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Thursday, March 30, 2023




Courtesy of The Pragmatic Capitalist 

Bull in bear costume

Readers have likely noted my decidedly more bearish tone of late.  Coming into 2010 I was fairly optimistic about the equity markets and the economy in the first half of the year with expectations of a second half slow-down.   The market appeared likely to unfold in exactly that manner, but the developments in China and Greece looked like game changers to me as the global turmoil unfolded a bit faster than I expected.  So much so that I initiated my first net short position in over two years as the S&P surged to 1200.  Just a few short weeks later the market was literally crashing.

But as the market continues to decline we have to ask ourselves if fear isn’t getting a bit ahead of fundamentals?  Are investors too bearish and pricing in too much negativity or are they not bearish enough?  In other words, is this a new bear market or this just a correction? This was the question David Rosenberg asked himself in last Thursday’s missive:

“Well, so far the S&P 500 is down nearly 10% from the highs, so this is indeed a correction thus far but more often than not, declines like these morph into something more severe — even when we are in durable economic expansion phases like 1987 and 1998. This recovery is tentative, at best. But the numbers we are looking at is a 50% retracement of the March 2009-April 2010 runup, which means 943 on the S&P 500 and the reality that lows in the market, whether they be interim or more fundamental, tend to occur with the index 20% below the 200-day moving average, which at this stage would be 879. So at least we have a defined range of when to begin to put money to work. A break below that range would indicate that Mr. Market is sniffing out a double-dip recession, not just a visible slowing.

The ECRI leading index is down to a 47-week low, which is pointing towards much softer growth ahead and the Shanghai equity index is off nearly 30% and perhaps giving us a reading on global growth prospects. The one thing we do know is that the last time China was down 30%, this was a train hardly worth boarding in terms of how to be positioned between risky assets and a more defensive posture.

Note that even within the S&P 500, the decay is spreading as now we are up to 76 companies who have corrected 20% or more and therefore are in a classic bear market phase. And, it’s not just energy stocks — 6 of the worst-performing 20 stocks since the April peak in the market have been in the consumer discretionary space. Consumer staples, meanwhile, have stocks that have actually gone up since the April market top — Mr. Market is telling you that the frugality theme is alive and well.”

It’s difficult to disagree with anything Rosenberg says (is he on the verge of redemption?).  The fundamentals certainly appear to be changing for the worse.  The chain of events that is occurring right now really couldn’t be occurring at a worse time – as government stimulus begins to taper off.  The problems in Europe are front and center and as I’ve been warning for months this problem is far more complex and dangerous than anyone (still) wants to admit.

The Euro problem clearly appears to be spreading.  The plummeting Euro will certainly impact trade in China and the USA.   The austerity measures in Europe will almost certainly drive parts of the EU into recession.  It’s now clear that no bailout will solve what is an inherently flawed currency system.  There is truly no good answer that comes of this and there is very real potential for defections and defaults from the Euro.  This weekend’s news from the G20 shows that dissention is on the rise – NOT a good sign.

International Commerce

The problems in Europe are fundamental to the currency system.  Just like the gold standard and single currency systems before it we are discovering that it simply does not work.  This time is not different.  I still believe the end game in the European currency crisis is a (partial) break-up of the Euro or full unity.  Unfortunately, full unity would require one rule of law, one treasury and one central bank all operating under the same umbrella – in essence a United States of Europe.  I believe thousands of years of negative history make that impossible.  The more likely scenario is a partial break-up where the smaller PIIGS nations defect, default and bring back their own currencies.  Unfortunately, the European politicians have entire careers invested in the Euro and letting it fail is simply not an option.  That likely means these problems will be drawn out until something (horrible) forces their hands.

Meanwhile, the problems outside of Europe appear to be mounting. The private sector in the United States remains indebted and fragile.  Friday’s job’s report was truly abysmal for an economy that is supposedly recovering.Housing prices appear to be rolling over.  China is slowing down.  Copper prices are plunging.  Lumber prices are plunging.  Leading indicators are literally tanking.  Deflation is clearly returning.  Our leaders appear truly clueless (and the public is realizing this). Public sentiment is horribly negative towards the stock market. And the worst apart in all of this is that the analysts have been increasing their estimates over the last few months.


So the question remains – is this sell-off different from all the ones we have seen since March 2009?  I believe so. The one primary differentiating factor between this sell-off and every sell-off since the March 2009 bottom is the action in the credit markets. We have not seen significant widening of credit spreads and deterioration throughout the entirety of the 60% rally.  This is a clear symbol of a fundamental change and an increasing fear of significant bank balance sheet deterioration. I never believed the credit crisis was over and have maintained that we are in a secular bear market that is unlikely to end before 2012. The credit crisis is clearly re-emerging and we are beginning to see market action that is eerily similar to 2008 when we saw a series of hiccups that preceded the final crescendo.  The action in short-term funding markets never lies and investors would be wise to take notice that this sell-off does in fact have some differentiating characteristics to it.

This looks more and more like a bear market every day and the dominoes are certainly lining up in a way that this could turn out to be worse than your average bear….I hate to sound like such a doom and gloomer (trust me, the life of a money manager is much easier in a secular bull market!), but no amount of government spending will solve the inherent flaws in the Euro or paper over the problems in the private sector.   Governments and citizens have become convinced that we won’t have to pay the piper for creating flawed currency systems and taking on far too much debt.  They believe they can bail everyone out at every twist and turn.  I think we’re going to find that to be false in the coming months and years. 

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