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Why Do Bulls and Bears Seem and Feel So Far Apart?


Psychology is polarizing bulls and bears leaving both exposed to a common enemy.

Yesterday there were several buzzes that touched on the perceived "bearishness" of the 'Ville and some of the reasons why so many of the Professors take a dim view of what's happening in the financial markets. What was not discussed is that, despite the emotions in Hoofy and Boo's camps, the differences between the two are actually remarkably narrow.

I'd submit, for example, that all sides pretty much agree that the U.S. twin deficits are growing into a serious problem, that by historical measures stocks are not cheap that the consumer is indebted to its eye-balls and that it is self-evident that most Americans could honestly care less about putting aside some savings. We all are also aware of the many geo-political problems, of the energy squeeze we are in, that housing is bubbling, that health care is out of control, and that our entitlement programs are running on borrowed time.

So why do Hoofy and Boo seem and feel so far apart? The answer seems to lie in the sustainability of the current condition. Professors Scott Reamer and John Succo have frequently offered that the simple fact that paper money is being printed as fast as central banks can cut down trees does not entail that borrowers will take that money and put it into circulation (the Japan experience is Exhibit 1 for such a scenario). Sooner than later this will dry up the excess liquidity in the system, which will eventually collapse under the existing debt-load.

On the other hand, Brian Reynolds (a.k.a. the Iron Horse), Chief Market Strategist for our friends at MS Howells, writes that the spigots of the corporate bond market are wide open and, with commercial banks getting into the lending action, virtually any entity can get as much money as it wants at spreads below what the borrower is willing to pay. Based on the daily list of new offerings, it is tough to argue that there is any hesitation by corporations to take on as much debt as it is available. The key to this dynamic is that much of the borrowed money is then used to buy back stock, M&A activity, LBO's, etc., and, according to Brian's data, these market operations are swamping the current record-setting selling of stocks by hedge funds and individuals. Brian believes this routine could go until the turn of the decade.

At the core, all our heroes agree that right now risk is higher than it has ever been. The dichotomy is that the longer the status quo persists, the more Boo thinks the end is nearing while at the same time Hoofy grows more and more confident that the end will never come; and the result of this self-reinforcing psychology is that it paints each critter deeper and deeper in its own corner.

What we try to accomplish in the 'Ville is to generate a discussion that strips both Boo and Hoofy of their emotional posturing, and keeps both of them on their toes just enough to control both sides of the risk equation. If we can stay within that framework, we will then have the luxury of being as bullish and bearish as we care to be while maximizing our odds of staying in the game.
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No positions in stocks mentioned.
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