Bear Market Geniuses

The bear market geniuses were getting a little too certain of themselves of late. There has been a lot of chest thumping and back patting. I don't believe the market will let these brazen bears off so easy with a one and done up day. Have a good night.

3 comments:

Shubh Desai said...

We will be lower for remaining trading days of August. September and October are bearish months with Europe issue in not resolve and no QE3 we are going down 8 to 9 % more next two months. People at work and my friends are not that bearish like last year and 2009. They want to buy BAC and C makes me think we are going down.

frank r said...

I've been hiking for the past month in the mountains, away from all the excitement but with plenty of time to put things in perspective. Either the trade surplus countries (china, germany, japan) will continue to accept paper claims from the trade deficit countries forever, or they won't. Also, the rest of the developing world (Africa, the Muslim countries, etc) will surely eventually join the world economy at some point. Finally, the baby boomers will eventually want to retire. Put all this together, and there will eventually be a transition from excess of supply over demand, and thus deflationary pressures, to the opposite situation of strong inflationary pressures. When this happens, the Fed can either accomodate the inflation, or try to hold it in check by raising intrest rates. I believe it will take the latter path. Bottom line, at some point we are going to see much higher real rates of interest, and that is really bad news for stocks, gold, commodities and long bonds (both nominal and TIPS). It will always be bad news for real estate, except real estate is being beaten down already so it probably won't fall much further once rates rise. 1162 on the SP500 does NOT price in this eventually hike in real rates nor the likely rise in taxes and pressures on profits that will result from the eventual need to bring the budget deficit down. So maybe 1120 or whatever the bottom was this week is a bottom for the short term, but I doubt it is a long-term bottom.

As for sentiment, I've said it before and I'll say it again. The true bottom won't be hit until the upper middle class is spanked hard enough to swear off stocks for good, and we haven't reached that point yet. These crashes like in fall 2008, march 2009, summer 2010 and again this summer just don't last long enough. There is always a rebound that breathes life back into people's hopes. Those hopes must be crushed completely before the real bottom occurs. We haven't reached that point yet.

My 2 cents worth.

Revelo

frank r said...

Oh yes, in case it isn't obvious, the reason why Africa and the Muslim countries joining the world economy is inflationary is that unlike the Chinese, I doubt these other countries will consume less then 40% of GDP while investing the rest, so they will need to import capital to build up their infrastructure. This is actually the normal pattern development. Rich countries run trade surpluses by exporting capital equipment to poor countries to allow the latter to become developed. Then the rich countries can sit back and take things easy while the poor countries work to pay off they debt they have incurred. This didn't happen with China because the Chinese are such fanatic savers. But it did happen when Britain helped the US develop in the 19th century, for example. Then the US paid all the debt back, and then some, during WWI, going from massive debtor to massive creditor by the time the war was over. Anyway, bottom line is that the development of Africa and the Middle East is going to add lots of labor to the world economy, requiring lots of capital to put that labor to use, thus raising the return on capital. Not good news for a stock market that is currently inflated due to very low discount rates (i.e. assumption of low returns on capital from now to the end of time).