lending.

What would cause me to reverse this position?

· Substantial improvement in real incomes for median workers
· Rescission of Bush’s upper-income tax cuts permitting pay-down of public debts
· Substantial re-direction of govt. spending from military to productivity-inducing investments in infrastructure (growth), export promotion (balance of payments)
· Substantial improvements in productivity of private economy

Ultimately, there must be some correspondence between the underlying economy and the stock market for it is return on investments that determine equity values. That correspondence has been interrupted by low interest rates and borrowing against inflating assets allowing excessive demand, by the government and individuals, that is unsustainable. Ultimately, gravity wins.

Read my article. At Google, enter, “Bush Budget Deficits”. It’s the #1 piece. Or, “Bush’s Economic Policies”. Also the #1 piece. Notice the dates. See if the predictions haven’t come true.

Anonymous said...

The defining moment in American history was when Reagan fired the air traffic controllers. Not the Civil War, not Custer's Last Stand, not anything else but that.

The United States achieved economic prominence through slavery. Slavery is written into the Constitution: the three fifths clause, the electoral college.

Reagan's firing the air traffic controllers said, "Guess what? Slavery is what made this country great and what will make it great. Slavery within our borders. Slavery in China. Slavery. Get used to it."

Nothing will make me bullish on America.

eh said...

Short and sweet:

...prosperity built on overpriced homes is illusory...a people cannot become rich by selling ever more expensive houses to one another.

This has to correct. Meaning house prices and household debt/income ratios must return to something close to their historic norms or trend lines. The US trade gap has to narrow significantly, i.e. the US has to begin creating and exporting more true wealth, and move away from a FIRE based economy.

TallIndian said...

What would cause be to become bullish:

1)The FED becomes some sanguine about the economy that it allows poorly run banks and dealers to fail regardless of their size

2) The US government stops spending my grandchildrens' (yet to be born) money today

Accrued Interest said...

Thanks for all the comments so far. I note that several of you have bearish views that would either have...

1) Pre-dated the current crisis by a decade or so


2) Probably have no near-term solution at all.

Sanni said...

When the Dow to Gold ratio hits around two, you know you're at the bottom for financial assets vs. hard assets. From the 1920s until now, we've hit that ratio twice. We're accelerating towards that number.

Hard assets are king now. Paper will rise again some day, but not until it's utterly repudiated like it was three decades ago.

Danny said...


Your two observations point to why bears are so bearish.

a) These problems have been building for years, most with the encouragement of government policy and irresponsible leadership of the Federal Reserve

b) Since these problems are so severe and have been building up for so long, there are not any short term solutions.

It is going to take a lot of very good policy (I am a libertarian so I don't have my hopes up) just to make this downturn not become very severe. But good politics does not equal good economics/policy. There is no such thing as a free lunch, and the bill is coming due on a lot of free lunches.

David Pearson said...

Good question. I've been short hb's then subprime then insurers -- almost three years of bearishness. What would make me go long?

The easy answer is market-clearing house prices. We're far from that based on Debt to Income.

Then there's a series of signals that the "adjustment" is complete. First is a return to a mid-nineties savings rate -- 6% should do it. Second, real Treasury yields of over 3% (such as existed in the early eighties). Third, a current account surplus.

Of course people have been predicting the above for years. The difference is that the adjustment is now "in process". Do you want to be long ahead of its completion? Not me.

A good bullish argument spells out how we avoid adjustment, or how stocks do well as the savings rate and real yields climb. I haven't seen or heard it. Perhaps you could give it a shot?

BTW, I'm not nearly as short as I used to be: like Paulson I think the easy money has been made.

David Pearson said...

BTW, AI, I think the experience of Japan is instructive. You could have beat your head against the wall chasing every 30% bear market rally from 1990 to today. Or, you could have simply ignored Japan completely and saved yourself a lot of time and effort. How many money managers outperformed the Nikkei enough to be famous? There's just not that many exceptional market timers around. I wonder why?

I'm no longer a pro, so I have the advantage of being able to "ignore" the U.S. for years and years. I feel sorry for the pro's.

Neilster said...

If Kudlow went on TV and finally said "the economy is toast, Reaganomics doesn't work - sell stocks!!". The ultimate contrarian indicator. Ha ha ha.

A rapid fall in housing prices and the associated corrections in over-priced securities might persuade me to leave the cave.

Until that point, I am using the Japan experience as my playbook and we all know where Japanese bond yields are today... not that I haven't enjoyed gains by investing in the Nikkei 225, but I don't actually BELIEVE that it is going back to 40,000. LOL. The same will happen here. Sideways market for a decade with enjoyable roller-coaster rides.

We need price discovery. Houses are worth what they were worth in 1990, i.e. 50% of today's prices in many areas. Of course the US cannot face reality and gubmint will do anything to save their beloved home owners and banks. (Can you tell I am an angry renter?). We will see a slow bleed in assets and the dollar.

Of course, we will also see the same declining housing market events play out in UK and Spain as well. I am actually worried about the stability of the Euro and monetary union as France and Germany control the ECB and will not cut rates to bail out Spain.

I would seriously change my mind about the future if Nouriel Roubini starts to be wrong about something important. So far NR's UltraBear predictions have been spot on. No-one in the cave was shocked when BSC went down...

When I look at the landscape out there I see a lot of signs of impending deflation and I would rather be on the same team as Ritholtz, Roubini and Mish who are incredibly smart and analytical than line up with Kudlow and a bunch of clowns.

I worry about commodity inflation - this should be reversing soon according to many projections and metrics. If we don't see this moderate soon we may see a series of consequences none of us are prepared for. Does anyone think the world remains stable at $200 oil? But I doubt that happens.


Deborah said...

I suppose when I feel confident my money is safe in a bank.

The level of debt has to be reasonable and responsible.

Government spending has to be under control and the there needs to be a surplus going to debt.

A sustainable plan for the aging population needs to be found.

Rob Dawg said...

1. Casey Serin and Angelo Mozillo sharing a cell. There's just no way to sustainably move the economy forward when there is disincentive to act legally and ethically.

2. Unbiased data. Seasonal adjustments, discouraged workers not counted, Level 3, excluding food and energy, please.

3. MSM accountability.

Gimme those three small things and I see a bright future. Most of our problems revolve around the fact that we all know those three small things are the right things to do and that we are promised them and we are not getting what was promised.

Anonymous said...

I have been short financials, hong-kong and the overall market on-and-off over the last year, but have been essentially neutral for the whole year. I look at two indicators that tell me the worst is in front of us: CDX-IG and TED spread. Both have had head-fakes recently, but have far from normal since last August. When these normalize I know the bottom has past. This method won't pick the bottom, but will clearly signal when it is safe to swim again.

Anonymous said...

* When poorly managed companies fail without bailouts.
* When the Government stops "slapping the market" when its not functioning properly.
* When the Fed is transparent enough to show the marketplace what it is taking onto it's book.
* When Joe Six Pack gets a raise rather than a pink slip.
* When the dollar stabilizes and start moving higher.
* When food is more important than ethanol (maybe).

Dave Wright said...


You asked for feedback on the bearish case and got a number of well reasoned arguments (and a few off the wall ones as well), but then you pretty much dismissed them with your "old story" / "no solution" post. I think Danny explained your points quite well.

I'd appreciate a more fully articulated response at some point.

As I mentioned in an e-mail to you, while not an ultra-bear I do think we are headed for slow growth for the next few years in the US. I wish it were not so, and that I could expect an 8-12% return in US equities, but common sense has me parked in Treasury Money Funds hating the 2% yield.

I agree with most of what has been posted here already and would paraphrase it as follows. The US economy has been relying on too much leverage for too long and that cycle has begun to unwind. The unwinding of the excessive leverage will take a while and be painful.

The excessive leverage is everywhere (at all levels of the system):

-US Govt financing its operations and debt mgmt by borrowing heavily from overseas.

-IBs securitizing mortgage products into ABSs with as much as 30:1 leverage. The resultant ROEs grossly exaggerated earnings in the financial sector for the last 5 years. A return to traditional ROEs in this sector WILL happen - most firms have already fired their Risk Mgmt Chieftains and/or Congress will pass some muddled legislation which will probably do more harm than good, but certainly require a return to more traditional standards of risk mgmt.

-American consumers relying on rising housing prices and resultant home equity to subsidize their spending/lifestyle.

It was a Ponzi scheme based on a steady and increasing stream of foreign investment, financial engineering and ever increasing housing prices. I'd say all three legs of that stool are gone, or will be gone soon.

I'll be bullish when the excessive leverage is worked out of the system at all levels.

By the way, the irrational exuberance we saw this week was based on a few corporations with good international exposure reaping the windfall of the weak dollar. When a Coca-Cola is selling for $3 US in much of the world, it's not hard to meet your numbers. But our worthless currency isn't going to reflate Wall St earnings or the housing market.

I'd love to hear what other folks with similar outlooks are doing with thier portfolios.

Thai said...

Short China.

And Robert, I do know people who are inverse some market indexes (though I don't know anyone inverse VTI right now)

Anonymous said...

The Sun is about 4.5 billion years old. It has used up about half of its fuel. In about 5 billion years from now, its gonna blow up, taking the entire solar system with it...

So yes, I'm extremely bearish in the super long-term! I think everything is gonna go to zero, if not negative.

Eckalectic said...

Like Anon 11:24, I am short the Sun long term...but, in the short term (i.e. 100 years or so), I want to see this before I turn bullish:

the S&P 500 100-day moving average rise above the 250-day moving average.

Eckalectic said...

Oh, I forgot..the secular bear market will end when CNBC is taken off the air and replaced with a cooking show (or a survivalist show).

DAB said...

I will point out in response to your ten year or longer point that you had asked those who look for problems to last longer than two years...

At any rate, the problem right now is lack of information visibility. The deeper problem as I see it is employment (or, the possibly related question of what exactly drives an economy not driven by agriculture or industrial output? What are we actually doing? If the answer is nothing, the whole thing will come crashing down...).

The fix in the intermediate term is to get an administration to pursue sane fiscal policy (starting with the mantra "all hail king dollar") and a reduction in the national debt. Lower the national debt and household debt starts to matter a lot less. For one thing, I think that the most useful application of the tax rebates is actually that it should transfer a fair bit of high price private debt to lower price government debt...

Harleydog said...

The mother of all bubbles, housing is over and done with in 6 months, with equities less than 20% for all time highs. Sorry, I don't buy it.

No one learned a thing from the tech debacle. The Nikkei in 1990, etc, etc.

When all have sworn off stocks for good and give up calling a bottom is when you will finally have one. Gold and crude in 1999/2000 is a perfect example.

Continued success to you all.


eh said...

I'd love to hear what other folks with similar outlooks are doing with thier portfolios.

Selectively trading, both long and short. But mostly rolling 1 month CDs (each less than $100k so they are insured) via a national marketplace provided by my broker.

eh said...

One more reason:

The Alt-A and Option ARM mess is just beginning.

And may end up being significantly worse/bigger than subprime.

Thai said...

eh, have you thought of currency GEMS?

Scott Finch said...

i read some good comments. there was a post by robert freeman that included some very important longer-term trends and issues. i believe he also mentioned real vs. nominal returns. equity markets indices may increase on a nominal basis along with everything else via inflationary pressures, but on a real basis, discounted by ongoing inflationary pressures, equity markets may provide the equity holder with a negative real return.

Accrued Interest said...

I didn't mean to be dismissive of anyone. I'm sorry if it came off that way. I will say I don't find certain arguments very compelling if the problem described has been a problem for many years. For example, say someone said to me that the markets are going to tank because we're off the gold standard. The question is, why is that going to create a problem now, but didn't create a problem 20 years ago?

I think the best case for a 2-3 year bearish view is that the Fed is forced to hike rates aggressively to stamp out inflation later in 2008, thus creating a double recession, starting in 2009 or 2010. We get a rally off the "liquidity crisis" bottom, but we don't form a cyclical bull market until after the second recession.

Accrued Interest said...

Also, I was curious what might change bearish minds. Some of you have posted things that aren't realisitically going to happen, which is the same as saying you won't change your mind. You are going to be bearish period.

That's a view I just don't subscribe to. I believe in a dynamic economy, which figures out ways to get through bad times. As I just said, I think there is a pretty good case for a double recession, which would be bad for stocks. But thinking more big picture, about the entire economy, a double recession is something we get through in a couple years and then start moving forward.

Also for what its worth, a very small percentage of my personal net worth is in stocks.

Dave Wright said...


On the issue of longevity of conditions, I think it's a matter or interpetation. You are looking at them as "pre-existing" and therefore irrelevant, many (myself included) are looking at them as longterm contributing factors to the current situation that need to be unwound.

As for "why now?", you could as easily ask "why did it take so long?". Just a matter of how you look at it.

I agree with you that the Fed will likely need to tighten aggresively towards the end of this year and into 2009. I'm very interested to see their release from the April FOMC meeting. I think we'll see language to the effect that they are done lowering, if they go another 25bp down.

Even dynamic economies have periods like the 70s. We certainly got through it, but not without some pain.

I believe in the business cycle, and that we're entering the down side for a while. Will the economy recover? Most definitely. But when and in what fashion? And more importantly, what do you do during the down cycle?

Dave M. said...

I say the US stock market goes sideways for many years. As a former momentum growth stock trader, I have seen many high flyers start to go sideways (instead of down) on the chart while earnings catch up to the inflated stock price.

Our system of capitalism is too dynamic to be a long term bear. IMO, sideways is a more likely scenario. Many rich people are type A personalities and cannot sit still and collect a coupon. They will instead create new businesses and new jobs, if govt. regulations are not onerous.

My portfolio consists of safe, municipal G.O. bonds, ( for the sleep well at night part) and equity, covered call, (aka buy-write funds) closed end funds selling at a discount (for the sideways part of my thesis). Some of these funds are global as well, since I think that global growth will be better than the US.

Accrued Interest said...

Its totally fair to argue that pre-existing conditions have finally caught up with us. Its my view that the burden of proof is on those who try to make that arguement. I wouldn't say its "irrelevant."

I think there is a better case, and maybe this is where Dave is going, is that some of the pre-existing conditions will result in a more tepid recovery than some past cycles. I think consumer debt is one of these areas. We'll probably see a longer-term move toward a higher savings rate, which means that as incomes recover there will be less spending than you'd otherwise expect.

Anonymous said...

I thought it was entirely appropriate for you to be dismissive. 99% of the comments are drivel.

Anonymous said...

evryone i know bought a house they cant afford. everyone i know has rolled their last car payment into the latest car payment. i know unemployed people that bought houses. i know unemployed people that refi'd and lived off that for years.

no one has any savings. most people i have worked with have been downgraded in their job meaning they make 40% less salary today than 7 years ago.

most of the people i know cant pay all their bills each month...they are always late on some bills.

all my friends or people i work with make/made $100k a year but dont today.

the friends from europe that are between the ages of 30-50 must live with their parents in europe. they cant afford a car. they cant afford children.

my friens in the usa cant afford their children...their parents oay for the grandchildrens education and medical expenses.

no one has health insurance.

how will companies in the usa make/grow profits when 70% of their income comes from consumers and the poor is still poor and the middle class is beyond foreclosure..........when someone can explain where the new growth will come from i will switch back to a bull.

Kicker said...

Our system of capitalism is too dynamic to be a long term bear. IMO, sideways is a more likely scenario. Many rich people are type A personalities and cannot sit still and collect a coupon. They will instead create new businesses and new jobs, if govt. regulations are not onerous.

Create new businesses selling what to who?

Demand takes both a desire and the ability to pay.

The US middle class still has plenty of desire but they are lacking in the ability to pay department.

And there is perception that even the US Government is edging up against it's ability to pay. Push much more and we'd trigger a run on the dollar.

Central bank reserves represent plenty of ability to pay and their citizens have plenty of demand but the transmission mechanism is a stronger currency.

Which developing countries (other than the US) is willing to see it's manufacturing base decimated to support domestic consumption?

The rich have done very well over the last couple of decades and have plenty of ability to pay but there are only so many iPods and Cars that .005% of the world's population can consume.

Where are tomorrow's consumers going to come from?

Josh Kalish said...

I love the blog.

I think that we were priced to perfection, expecting low inflation and sustained high earnings multiples. I think we'll need to see a stronger sell off and lower p/e's. Probably in the 8's or so as in other bottoms. And then also some end in sight for credit.

Dave M. said...

kicker said.."Create new businesses selling what to who?"

Selling products and services to the global community, especially the newly emergent middle class in the BRIC countries.

Dave Wright said...

Dave M.

I agree that future consumption growth will be fastest in the developing economies as their middle classes grow. However, I'm not sure that I see a case for the US to be a top provider of goods and services to those new consumers.

Outside of highly specialized products, we cannot compete in the manufacturing sector any longer. I purchase VERY few items that are made in the good ole US of A.

We have definitely been the leading global supplier for financial and IT services.

We've already begun the first wave of outsourcing IT services (customer service/support and software development). And the continued call for more H1B visas by the tech CEOs tells me that we are continuing to train a bunch of foreign engineers here in the US. A lot of them will return to their home countries to take advantage of the growth/entrepeneur opportunities. I think the leading edge of tech innovation will remain in the US for the next 20 years at least, but I see a lot more of that sector going overseas. (I worked for Cisco for 10 years as an engineer).

I don't have much personal experience with the financial services sector, but I do wonder if the current crisis won't lead to more international suspicion of Wall St. financial engineering. I guess on the other hand we're supposed to have the best oversight (not that that helped a whole lot either). Any comments from you folks who work in this area?

I would say we're in a position where we need to be the leaders of the next big wave in order to remain the leading economy in the world. Let's hope the big breakthroughs in genetics, nanotechnology or alternative energy happen here and not in China or a former Soviet state.

As a father, I want to think about what careers would support my kids and their families 30 years from now.

I said in a previous post that I believe in the business cycle. I also believe that history does tend to repeat itself and that like every other historical great power (Rome, British Empire, etc...) we will reach a point when internal stagnancy and external pressures will relegate us to a modern day Italy or Great Britain.
At today's pace of change I think the transformation will happen a lot sooner than in the past.

Thai said...

Dave W said... "Outside of highly specialized products, we cannot compete in the manufacturing sector any longer"

I don't want to argue, however this statement is not true. The US is the largest manufacturing center in the world--both in absolute $ and as a % of world GDP. In fact we are VERY close to manufacturing being at an all time historical high). American manufacturing is also by far and away one of the most profitable sectors of the American economy.

There are just NO JOBS in manufacturing since productivity improvements in manufacturing have been so robust over the years that workers have been replaced with robots, automation, etc...

America's manufactured good are very much in demand in the rest of the world. America has such a large economy, exports are just a relatively small % of our economy compared with countries like Germany, etc...

Google the accuracy of this yourself.


Dave Wright said...


Thanks for the response. I need to be careful with my generalizations.

My intent was to say that US manufacturing will not be a top supplier of the consumer products that the next wave of global consumers will need.

In support look at the Commerce Dept. data from February

One excerpt...

"The U.S. deficit in manufactured goods improved from $690 billion in 2006 to $679 billion in 2007, a decline of 1.6%. Manufactured imports are responsible for the bulk of the U.S. trade deficit. The manufacturing sector lost 3.3 million jobs between January 2001 and December 2007, including 200,000 jobs lost in 2007 alone. More than 32,000 U.S. manufacturing establishments closed between 1998 and 2005."

also before we get too excited that 2007 was slightly better than 2006...

"Improvement in the U.S. trade deficit in 2007 was due to the combined effects of appreciation of the Euro and other currencies over the past five years, and the initial effects of a U.S. slowdown."

If American consumers are sucking this stuff in from overseas, why would we think we could become suppliers to the rest of the world?

Dave Wright said...

sorry I was trying to post the URL. the end should be:

How do you make a link in this editor?

Thai said...

I think I see you logic but it has a flaw in it... remember, the trade deficit (of which manufacturing is a part) is a result of American's borrowing from abroad. If we were not borrowing to finance our growth, the deficit would go away.

Myr said...

All my stocks are hedged with S+P futures so I have no net exposure.

Things that would cause me to go long.

(1) S+P closes at all time high.
(2) S+P closes down 35% from all time high.
(3) I'll go long no later Jan 1, 2010
(4) Nominal house(Case Shiller Index) prices fall 25% from peak.

I fully expect the credit crisis to spread to ALL parts of the world. Contagion often takes quite a long time to spread...something like 1.5 - 2 yrs. I'm using Aug '07 as the start.

Dave Wright said...


I do not believe that your last assertion is correct. But I'm not an economist (I only play one on TV :-) ).

The trade deficit (tracked by the Commerce Dept.) tracks the imports and exports of goods and services.

The current account deficit tracks the net flows of trade and other investment into and out of the country.

Hence foreign investment in the US would be captured in the current account deficit, not the trade deficit.

I would also content that the growth in the current account deficit has as much, or more, to do with financing our public debt as foreign investment in US growth.

Here's an interesting article on the state of the current account situation...

Thai said...

Dave, thanks!

Would you help me with my logic which has always been as follows...

Americans want DVD players and healthare, etc... Only Americans can't afford both so they buy one out of their 'own' pocket and have the governement borrow for the other (comes up as more government debt).

But Americans would not buy DVD players if they ALSO had to buy healthcare from their 'own' pocket (no plug on private healthcare intended)-- fortunately American's don't have to 'sacrifice' right no as foreigners have been more than kind enough to lend them the extra money they need (awfully nice of them!)

So yes, I understand 'trade deficits' and 'account deficits' are different, AND at the same time they are inseperably interrelated, e.g. the distinction can be a little like Clinton's: "it all depends on what the meaning of 'is' is".

Do you think I am looking at the issue wrong?

Dave M. said...

I would be careful about using the trade deficit to analyze anything. It includes oil imports, which I think compromises it's usefulness.

Dave Wright said...

Dave M.,

I agree that the price of oil imports makes the aggregate trade deficit number harder to analyze. That's why I highlighted the point in the report that Manufactured imports are responsible for the bulk of the U.S. trade deficit. They separate Manufactured Goods from Commodities, so the statement above does not apply to petroleum.

You'll also notice in the report that the country where our trade imbalance is continuing to careen out of control is with China (10.2% growth from 2006 to 2007). Those are consumer product imports, not petroleum.

All of this was in support of my argument that I don't believe that the US will be a primary supplier of consumer products to all those new consumers around the globe.

Dave Wright said...


I'm sorry, but I'm not quite clear on what you are asserting.

I agree that Govt. spending, tax cuts, and willingness to borrow has certainly enabled a lot of consumption in the US. How does that relate to our discussion?

I may be reading your post wrong.

Thai said...

Dave, my view of the conversation... :-)

I was originally responding to your point that American manufacturing is not in bad shape at all (just that there are not many jobs in manufacturing anymore).

You then responded by saying "My intent was to say that US manufacturing will not be a top supplier of the consumer products that the next wave of global consumers will need.

You supported your point with information on trade deficits (as opposed to absolute trade itself), which implies to you manufacturing will not be 'pulling the American wagon' going forward.

I pointed out that deficits are not a very compelling way of looking at the issue (at which point you correctly reminded my of the difference between account deficits and trade deficits) since they are an account of how people spend money, which is related to how much they think they have, which is related to how much they are given (loaned, etc...)

To me, everything in economics is linked to everything else-- so one consumer's decision (or a group of consumers like a whole country) cannot have one spending pattern examined in isolation meaningfully since it is always impacted by other spending patterns.

But the total value of US exports is tremendous; if I am not mistaken, we are the third largest exporter in the world.

Richard Matthews said...

We are facing undeniable evidence of recovery. Although some of my evidence comes from an unlikely source. This spring China provided some early evidence of economic recovery. More recently, China announced that it is on track to see 8 percent growth in 2009. When coupled with positive US housing and manufacturing data, we have reason to be optimistic.

Please see The Green Market