Deadman's picture

    I'm back ... and the Bear will be joining me shortly

    OK, I know I've been a bad, bad, bad dagblogger for quite some time, but seeing as I'm getting married in less than four weeks, I'm giving myself a pass. (Today's key word: ELOPE!!!)

    I'll be back more regularly by the end of the year, but for now, I just wanted to give you a ballsy prediction:

    The market is nearing a significant short-term top. Nailing the exact timing is always difficult, but I expect we'll be significantly lower by the end of the year, and certainly by the end of the first quarter of next year, I expect we will see market averages at least 15-20% lower than we have now.

    Way back in March, on the day after the stock market bottomed, I wrote a piece predicting the rally could have legs. Now before I go patting myself on the back too hard, I must admit I've been surprised by how long the rally has lasted and how ferocious it's been. But I suppose that's the kind of combustible response you get when you combine a recovery from a near-death economic experience with trillions of dollars in government stimulus and bailouts and near-zero interest rates.

    So why do I now believe the party is about to end? Well, for several reasons. First, my prediction is obviously influenced by my overall negative view of our economy. Employment is still ugly, consumer debt levels are still too high, the dollar is getting perilously weak while commodities like oil and gold are rising on an almost-daily basis. To stimulate the economy, we've pursued short-term measures like foreclosure relief, tax credits, and Cash for Clunkers, which have done little to resolve the structural imbalances in this country. The only thing we've really accomplished is burdening future generations of Americans with crushing levels of national debt. We may in fact see decent GDP growth for the next few quarters but that's only because the comparisons will be so weak.

    The overall bullish reaction to this better-than-expected - but still rather grim - drumbeat of news we're getting is another reason I'm worried the good times are about to end. Take today for instance. Retail sales rose 0.1 percent for the month of September, according to a survey.

    This is the first sequential rise in sales in over a year, and apparently a cause for massive celebration according to the chief economist of the group that led the survey. "Let the retail recovery begin," said Michael P. Niemira of the clearly unbiased International Council of Shopping Centers. "This is the start of a better performance and better fundamentals."

    Hogwash. With unofficial unemployment rates still in the teens and rising, I guarantee you this holiday season - and many holiday seasons to come - will be a big disappointment.

    Speaking of unemployment, by the way, the market is also cheering the fact that the Labor Department reported that new claims for jobless benefits fell to 521,000 last week, the lowest level since January and, yes, 'better-than-expected.' Meanwhile, this still means that more than a half-million Americans lost their jobs, above the rate where overall unemployment would start falling.

    i wouldn't say the pundits and experts are universally bullish - which would be the ultimate contrarian indicator - as I do still see some skepticism out there, but I believe investor complacency is rising to dangerous levels while most of them try desperately to chase the market.

    The final reason for my growing bearishness is more technical, but basically comes down to the fact that many of the stocks I look at are now approaching their 2008 highs. This is a little inside baseball, but basically it's often the case that old highs for a stock end up being significant resistance points as investors who bought at those levels look to get out close to even. You see these 'double tops' often when looking at stock charts.

    Since I believe that very little has been done to fix the economy structurally, I feel that 2008 levels will serve as a high watermark for the market for years to come.

    Now don't get me wrong. We've done a few good things to justify these higher prices. Inventories have been drastically reduced. Many companies have cut costs and yet kept efficiency and productivity levels high. The emerging markets like China and Brazil have shown a great deal of resiliency. And certainly the prospect for a total economic collapse - which seemed almost inevitable at the height of the panic - now appears very remote, at least for the foreseeable future.

    But mostly what we've done is comparable to giving a sick, lethargic, malnourished patient a shitload of sugar and then celebrating the fact he seems more energetic. The sugar high crash is coming and it won't be pretty.



    Just a minor point of clarification: 72,000 people stopped claiming benefits, so the net number of unemployed* people is 449,000. Don't you feel better now?

    * Well, the word unemployed is used here to also exclude those who have just stopped looking for jobs, or are underemployed, etc.

    How I've missed your dyspeptic forecasts. Seriously, good to have some classic Deadman cold-hard-truth, and I can't dispute your well-reasoned analysis.

    And for an opposing viewpoint from a well-respected, normally bearish analyst, check out this article. It's pretty well-reasoned, but I don't agree with several of his points.


    For as much as rolling the bones is worth, I have little reason to disagree with your general outlook.  However, there are a couple of points that you gloss over here which deserve more attention:

    But I suppose that's the kind of combustible response you get when you combine a recovery from a near-death economic experience with trillions of dollars in government stimulus and bailouts and near-zero interest rates.

    That's a helluva scorecard, Muerte, but you're lumping together fiscal policy, monetary policy and handouts to the banks.  These things are not equal and they all have different effects.  The bank bailouts served to shore up the balance sheets of the TBTF banks, which lead to rosy earnings reports that helped spark the rally.  Monetary policy is at the zero lower-bound, so that doesn't really figure in very heavily given the liquidity trap.  Finally, the expansive fiscal policy was never big enough to plug up the hole left by the recession.  It was known to be too small to begin with, but "compromise" in Washington is a different game than straight analysis.  Which brings me to:

    The emerging markets like China and Brazil have shown a great deal of resiliency.

    I don't know about Brazil off the top of my head, but China's resiliency has much to do with their very aggressive fiscal stimulus.  Inflation Chicken Littles take note.  Finally:

    Employment is still ugly, consumer debt levels are still too high, the dollar is getting perilously weak while commodities like oil and gold are rising on an almost-daily basis.

    Now we've got some real economy stuff lumped in here with some hand-wringing and some I-don't-quite-know-what.  Employment is bad and showing no signs of getting better.  Consumer debt levels are high, but have been dropping like a hot rock for the past year and aren't anything to be historically alarmed about.

    Oil and gold are both commodities, but that's pretty much where the similarities end.  Gold has limited industrial applications and pretty much exists in a relatively static supply at this point.  Oil makes the world go 'round and supplies are dwindling.  Perhaps you have a deeper analysis as to why it matters that both of these things are going up, but I'm not sure what it is.

    Now the dollar: When is the dollar "perilously weak"?  What does that mean?  I hate to say it, but this sort of hand-wringing puts you in the company of economic analysts like Sarah Palin.  As Andrew Leonard notes in the article, a strong dollar means weak exports.  Now, you can't really decry the sorry state of employment in America and then turn around and tell me that you're worried about a weak dollar.  That just doesn't make sense.  The whole point of a floating currency and the comensurate variable interest rates is that the exchange rate can adjust according to trade.

    This is part and parcel with the constant nonsense I read about China "manipulating" its currency.  China buys U.S. bills to keep the yuan low against the dollar because they don't have a domestic consumer market that can fill their needs.  So, they need to be able to sell in ours, which means they need for their exports to be cheap for American consumers.  If we want to increase net exports, which will in turn increase GDP (and employment in the process), then the dollar has to fall.  With nary an indication of inflation on the horizon, exactly why should we be scaring people about a "weak dollar"?

    Again, I have little reason to disagree with your conclusion, but the points above lead me to wonder whether you're getting the right answer for the right reasons.

    As for predicting a point of inflection in the market, I'll be interested to see if this occurs.  Just thinking about it a little bit leaves me to wonder whether it would be possible look at trading volumes and determine what the maximum impact of these "late sellers" could be.  If trading volumes were high enough, say, a year ago, that would lead me to wonder whether there were enough of these folks left waiting to pull the trigger to make a difference.  Even then, you still wouldn't know whether they'd all jump at once.  Maybe it really is too much inside baseball.  Anyhow, I'll be watching.  Glad to see you back.

    I know this was forever ago, but this was the last post I wrote, and for some reason I never saw your reply, DF, which was thoughtful and merited at least a response (as silence implies concession!) ((btw, i certainly didnt nail the timing of the top as the market is basically flat since I wrote this, but im sticking to my guns, big move down coming - within the next 3-6 mos, which will not be a pause in a new bull market but a resumption of a generational bear))

    as to your thoughts, DF, i agree i was throwing a stew of concerns into the pot, all of which I think are valid, some more so than others, and certainly not all as interrelated as I may have suggested by context and/or word placement.

    in terms of what caused the rally as in March, I think it was an amalgamation of all those things: a market that had been beset by panic and was discounting some sense of Armageddon - hence, mere relief that we avoided that scenario (at least in the near-term) had probably the most to do with the ferocity of the rally as valuations were very cheap and money was hiding scared just waiting to embrace some risk again. Continued easy monetary policy - whether in the form of near-zero interest rates or buyouts of collateralized mortgages - probably is second to credit (blame). im not quite sure what you meant by liquidity trap. And while fiscal policy would not have been enough to move the economic needle on its own, it certainly helped stoke the flames, esp. in certain pockets of the market like homes and autos where policy has most certainly driven activity which wouldnt have happened otherwise.

    you mention the emerging markets being helped by their more aggressive fiscal approach to the slowdown, esp. China. Well, guess what, they can afford it. they are a huge net exporter and a nation of savers. as someone whos been to china a couple of times, i can assure you bubbles are building there which will eventually come crashing down but thats more of a question of pockets of poorly deployed capital then too much.

    in terms of consumer debt levels, yes they've been coming down - partly because of our own actions, partly (largely?) because of banks unwillingness to lend, but they are still at worrisome levels, esp. considering how far their equity (house and stock prices) has fallen and given the high levels of unemployment. and when you combine consumer debt with our government debt, it's still a scary picture.

    oil and gold dont have much in common, except that lately they rise when the dollar falls, plain and simple. the correlation isn't perfect, but oil is still priced in dollars so thats a rather simple equation, while gold obviously has a use other than the industrial applications to which you refer (meaning, of course, as a store of value and a hedge against, why yes, a falling dollar). nary an indication of inflation on the horizon?? really??

    which brings me to the dollar. you just can't dismiss an argument about the dangers of a falling dollar by declaring that sarah palin is worried about it too. thats poor form. yes, a falling dollar helps our exports (well, theoretically, at least, but its worth noting our trade deficit rose 18 percent in September to the highest level since January), but my concerns are all about the slope of the fall. If you can keep it slow and steady, then I'm all for it. Savers like me will be crushed, but it will ease the burden of our national debt while presumably helping our economy.

    But my fear is a precipitously falling dollar, which frankly - given the structural imbalances that still exist in this country - would be justified and has all sorts of nasty implications.

    I really think people overthink this nonsense. Me, i just like referring to nursery rhymes for my economic predictions. We had an enormous, once-in-a-lifetime credit bubble burst (alongside a concomitant housing bubble) - and all of the king's horsemen won't be able to put Humpty Dumpty back together again.

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