Five Things You Need to Know: The Debt Crisis Is Not a Final Destination

By Kevin Depew  JUN 27, 2011 2:30 PM

The debt crisis is not an end in and of itself, but rather is something to pass through. And no one knows what will emerge from the other side.


1. Are You Married to Your View?

One of the macro guys I really pay attention to is Edward Harrison of the site Credit Writedowns (Toddo, Peter Atwater, Professor Pinch, James Kostohryz, all Minyanville contributors being a few of the others I pay attention to). But Harrison is one of the few people who writes valuable macroeconomics content without being overly emotional or dogmatic. He isn't married to his view. And if the macro fundamentals shift in unexpected ways, as is often the case, he isn't afraid to update his outlook accordingly, something that is far more difficult than it may sound. (Here is Harrison outlining what is at stake in the latest Greek bailout.)

As human beings with egos we often attach too much significance to our opinions, sometimes forcing our analysis to try to make it correct when it is not. It's really hard to change a secular view once you've made it. To see this in action,  just look at your Twitter stream and check out the Twitter handles people use. If your handle is @econoswindle, @FedFail, @ZeroCouponBust or @FiatFraud, it's likely you are married to your macro outlook. Those are each available by the way!

The crossroads for me came in 2009 when I started to run out of new things to write about the market. Not only was I running out of new things to say, the feedback loop when I did write began to come in aggressively positive. At a point, I thought, "Uh oh, something is wrong here." Don't get me wrong. It's fun and encouraging to get positive feedback. But there was a long transition in the responses to what I was writing from 2005 to 2009. In 2005 the feedback was almost entirely negative. "You guys are too bearish." "No way housing goes down 20%." "Get a life and stop hating." Every once in a while, infrequently, someone would write a charitable note. I saved those. But again, cycles change.

The point I want to emphasize is that 2006 was the time to prepare for a collapse, not 2011. Make no mistake, the road is going to be choppy from here, but what we should be preparing for now is to invest during the liquidity crises we see going forward. Liquidity crises are temporary. Debt crises are long-term. Right now we remain in a debt crisis, still, but we have reached the point of recognition. This is it. Everyone is now aware of the crisis. Ask your cab driver about PIIGS, the Greek debt situation, quantitative easing and whether he likes gold. Liquidity scares will shake out many longs and attempted longs, but the successful investor going forward will be the one who is positioned long and optimistic, not the one who obsessively focuses on what the market has already recognized.

With the point of recognition here, the coming phase will ultimately be bullish. Remember, the debt crisis is not an end in and of itself. It is not the destination. It's something to pass through. No one knows what will emerge from the other side. If we did, we'd all be bullish right now instead of angry and pessimistic.

Bear markets discover and price in structural issues; bull markets are the manifestation of those issues reconciled. I did not say resolved, but reconciled. This is critical to understand: we will never solve our issues. We will never solve for energy, lack of food, excessive debt, [insert macroeconomic variable here], we will only reconcile them and move forward to a new phase in the process of crisis --> decline --> recognition --> reconciliation --> advance --> crisis.

I find it easier to grasp economic problems when considering them as part of this process. Too often we consider economic problems as destinations. I made this mistake early
on with how I viewed and wrote about deflation. It was hard to imagine what could emerge from the other side, and at the time I felt it was more important to inform people about what the process of asset deflation would look like and how to prepare for it. But even so, I found myself married to this view in mid-2009 and struggling to adapt. Understanding it as part of an ongoing process helped me re-formulate my market view.

2. Bulls Face Uphill Summer Battle

After making my long-term bullish view, here is a quick market comment on how the short-term technicals are shaping up. On the positive side, the action in the Russell 2000 (IWM) has shown a positive divergence. Despite closing below the key TDST (the DeMark key trend measuring level) Down level at 79.46 for nine consecutive sessions, buyers were able to reclaim that level last Tuesday and it was never qualified as a breakdown.

Of course, the primary technical issue facing markets on multiple time frame analysis is the MONTHLY sell setup with at least 13 more weeks of duration, and the WEEKLY at least three more weeks before a potential buy setup can record. One way to get a sense of the uphill battle ahead this summer for bulls is to look at the WEEKLY NYSE High-Low Index, below. We have seen successive lower highs for this since October 2009, a bearish divergence versus market prices. This index is negative, having reversed down earlier this month, and at an elevated risk level above 70%.

Finally, while the overall market index will struggle this summer, individual issues continue to show positive divergences from the market. Friday's weakness produced a handful of TD Sequential 13 buy signals of note, and no sell signals within the S&P 500 universe. Among TD Sequential 13 buy signals: Advanced Micro Devices (AMD), BB&T Corp (BBT) and Exxon Mobil (XOM).

3. Did Buy-and-Hold Die?

So much financial commentary today is targeted toward explaining why everyone at the Federal Reserve is an idiot, how everyone at Goldman Sachs is a thief, and in general favors punditry over analysis. But in the course of doing some separate research this morning I stumbled across a handful of voices in the wilderness who offered some timely advice in May 2009.

You won't find this article easily in searches for "Death of Buy-and-Hold" because it apparently wasn't search optimized. It's from Morningstar. That alone will guarantee many people won't click on the link. (Here, I will save you from having to do this yourself. "Kevin -- Thanks for the link but don't you know Morningstar is more or less just a credit ratings agency for the mutual fund industry? Thanks, but no thanks.") Anyway, this was a nice summary from Chris Davis, a portfolio manager for Davis Funds, at one of the most pessimistic times in market history in my lifetime.

"[T]he last thing I would say is that the chorus that cries out that buy and hold is dead will reach its crescendo at exactly the time that buy and hold should work going forward. In other words, when it looks worst in the rear view mirror is when it will be best in prospect."

Along these lines, there is much speculation today that the individual investor is dead. The consensus view is that individuals are out of the market, which is largely true, mostly because the game is rigged, not true but conventional wisdom, and that the notion itself of buying individual stocks and even investing itself quaint and old fashioned. Fair enough. But there are advantages individual investors are going to enjoy over the next decade that hedge funds and professionals cannot, among them the ability to withstand drawdowns in markets due to liquidity shocks that leveraged traders cannot. Everything eventually cycles in and out of favor. Everything. If I were to write a piece today and file it away to be published on June 27, 2021, I would headline it: The Return of the Individual Investor. Ten years from now it will be relevant.

Follow Kevin Depew on Twitter @kevindepew

4. Payday Is Killing you

I realize this does not quite qualify as "good" news for the many people in America unemployed, but it's noteworthy. People are more likely to die on or shortly after the day they’re paid, according to a new study.

5. Interesting Counting and Data Widgets From

Found this widget over at the folks. It provides an interesting visual of just how dependent on fossil fuels we really are.

Follow Kevin Depew on Twitter @kevindepew

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.