Even the Bears Are Bullish Now

With Jeremy Grantham's valuation models suggesting that the average large cap and the average small cap US stock will underperform an A-rated 7-year non-callable tax-exempt bond, it strikes yours truly as the sign of a top or at least topping process when even the bears are bullish.  Here is a compendium:

Carter Worth of Oppenheimer is insistent that a correction is due-- but he expects it's onward and upward after that.  If so, how can he be sure that a correction is coming, and why should a client take the risk of missing the up-move just to catch what may be as little as a brief 6% decline that could be reversed in less than one bullish week?  (LINK)

More pertinent, Zero Hedge quotes Bob Janjuah- a well-known bear- as predicting new highs-- then the usual call for a crash.  But-- new highs!  So- stay in is the message, or at least buy the dip.  (LINK)

Perhaps most dramatic is the turnaround from the economic bears ECRI.  They have been talking recession since September 2011.  In their public commentary introducing their recession call back then, they referenced a dire state of affairs.  Something to the effect that if you thought the Great Recession was bad, just wait until you see how bad things will get soon.  Now they have changed their tune.  They allege that the US is still in a recession, but it's mild, and they point out that in 1945 and 1980, recessions were associated with bull markets in stocks.  But what the emphasize is the other modern recession with a bull, not bear stock market- 1927.  That's the one they highlight.  The message is clear:  buy stocks, a massive bull market may await (LINK).

The well-known bear Gary Shilling, who I believe was predicting a recession both in 2011 and definitely was predicting one for 2012, is out with a series of articles in BBG predicting deflation-- but now it's the "good" deflation.  It's the sunniest article, of many, I've ever seen out of him (LINK).  It's called The Benefits of Chronic Deflation.  But it's good deflation!

Richard Russell, who 1-3 years ago was calling our times a depression, worrying about his grandchildren, etc., and who a year-and-a-half ago was espying "gold fever" as gold got to its 2011 peak, is now-- what else-- bullish.  Why is he bullish?  Silly question.  Stocks are going up!  Gasp - the industrials are going up and- mirabile dictu- so are the trannies.  Thus, res ipsa loquitur- buy, baby, buy.  Did you evah-- they printed money, speculators speculated, they speculated in both industrials and transportation stocks-- so, many Dow points higher than when he was bearish, he is now bullish.

These are just some examples.  Rosie turned bullish a while ago.  So did Tyler of ZH.

The fly in the ointment is that the latest crutch to GDP, the newest potential bubble, is not housing and it is certainly not tech (that was so 20th century)-- it is Federalizing education by calling aid to students "loans".  The problem is that many of them can't pay the loans back.  This is turning into a decent-sized problem.  Then there is the issue that it was recently casually reported at the end of a (what else?) bullish BBG or Reuters article on the wonderful recovery in auto sales that something like 42% of new auto loans were subprime.

If interest rates were really too low, the ubiquitous "they" wouldn't have to resort to this sort of stuff to keep appearances up.  Students would get loans to go to school, then they would get jobs, and pay back or their loans.  Many of them would not want to waste time in school, because they would prefer just to be working and earning money rather than being bored in school at great  expense.  But from the standpoint of the current crop of politicians, getting these people in school means they are not counted as unemployed.

So it goes.

There are a few boring stocks I like, such as LNC, which trades way under book value with record and rising earnings and a low P/E.  But overall, there's lot of hopium.  The US economy- remember that- continues in its prescribed Reinhart-Rogoff pattern of moseying along with several more years of working through the horrible and spectacular collapse of the 2008 period; said collapse made a mockery of many years of financial statements and underlying assumptions about the economy.  Thus ZIRP and more ZIRP.

But overall, as Jim Rogers said very recently, those of us of a certain age just watch the bulls running.  We can't run fast enough anymore to run with them, and if you short a bull run, you're liable to get trampled, so you just go about your life and let the speculators go about theirs.

Comments on the Selloff and the Sequester: Still Cautious After All These Years

Things are beginning to resemble 2011, though with tech and the Russell 2000 small stocks as the "rage" this year, rather than commodities in 2011.  If past is prologue, stocks will survive a scare and rally.  Then, later in the year, "the horror, the horror" that most of this "recovery" from the Great Recession was exactly as Reinhart/Rogoff expected.

If the above scenario comes true, and of course it's pure speculation, we will see what we will see.  If my long-held Japan scenario continues to play out this year, new lows in long-term T-bond rates loom before yearend.

The speculative way to play this is to buy EDV or ZROZ.  Somewhat less speculative is to directly purchase a zero coupon T-bond of the longest duration possible.  In either of the above cases, one is basically gambling on reversion of long-term bond yields to the Japanese mean, as it were.   I and some of the accounts I manage are long EDV (we are Vanguard clients, and EDV is commission-free to Vanguard clients) and zero-coupon T-bonds, plus the more sedate TLT.

Regular readers know that the last time I had anything really nice to say about the US stock market came in early August 2011 after the mark of the beast 6.66% down day on the Dow  Even then, my bullishness was tepid.  Unfortunately, the late September recession call by ECRI made me step away from stocks and focus on the muni market, which was seriously undervalued relative to Treasuries.  Oh well...

But it looks to me as if the Russell 2000 is this market cycle's equivalent of the NAZ in the later '90s.  It's for mo-mo players only.  A lot has to go right with the economy for it to be even a fairly good investment on a multi-year basis.

One final thought.  The media is downplaying the effect of the sequester on the economy.  How, the mouthpieces ask, could a mere $85 B spending cut by the Feds harm the "recovering" juggernaut of the  economy?  Doesn't the stock market predict a boom ahead?

Yours truly thinks that the Fed is all in and cannot "stimulate" more, and the second derivative of fiscal stimulus will turn definitely negative if the sequester takes hold as legislated.  If anyone thinks this is somewhat the opposite of the situation in early 2009, given the tax increases that took hold on Jan. 1, please join me in raising your hand.

I am all for less unbalanced budgets.  I just think that in the investment world, they tend to lead to stock market selloffs and renewed bull markets in Treasuries.

Reinhart and Rogoff Fight the Fed

In 2009, Drs. Carmen Reinhart and Ken Rogoff published This Time Is Different: Eight Centuries of Financial Folly. This academic work became topical as it was nearing its completion due to the "Great Recession". They added a long ending chapter to deal with the crisis and predicted a great deal of what has transpired: several years of falling housing prices, shift of debts to the sovereign, slow employment gains well after the recovery began, among other things. They did this because they felt that the Great Recession was not different from other financial crises throughout history.

There is now revisionism at the Fed, which they rebut in a Bloomberg.com article published yesterday titled Five Years After Crisis, No Normal Recovery. Here are excerpts:

With the U.S. economy yielding firmer data, some researchers are beginning to argue that recoveries from financial crises might not be as different from the aftermath of conventional recessions as our analysis suggests. Their case is unconvincing.

The point that all recoveries are the same -- whether preceded by a financial crisis or not -- is argued in a recent Federal Reserve working paper by Greg Howard, Robert Martin and Beth Anne Wilson. It was also discussed in a recent article in the Wall Street Journal.

It is mystifying that they can make this claim almost five years after the subprime mortgage crisis erupted in the summer of 2007 and against a backdrop of an 8.3 percent unemployment rate (compared with 4.4 percent at the outset of the financial crisis).

Later, they strengthen their case:

What is striking about the Howard, Martin and Wilson Fed study is that it doesn’t really dispute our finding that recessions that financial crises are worse in terms of depth as well as duration. Instead, it argues that one should be more interested in a much narrower question: Once they begin, recoveries after financial crises are typically just as strong as those that follow a typical recession.

We admit that this time is different in one important respect: The goal posts many analysts use to assess economic outcomes seem to shift from data point to data point. When we first identified that financial crises were associated with severe recessions, the rosy-scenario crowd responded that the Great Moderation had smoothed the business cycle. Recessions in the new era were short and shallow.

After the crushing contraction, a new metaphor held that the harder the fall, the more vigorous the bounce back. Nonetheless, what followed was an anemic recovery that has yet to pull per capita annual real GDP back to the level of 2008.

Now, the staff of the Fed hopes to shift the goal posts yet again. Their advice is to forget about the problems of the past few years and focus on the coming expansion that they forecast using their own idiosyncratic interpretation of business-cycle dynamics across 59 countries.

Finally, they suggest that simply avoiding a recession or deceleration in economic growth might be the best we should hope for:

Is the U.S. on track to an ever brisker recovery in which the jobs numbers -- which have already turned from 100,000 to 200,000 a month -- start showing 300,000 or even 400,000 net new jobs a month?

Perhaps. We hope for good news at the end of the week when jobs numbers are released...

But considering the huge and rising debt levels in the U.S., and the very limited extent to which deleveraging has taken place in the household and government sectors, we would be pretty happy to see a few straight years of trend growth, even if that falls short of the V-shaped recovery that some see around the corner. It might happen, but the historical evidence is at best mixed.

To interpret, they are asserting that too many debts were incurred during the booms to make economic acceleration likely. Why were they incurred, and why were so many debts not self-liquidating? It is difficult not to point to central bank stimulative policies as a key reason, though of course the Fed does not act alone.

From an investment standpoint, strangely it can turn out that a muddle-through recovery that avoids other than the mildest of recessions (which might not be defined by the experts until it had passed) can continue to allow the permissive financial environment in which the different assets of bonds, stocks, and gold all appreciate in nominal terms. This in fact is what happened in yesterday's trading. It is an unstable equilibrium, but it is precisely what has been happening the past few years. Eventually these assets "should" have major trend divergences. When and how, or even if, these disparate markets go their own ways is the major question for longer-term investors that I see.

(An unrelated note: Over the weekend, I mentioned that I had sold most of my AAPL stock last week. The price fell late Friday, and a favorable iPad survey was released yesterday morning. I am a member of the group that was surveyed, and the members-only data that was not released publicly was also quite strong for Apple. Thus I took advantage of the dip and bought back in. From here on, because this site is not a stock site, I am not going to comment on short-term trading, and regret that I mentioned it.)