The Time for Bearishness Has Passed
Let's put Doomsday in perspective.
Chicago Tribune, 1934
Indeed. Like it says on the sign, "Plan of Action for U.S.: Spend! Spend! Spend! Under the guise of recovery - bust the government - blame the capitalists for the failure - junk the Constitution and declare a dictatorship."
The point is: either take your doomsday with a grain of salt, or simply take your salt with a grain of doomsday. In the end, the salt will be worth more. Which partly explains yesterday's bizarre outburst about "buying stocks."
Bizarre Outburst Explained
Yes, the economy will turn horrific before improving. But the economy and financial markets are not the same thing.
Recently I took some heat from people who demanded to know how I could claim we are in the middle of a deflationary debt unwind while at the same time saying I want to add exposure to stocks just below 800, given a 10-plus year time horizon.
Let's pause for a moment and consider where we are: The S&P 500 closed below 900 on a weekly basis just 56 times over the past decade. That's 520 weekly closes. Fifty-six below 900. All told there were 28 closes below 900 in the 2001-2002 period, and 28 recently. There have only been five weekly closes below 800 over the past decade, each one occurring this year.
Here's the thing. I agree there is a some probability we trade below 600, a lesser probability we overshoot and trade in a range of 400-500. But going down, and staying down, are not the same thing.
Ask yourself this: How long do you believe we'll stay at 400 if we decline to that level. Two weeks? Two months? Two years? Those time frames can be evaluated probabilistically. My contention is that if someone with a time frame beyond 10 years does some work on those probabilities, they'll reach very interesting conclusions about when to recommit some portion of their cash back to equities.
I guess what it comes down to is that the time to be bearish was in 2007 at 1500. And in Minyanville we were. That's not the same thing as saying now is the time to be bullish. But just as we spent time in the run-up to 1500 explaining why that move was bearish, not bullish, now is the time to prepare for the rundown to 700, 600, maybe even 400, considering why that move will ultimately be bullish, not bearish.
Putting the Pieces Together
But again, how does this fit with the deflationary debt unwind scenario? I am working with the following long-term investment thesis:
Step One: Asset Deflation Accelerates - Point of Recognition Reached
At this point I expect stocks to decline along with other asset classes as the deflationary debt unwind everyone thought was over reasserts itself with renewed intensity, perhaps by the fourth quarter of this year. But keep in mind the bear market began in 2000, so we are nine years into it already, and the heart of it will be the deflationary phase that corrects the prior over-leveraging.
Step Two: Embrace the Difficult
I have no idea what fundamental events will be blamed for this acceleration in asset deflation. What I do know is that it will seem foolish to recommit capital to stocks as we cross 800 to the downside. It will seem just plain dumb to do so when/if we cross 700 to the downside. And if we cross 600 to the downside then The Dumb will seem like geniuses compared to the Fools that bought 200 S&P 500 points higher. But I'll ask myself again, what is my time horizon? If it's longer than 10 years, then I can withstand 10 months of being Dumb and Foolish.
Step Three: Real Assets
Following upon Step One for a moment, I think we get one more major turn of asset deflation, hence a move for stocks below 800, and that deflation I believe will spill over into gold and other commodities too. At that point I want to be able to start adding exposure to real assets, commodities, particularly foodstuffs and softs.
What about the dollar in all of this? Short-term, I am looking for a respite here in the next week or so, followed by a potential qualified break (DeMark indicator terms) of 77.92, which will mean a low next year ~71 or so, possibly below 70 briefly. But, I think that is the bottom.
Again, I don't know why or how, and see the same fundamental issues everyone else does, but the technicals simply do not support a (further) collapse of the dollar. There is a non-trivial probability that we see a major currency readjustment in our lifetime, but I think it is years away. Meanwhile, silver, more than gold, seems to project some type of either currency attachment or at least some kind of industrial usage that makes it far more attractive than gold to me. I just do not believe gold will become the currency alternative people believe it to be.
Step Four: Priorities
I currently have exposure to Emerging Markets that I initiated several months ago through the Emerging Markets ETF (EEM) and a number of other funds. I want to be overweight this group versus U.S. stocks, but with no exposure to U.S. markets currently, I will be looking to begin increasing it at 800 and below.
While some Minyanville professors, such as Ryan Krueger, have been a long time ahead of the curve with respect to commodities and Real Assets, that is a priority for me after the:
1) Emerging Markets;
2) Real Assets;
3) U.S. Stocks.
Viewed in that context, U.S. stocks are still not exactly bullish, at least not in a relative sense. But it's a long way from Doomsday.
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