A Bearish Predisposition?

Via Pension Pulse.

From systemic risk of capitalism, we move on to more current events. I had lunch today with Greg Gregoriou,
a professor of Finance at SUNY (Plattsburgh) Greg has published many
books and articles, and his most recent article with Razvan Pascalau on
the optimal number managers in funds of hedge funds has garnered much attention.

Interestingly, while some major funds of hedge funds lost out in the crisis, assets from global pensions remain stable. Moreover, hedge funds are much more focused on meeting institutional demands:

Pension
funds globally typically allocated less than 5 per cent of their
portfolio to hedge funds or funds of hedge funds (while targeting an
allocation of 6-10 per cent), and while this share has increased over
the last few years, many expect it to double or triple in the years
ahead.

In the US, private sector
pension funds look to allocate on average up to 10 per cent of assets
to hedge funds, a little ahead of America’s public sector pensions,
which target about 8 per cent. In the UK, some of the biggest schemes
allocate up to 15 per cent of their portfolio to hedge funds. In
continental Europe, the take-up of hedge funds by pensions has been
more mixed, but pension funds in some markets, such as the Netherlands,
have embraced hedge funds and other alternative investment strategies.

The global economic crisis provided
only a temporary interruption in the growth of institutional
investments. Investors pulled about $300bn (£197bn, €232bn) out of hedge
funds between October 2008 and June 2009, but inflows returned to
healthy levels in the second half of 2009. Recent surveys by Credit
Suisse and Deutsche Bank suggest the industry may attract $200bn-$300bn
of new capital this year. It appears a large part of redemptions that
followed the 2008 crunch were from wealthy individuals rather than
institutions, and that institutions continued contributing new capital
throughout most of 2009.

As part of their own growth and
maturation, and in response to greater institutional investor demand,
hedge fund managers and firms of all sizes have become more
institutionalised in terms of their internal systems, structures and
general operational infrastructure. This can be seen in the use of risk
management practices and systems, compliance procedures, performance
and risk reporting, governance structures and overall operational
sophistication.

Institutional
investors demand the highest quality operational and risk management
systems from the funds they invest in, and to attract and in response
to investor feedback, hedge fund managers have developed sophisticated
asset management and trading infrastructures.

These demands have
required significant investments by managers in systems, technology and
people. However, the benefits to investors and managers outweigh
costs. The emphasis by investors and policymakers on transparency and
systemic risk analysis will serve to reinforce and continue this
infrastructure build.

The institutionalisation of the hedge fund
industry has been a developing theme for the past 10 plus years and is
likely to continue. It will also assist them to meet new regulatory
demands.

FINalternatives reports that three of New York City’s five public pension funds are mulling their first allocations to hedge funds.
So why the fixation on hedge funds? Part of it is gaining access to
top investment managers who deliver alpha no matter what market cycle we
are in, part of it has to do with the focus on risk management and
managing liquidity risk, and part of it is the whole fixation with
alternatives (hedge funds, private equity, real estate, commodities and
infrastructure).

Here in Canada, sophisticated public pension
funds are scaling back, being a lot more selective with the hedge
funds they partner up with, preferring to manage assets internally.

But
whether or not you farm out assets to hedge funds or manage assets
internally, you still need to understand the cycle we're in. Greg told
me he sees a repeat of the 1966-82 period where the Dow basically traded
sideways. He told me some of his colleagues at SUNY are working a
little longer before retiring, but they plan on "pulling their money out
of the market once the Dow goes over 13,000 again".

In his article, A Bearish Predisposition, MarketWatch's Mark Hulbert notes that advisers are not betting on a rally:

The stock market had its best day in over two weeks on Thursday, with the Dow gaining more than 200 points.

And
yet, the short-term stock market timers I monitor didn't budge: They
finished the day just as bearish as they were before the session began.

But,
when I recently went back and reviewed what the advisers were saying
then, one of their arguments stood out as providing a good illustration
of how excessive pessimism got the better of some of those advisers.

The
particular argument involved drawing a parallel between the rally that
began at the Mar. 2009 stock market low with the rally that began in
late 1929, following that year's stock market crash, and which lasted
until the following April. A number of the advisers I monitor drew
charts superimposing the post-Mar. 2009 performance of the Dow Jones
Industrial Average with the index's rally 80 years previously -- and,
upon noticing a superficial resemblance, predicted that the market would
continue to follow the same script this time around.

That was a very scary prospect, of course, since the Dow dropped some 85% from its Apr. 1930 high to its Jul. 1932 low.

Have
those advisers' worries come to pass? Not so far, at least. Almost
immediately after they began drawing the ominous parallels, it became
clear that the stock market was following an entirely different path. In
fact, the market today is about twice as high as it would have been
had it followed the script that so worried advisers last fall.

These
advisers' response? They just quietly stopped mentioning the alleged
parallels, focusing instead on some new found reason for concern.

In
any case, it should have been clear to everyone that drawing parallels
in this way is shoddy analysis. With over 100 years of daily data
available for the Dow, as well as countless more years of stock market
performance in other countries, one can fairly easily find any of a
number of past instances that appear to bear an "uncanny" resemblance to
the market's recent performance. And, yet, hardly ever is it the case
that the market behaved in exactly the same way following each of those
prior instances.

Of course, the
advisers rarely acknowledge that history doesn't speak with one voice
on a particular issue. Instead, they too often choose to highlight just
one of the historical parallels.

Their behavior reminds of a
famous remark attributed to Adlai Stevenson, the Democratic Party's
candidate for President in the 1952 and 1956 elections: He was fond of
mocking opponents by saying "Here's the conclusion on which I will base
my facts."

And
it's bullish from a contrarian perspective when the conclusion on
which advisers are basing their facts is that the market is going to
decline.

But the bears keep on growling,
reminding us that systemic, structural problems aren't going away
anytime soon. Bob Chapman of the International Forecaster notes this in
his latest comment, Talk of a Recovery Hides Collapse:

Talk
today centers around a stillborn recovery that never quite held on
long enough to materialize. Five quarters of 3% to 3-1/2% growth traded
for $2.5 trillion. Money and credit was thrown at the system again,
and again it didn’t work. Keynesianism at its finest.

The
housing purchase subsidies are gone, and real estate sales and prices
are again falling. Even with interest rates near 4-1/2% for a 30-year
fixed rate mortgage there are few takers in the hottest sales period of
the year. There are four million houses in inventory for sale or 1-1/2
years supply. That figure could be 5 to 6 million by yearend, as
builders’ build 545,000 more unneeded homes. More than 25% of mortgages
are in negative equity. Excess mortgage debt is $4 trillion and headed
much higher. Government is so desperate that they have begun to take
punitive action against those whose homes are under water, but they can
still make the payments, but are bailing out. What a disincentive for
anyone to buy a house. Will debtors prison be far behind?

There
certainly have been strategic defaults, but not as many as government
would have you believe. Twenty-five percent of all borrowers are stuck
with negative equity, which we expect will worsen. That could mean a
wealth loss of some $4 trillion. Obviously, homeowners are hoping for
higher prices. If that does not happen you can expect more walk-away
foreclosures. There are already four million homes for sale and many
more could be on the way. Plus, more than 500,000 more new homes are
being added to saleable inventory annually. Next year will be another
bad year for builders. Some will fail and others will merge. Government
is having ongoing meetings with three major builders in an effort to
nationalize the industry, as they will do with banking. Government is
doing the worst thing possible. It reminds us of Sovietization. The only
thing government has going for it is that underwater homeowners
usually do not default until they are down 62% from equity, but that
could change. Interest rates at 4-5/8% for a 30-year fixed rate
mortgage should keep them in their homes for now, but if interest rates
rise that plus could become a negative. That leads us to believe that
interest rates will stay that way for a long time. As a result the Fed
must keep interest rates at zero for a long time to have millions of
mortgages kept from falling into foreclosure.

At $15.3 trillion
the world’s holdings of US dollar denominated assets in ten years rose
from 60% of GDP to 108%. This in part has been caused by a
never-ending current account deficit. This factor alone makes one
wonder how the US dollar can be a strong international reserve currency.

In
just six years from 2001 to 2006, mortgage debt grew to $14.5 trillion
- a credit expansion unheard of in history. In the past almost two
years government borrowings have grown 49% just slightly more than the
45% in 1934-35. The Keynesian game is the same, it is just the time
frame is different.

Over a
20-year time frame total US credit rose from $13 to $52 trillion, or to
370% of GDP. A good part of these credit excesses have been exported
to the rest of the world and they are increasing exponentially; almost
160% just in the last six years, or to $8.5 trillion.

The
deliberate move to expose Greece’s problems, which those in government
and finance had been aware of for years, backfired and exposed all the
problems in Europe in the process. The impact of Greece, and the
elucidation of the depth of problems in Portugal, Ireland, Italy and
Spain curtailed the so-called global recovery and exposed extraordinary
weakness in the euro zone throughout the EU and Eastern Europe. That in
turn will ultimately cause problems for the US dollar and the pound.
There is now no question that the dollar rally is over and the question
is when will the dollar retest the 74 area on the USDX? The leverage in
banking is still 40 times deposits and we see no way to easily reduce
that. We believe dollar reflation will have to be the answer for the
Fed.

The financial terrorists
that inhibit our banking system and Wall Street still remain confident
that inflation caused by quantitative easing won’t show up for years,
if ever. What else can the Fed and ECB do except use stimulus? The
sovereign debt contagion in 20 major countries and as many creditor
countries, is not going to go away anytime soon. These are systemic,
structural problems. We certainly do not see the likelihood of the
dollar proving any safe harbor. Those who have flocked to the perceived
safety of the dollar are going to be very unhappy with the results.

Many
countries are enmeshed in major debt and in the case of the US the
debt is colossal. It is hard for markets to appreciate this in Europe,
the UK and US. The problems of the credit crisis are not over and there
won’t be a recovery, unless the Fed injects $5 trillion into the
economy. That will keep the economy going sideways for two years as
inflation rises. Small and medium sized business cannot get loans, so
they cannot expand and hire. About 23% of large corporations may expand
and hire. Offshore US corporations have far too much excess capacity
already. As you all know there are many speed bumps on the road ahead.
You had better be prepared for them.

Switching gears again, we
find very little coverage of the problems in Eastern Europe. Hungary is
a good example. Financial exposure is Austria $37 billion, Germany $32
billion, Italy $25 billion, Belgium $17.2 billion and France $11
billion. This kind of exposure to the banking systems of these
countries could be very painful. It will be interesting to see if
national governments, or the ECB step in as they did in Greece, and
manage the problems. The world should be paying attention because there
are 20 major countries in the same dilemma.

The
sovereign debt crisis is just getting underway as observed with
foresight. There has been no containment and 56% of Hungarian real
estate loans are in Swiss francs. The problem, which we have been
citing for some time, could cause a domino effect across Europe and we
wonder if the solvent nations and the ECB can handle the debt rescue.
Our answer is no. The next shoe to drop could be in this region and
surprise almost everyone.

Mr. Chapman isn't the
only one waiting for "another shoe to drop". Some market watchers point
to the recent weakness in the Economic Cycle Research Institute’s
Weekly Leading Index (a.k.a. ECRI WLI, see chart above) as evidence
that growth rate and stocks will continue to plunge.

But others correctly point out that the ECRI is pointing to a slowdown, not recession:

The
Economic Cycle Research Institute's Weekly Leading Index has been on a
downward trend since late April and has now hit a 49-week low, but
does that mean a recession is close? According to Globe and Mail, some
bears think so:

[The WLI’s] annualized
growth rate of negative 9.8 per cent is perilously close to a 10 per
cent decline, which the pessimists note has always been accompanied by a
recession.

The Wall Street Journal last week
quoted a British economist as saying the WLI is “very sensitive to
financial indicators … leaving it vulnerable to feedback loops from the
markets.”

Managing
director of ECRI Lakshman Achuthan, however, is hesitant to follow the
WLI blindly; he believes that predictions must be based on more
complicated indicators:

He
notes, it’s not a simple positive-to-negative swing that forecasts a
recession, making the BMO analysis oversimplified, he says. ECRI is
looking for “pronounced, pervasive and persistent” changes in the WLI.

And while David Rosenberg thinks a double-dip is imminent, Don Hays, founder of Hays Advisory Group, says a double dip is off the table and that the market will rally into the November elections.

My
own feeling is that the liquidity tsunami has not crested and will push
risk assets higher. Now that European bank stress tests are over,
expect them to join the party on Wall Street. I also expect banks will
start slowly lending again as employment growth finally shows some
sustained improvements.

Finally, keep an eye on some shipping companies that will be reporting this week (for example, Dryships: DRYS).
Any rally in shares of companies that are heavily leveraged to the
global economic recovery signals that risk appetite is back. In fact,
last week's one day bounce of Goldman Sachs and Amazon shares on the
day they reported disappointing earnings may be an ominous sign of
things to come. All those hedge funds desperately trying to find the
next big bubble -- and they aren't alone. Stay tuned, we might not need
QE 2.0 after all.

Comments

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[arthur darrell]

cpi for 12 months just registered lowest reading since 1966 the beginning of a 16 year bear market

[Strom]

As always, Hussman has some very good comments, this week relating to ECRI and WLI:

http://www.hussman.net/wmc/wmc100726.htm

[P-K4]

Why doesn't anyone mention municipal bond isses defaulting ? As much as 10 years ago, local government was issuing debt against revenue streams as far as 20-30 years out in the future. Now, you add the massive, public pension payouts against a backdrop of declining tax revenue, and the problems can only get worse.

When you throw in the global sovereign debt issues, I have trouble believing the equity markets are going to be the safer place because of sophisticated risk management.

[traderjoe]

I agree - I think muni defaults/soft defaults (not paying bills, education cuts, furloughs) are the creeping trigger of the real crisis to come. See parks close and classroom sizes mushroom hits the citizens hard. It makes it tangible. It lowers confidence. It lowers incomes and raising property and sales taxes. And we might just get a hard default of a large municipality. That's why we never hear it being discussed on the financial channels. The problem is too endemic.  

[TooBearish]

ERCi will be back below 8 after world stk mkt recoverys in July.....

[Thoreau]

Leo, you just about have me convinced that the MARKET is fundamentally bullish. Now if you could only convince me that that same said market is not completely dislocated from the realities of employment, production, deficit reduction, health care, real estate, sustainable resources, asteroid impacts, world peace.......

Really, dude, you are far too occupied with the rich mans' roulette wheel. The only relevancy to the masses is the ira/pension teet that so many are now tied too. Managers are looking into hedge funds to recoup losses. The market be damned! It's meaningless at this juncture. Ditto for all the charts, graphs, GDPs, ECRI, BDI, gov't propaganda, etc. Meaningless, manipulated misinformation.

The real fundamentals here are physics and ecology - gravity and equilibrium. The whole she-bang is moving toward homeostasis. Look where we are now, and where we need to be to get there.

[Max Hunter]

+1000.. I should have read this before I commented.. Would have saved me from typing.. :)  ahhh who am I kidding.. I love to ramble..

[hungrydweller]

+++++

[fromthedeepersouth]

Leo,

Certainly the governments and central banks are trying to keep things stoked and some economic numbers might look good, but there is tremendous nervousness among the sheeple, and they are holding onto their dollars with tight fists.  The Dems are trying to keep things alive until the elections, but with such a huge debt load underpinning everything its hard for me to feel any bullish sentiment.  It's only a matter of time before the chickens come home to roost.

[InconvenientCou...]

Thanks Mr K.

The ZH meritocracy needs independent thinkers such as yourself.

Everyone needs to challenge their own biases, whatever they may be.

[DoChenRollingBearing]

+++

[Internet Tough Guy]

Those SUNY suckers better keep their pointy academic noses to the grindstone. They think a blissful retirement will be theirs if they can just cash out at Dow 13000? LOL.

They will be lucky to keep their jobs as either

a. stocks drop, wiping them out

or

b. DJIA rises over 13k, on the way to 36k, as the dollar hyperinflation destroys their purchasing power, wiping them out.

Pick your poison, SUNY sheeple.

[Kreditanstalt]

Leo, can you keep your posts to about 300-400 words total in length?  It would help those of us trying to keep up...

[Leo Kolivakis]

I am prolific, and will try to keep them brief, but there is a lot to cover, and things move quickly. Will keep your comments in mind. Thx.

[Max Hunter]

That article was pretty realistic.. Since you basically avoided the fundamentals of the economy and strictly spoke of liquidity, interest rates and equities, you have a case with the market potential.

I still think this country needs to build things so people can be hired and that will cure the economy. No debt or paper assets will work as a long term fix...

"Three things cannot long be hidden; the sun, the moon and the truth." Buddha

The truth is: 25 million people without good jobs and no prospect of good jobs will weigh on the economy.. The rest is just noise..

[demsco]

Yup, buy, buy, buy. You nailed it with "liquidity driven tsunami." However, it will end, it always does. The question is, should the markets be higher based on the fundamental data we have? The answer is no, but it is. Therefore, you have to be long, always. Buy crap ass solar stocks of which 1 out of 1,000 will be around in 5 years. Buy AIG, MBIA, AMBAC, hell, buy LEHM.PK because it just doesn't matter, everything goes up, everyday, no matter what and no one sees this as an issue. Insanity is back in full force. Are things as bad as many of us think? Maybe not, I don't know anymore, I find myself doubting it now, their plan is working! But, it is certainly not good since most upgrades or beats are on severely depressed outlooks to begin with. 

Bottom line is this, the data is rolling over and I do not care what the creator of the ECRI says. I feel like everyone was or is being forced to soft peddle bad data, including the ECRI people. What is real cannot be hidden forever and what is fake will have to be revealed eventually, it is just a matter of time. As far as anyone who thinks that markets are reacting normally here, you are a moron.

[Goldenballs]

Top post.

[Leo Kolivakis]

demsco,

Nobody can predict the future. Markets are humbling. You think you got them all figured out and all of a sudden, BAM!, you get clobbered. My central premise remains that the financial oligarchs will do whatever it takes to reflate risk assets, and introduce inflation into the economic system. As long as rates remain at historic lows, they have every incentive to trade away in their prop desk activities. If rates back-up significantly, then all hell can break loose, and we can have the second wave of the financial crisis.

[SheepDog-One]

Theyve tried to re-inflate ASSET prices with printed trillions, and it hasnt worked because the valuations were already bubble inflated, way too high. Leo, you may as well be talking about every heroin addicts dream- the magical bottomless 8 ball baggie. Just keep usin and it magically refills. Never gonna happen man.

[Doc Occ]

Leo,

Good article.  You covered a number of points to describe the "bearish predisposition."

More importantly, I like the way you canvassed different managers' opinions as to where the Dow is heading.

You're right on the money in saying that the markets are humbling and you did not get emotional in responding to Demsco. Every time I was 'certain' where the market was going and brimming with confidence, I often made my worst mistakes.  And when most everyone is thinking that the market is going one way, it usually goes the other way.

Slowdown vs. recession.  Recession continuing into a double dip or maybe getting worse.  Earnings continuing to beat estimates.  Bank stress tests alleviating public concern.  What to make of the conflicting news reports?

My main concern is how much each country's economy is tied up in construction.  There has not been much if any alleviation of the long-term downtrend in Commercial and Residential Real Estate prices.  All the QE that we've seen has not helped that sector.  Until currently inflated RE prices fall a lot more, we will be stuck in a deflationary economy.

Currently the markets are caught in a trading range.  Dow resistance at 10,450 and support at 9,800.  Day traders may make money, but until those significant resistance and support levels are taken out, the economic sailing ship will stay in the doldrums.

Technically speaking, the Dow was making lower lows and lower highs, until the most recent higher high of this past week.  So until the charts show otherwise, the longer-term trend remains down.  If the Dow breaks strongly past 10,650, then this bull market may still have life.  But if the Dow breaks 9,800 watch out.  The financial dam will break.

[SheepDog-One]

The permabulls LOVED the ECRI a year ago when it was up, now that its down it means nothing...nothing....in fact they never even heard of it before.

[Zina]

Epic headlines from June - July, 2007:

IMF raises forecast for world economic growth

IMF to revise economic forecasts amid 'global boom'

IMF: Global economy is booming

All was well! All was well!

[SheepDog-One]

Yep 'all was well' until some big FED shadow bankers got bit in the ass, THEN we were in dire financial straights suddenly....and the same will happen again in short order.

[chindit13]

World MUST be in better shape than I thought.  We believe enough in paper to give our food, land and labor away in exchange for it.  We believe in infinite debt that we know fully well will never be repaid, but we come to accept debt service as good enough, even though we are also fully aware that new debt will have to be issued to raise the funds to service the old debt.  We applaud GDP for GDP's sake, and rejoice in the construction of buildings---even entire cities---that will decay before a soul lives within them, and whose costs will never be recovered.  In the West that's called Keynesianism;  in the East it's called Economic Miracle.  Apparently the alternative to all this belief and make-work is just so distressing that most people agree to think only good thoughts and sing "kum baya", except for those malcontents who insist instead on Barry Mcguire's "Eve of Destruction".

As my latest personal real world example that things are "better than expected", a mile or so from where I reside in my Third....oops, Developing World haven with its $250 per capita GDP, a small piece of land in a residential area (89' x 89') just changed hands for $6 million, or about $750 per square foot.  The buyer is looking to flip it for capital gains, which roughly translated from the native language means "a greater fool".  Six or seven years ago the land could have been had for $10000.  Land prices never ever fall, however, or so the belief goes.  Every transaction just creates a new floor, at least in Asia ex-Japan.  At some point land price appreciation equals hyperinflation by another name, and this is not lost on the 99.9% of the populace who earn within rounding error of the aforementioned per capita income, and who could afford after a year of labor a seven inch by seven inch piece of that record lot.  And to think these price rises were achieved without a fractional reserve banking system, at least not a domestic one.  A neighbor's money printing and voracious appetite for resources is what's driving things.

It seems that the trend in the entire world is for the majority of chips to fall into the hands of a select few, whether that's here, in the Hamptons, or Shanghai.  Are there enough bread and circuses to keep the masses pacified, or do I need to crank up Barry Mcguire?

[HEHEHE]

Markets can do anything in the short-term right now but that doesn't reflect what's down the road.  It reflects stock traders stupidity trading other people's money on the basis of results from last quarter when the inventory rebuild ended.  Unfortunately past performance is not going to equal future results. 

[Leo Kolivakis]

It might just reflect that banks are borrowing at zero and investing in risk assets all around the world. Plentiful liquidity, which includes hedge funds' mushrooming assets, is driving risk assets higher. Also, fundamentals aren't anywhere near as bad as doomsayers will have you believe.

[Iam_Silverman]

"It might just reflect that banks are borrowing at zero and investing in risk assets all around the world."

How will this play out in the future - assuming that the limits on bank prop-trading are enforced?  Will they be allowed to keep their current positions, or will they be forced to unwind them and face the peril of a big selloff in the markets?

[traderjoe]

As Leo implies, 99% of the world benefits from the stock market going up. Commodities - not so much. But there will be no political will for: (1) a lower stock market; and (2) higher PM's. 

Therefore, the PTB will allow any stock market manipulation needed (and PM price suppression - see exclusion to gold/silver in FinReg). Perhaps you have 20% U-3 unemployment and Dow 20,000. Sue Herrara will be gushing about the latest stress test results...

[Iam_Silverman]

"Perhaps you have 20% U-3 unemployment and Dow 20,000."

I can see how they will make that happen too - paperless UE payments.  Yup, you gotta have an account at Wells, Citi, G-S or some other TBTF for direct deposit.  Of course they will eat up 10 to 20% of your check in fees.  The Financial Sector posts earnings that exceed (lowered) expectations - rally on!

[traderjoe]

Leo, I get your liquidity argument. You have the past 12+ months of evidence to demonstrate that it can work. And the EU stress test - and the market 'reaction' - only solidify IMO the demonstration of their resolve to paper over the mess (pun intended).

I was hoping to see in your article some of these fundamentals you talk about. I'd love to be proved wrong or to learn a new perspective.

The trouble, IMO, is that most of the green shoots you give to me will be infected with the massive government-borrowed spending across all sectors of society. When the Fed government borrows 42 cents of every dollar spent, and the economy grows 2-3%, how long is that sustainable for? It's worked for the Japanese for awhile. But their stock market hasn't worked out so well, and their economy really hasn't grown for 20 years (and ask about how its working for their younger 'temp' workers). What happens when their demographics turn against the Post pension system?

I have but 3 statistics to give you for my bearish argument (on the economy - not the stock market) that demonstrate the pillars of my argument:

1. Illinois has $5 billion in unpaid bills. http://www.illinoispartners.org/node/128 

Their budget deficit is approximately 100% of their revenue. Their pension plan is 50% under-funded. How will this be resolved without a soft-default of some sort?

Municipal finances (they can't print their own money) are in complete shambles. While the Feds might bail them out, this won't actually solve the underlying structural issue(s).

2. 40 million Americans are now on food stamps.

The amount of pain experienced by middle-to-lower class citizens is tangible.

3. As a previous poster suggested, the debt-to-GDP ratio across the economy has ballooned. How much of the 2000's boom was a debt-fueled mirage used to purchase any number of consumable items by average citizens. Car sales used to run 16-17 million at the peak, with cheap leasing deals (that proved to be a terrible business). Same with 1 million new home sales prints. Now that activity is a fraction of those levels - what replaces the unsustainable levels of demand? How much capacity (and human labor) needs to be destroyed? Of course, those are the forces of deflation.

Again, I get the stock-market argument. They saved the system - for the time being. On the backs of massive government funding, guarantees, etc., etc. They got an 80% ramp without much economic improvement but some 'stabilization', 'green shoots', and temporary 'bottom bouncing'. Since auto production shut down last year with the bankruptcies, it's easy to get some inventory re-stocking and good y/o/y numbers. Where's the hand-off to the private sector? Can the government ever get out of the housing market? How much will it cost to subsidize housing? How long until confidence is lost in the populance that we are moving forward sufficiently enough?

[Iam_Silverman]

I can offer some Cramer-Like spin on some of this, if you'd like:

"1. Illinois has $5 billion in unpaid bills"

This is an excellent opportunity to jump into the Muni Bonds, think of the interest rate you can get for short-term notes so that they can roll over their coming obligations!

"2. 40 million Americans are now on food stamps."

What do buy with Food Stamps - Food!  Buy ConAgra, Purina and General Mills!  Compared to Apple and Google (who don't make anything you can buy with FS), these stocks are cheap, cheap, cheap!

"3. As a previous poster suggested, the debt-to-GDP ratio across the economy has ballooned. "  Of course, but this is already priced-in!  The best way to utilize leverage (debt) is to borrow yourself rich.  Take out a HELOC and buy some equities today.  I recommend being heavily into the financials.  Buy Citi.  It would be even better if they were the ones who originated your HELOC, then all would have skin in the game.

If I had a pretty smile and could fill out a tight sweater, I bet that CNBC would be knockin' on my door!

[traderjoe]

Fair enough. It was a long question, but I still haven't heard one bull make an argument about where the growth will come from in the future. It's always - it'll grow just because it always has. And then they make arguments that are more related to a cyclical recovery and not a structural recession. 

I found a better link, re: Illinois: http://illinoisisbroke.com/newsitem.aspx?id=236. The budget crisis has its own website. Thousands of teachers being laid off. 37 kids per classroom. No end in sight for a budget crisis that might just result in the flight of high-tax citizens (see California) that becomes a death spiral. Being bullish short/medium term riding the PTB/PPT - check. Long-term solutions being fixed - hmmm....

[Iam_Silverman]

"Long-term solutions being fixed - hmmm...."

Yeah, I agree.  Even trying to poke fun at the situation is not helping.

[SheepDog-One]

NAH Leo youre right! 'Fundamentals' are awesome....IF youre trying to create Zimbabwe 2.0!

[Plainview]

Yep, the fundamentals are just rosy.

How can you look at a chart like this and spout such utter nonsense...

http://assets.theatlantic.com/static/mt/assets/business/median%20longterm%20unemployment.png

Just look at that chart and think through its myriad implications... none are bullish.

[FEDbuster]

Doublespeak 101: Jobless recovery

10-20% unemployment is the new normal (army, road repair, oil cleanup crew take your choice, no college needed)

[chrisina]

Leo,

" I also expect banks will start slowly lending again as employment growth finally shows some sustained improvements."

It doesn't matter that they start slowly lending again. When will you finally understand that what matters is that they start lending faster than economic growth? For there has never been any sustainable economic recovery anywhere in the history of the world without a rise in outstanding private debt / GDP levels. NEVER. You can look at all the historical economic data you want, in the USA, Europe, Japan, there has never been any exception to that simple rule.

Right now outstanding private debt is 3 times GDP after a 30 year bubble brought it to this astronomical level. Private debts have finally started declining because households and businesses had reached a level when they had too much debt. Too much debt means you can't get more. And that is true all over the OECD.

Aggregate demand = GDP + Change in debt

So on the upside of the bubble, the growth in Private debt helps to grow aggregate demand and GDP faster. On the downside, it has the opposite effect. Because private debt is 3 times GDP, a tiny decline causes aggregate demand to decline even faster. So GDP can't grow. That's how the system works for crissake. When will neoclassical economists finally understand the importance of change in debt on the economy? They just keep ignoring this in their useless models. 

In the OECD there is an excess of approx. $60 trillion worth of private debt that is going to be substracted from aggregate demand in the decades to come. Last time we had a similar situation, in the 1930s, it took 15 years and a WWII that destroyed half of Europe and Japan before there could be a sustainable recovery. And back then private debt levels were even lower than today and we had all the cheap energy we wanted.  

I'll put money into equities when outstanding private debt / GDP starts growing again. Until that happens, you permabulls can sing to me all the lullabies you want, all your wishful thinking and your best intentions won't change the way the economic system works.

[Iam_Silverman]

"I'll put money into equities when outstanding private debt / GDP starts growing again."

I think that I have finally figured out the PermaBulls directive to us dumb retail investors.  We need to jumpstart growth in all directions, so we should get a Home Equity Loan to buy equities!  See, using equity to buy equity - we can leverage ourselves indefinitely!

I really am at a loss though.  Leo has done his best to convince me that the worst is behind us by showing us the good news we may have overlooked, but overall, I still think that it is safer on the sidelines right now.

[Privatus]

Show me the audited track record.

[mephisto]

Thankyou Leo, that's another good article though we disagree on the direction of the market.

Your institutional investors are an odd bunch, aren't they? They

demand the highest quality operational and risk management systems from the funds they invest in

but they never sell!

It appears a large part of redemptions that followed the 2008 crunch were from wealthy individuals rather than institutions

-it is as if they can never admit they were wrong, even as the financial system collapsed around them in '08-'09. Could it be a version of the trader's call option? You know the one  - always get long because if the market collapses and I lose, so does everyone else? I think so.

I don't think I want to follow that bunch of asset 'managers', who don't ever get out.

I think the markets are all showing that there is a global lack of demand, hence deflation fears, low bond yields. For you to say there is more liquidity to hit the market, without QEII, means this demand has to pick up. I just don't see signs of that yet. An equity market that chops up and down 5% again and again, as we have seen, to me is just a sign of technical traders pushing and pulling it around in a directionless summer market. The western financial system is still under stress and so I'm happy to be short, waiting for the next shoe to drop.  

If you are saying many institutions didnt sell as we went down to 666 on SPX, then we have seen how bad things can get even without these large investors selling. Everyone else is trading short term - maybe less leveraged than before 2008, but with less confidence too. I think there's a good chance they all get out together, and we revisit those levels of spring 2009.

[Hedge Jobs]

ECRI has been around for about 40 years i think. If you really are a DMA trader you should have heard of this before this week.

When the ECRI was 130 earlier this year it was the perma bulls who were championing this indicator as proof of the recovery. They seem to have gone very quiet about this recently

[Graphite]

They're doing the same thing with the Baltic Dry Index. When it was collapsing for 34 straight days it was meaningless; now that it has turned up a little, it's just another sign of the nascently nascent recovery.

[Whats that smell]

I think you must have noticed as I did how that word "nascent" has been getting much use lately.

Goggle "nascent recovery"

About 2,550,000 results (0.27 seconds)

The second result is where the term came from perhaps?

http://www.businessweek.com/news/2010-02-24/bernanke-says-nascent-recove...

[DMA Trader]

Exactly good point. 

It all depends on bias. 

[MayIMommaDogFac...]

Yeah, no.

</sarcasm>

[DMA Trader]

this is at list site number 10 where i see ECRI in 2 days. 

never heard of him until last week. 

it's like the shampoo producers. 

one has find bifidus esensitis and bank 10 shampoo's with bifidus. 

ECRI is the new motto for perma bears. 

[vxpatel]

dude, leave dma trader alone.

he's obviously more baked than me.

[Dental Floss Tycoon]

Does anyone here speak Engrish?  Translation please.

[MayIMommaDogFac...]

Perfect English broken here.