Thursday, June 25, 2009

Hard Out Here For a Bear


Being bearish on something requires a different temperament than simply switching one's bullishness to a different asset class. I am uber-bearish on traditional asset classes like stocks, corporate bonds and commodities. Being in cash is no fun and not very helpful when one is trying to grow their wealth through investing and speculation.

Talking to most people about going short or buying puts when the discussion turns to investment causes their eyes to either glaze over or start to roll in irritation. It seems that hope is more important than fact. And to be honest, the ones who are hopeful usually do better than those who try to be skeptical. After all, markets tend to move higher or sideways over longer periods of time, not down.

Bearishness is not popular because it often requires betting against people who are trying to do their best. It conjures up images of gloom and doom. For example, Mr. Nouriel Roubini has been called "Dr. Doom" for accurately predicting some of the things that have come to pass. No one thought to call him "Dr. Got it Right" or "Dr. Smarter than permabull Cramer."

This is the nature of things. Even when bears make the right call, they are usually better off keeping their victories to themselves, as their gain may well be an optimistic friend's loss. It seems our financial press would rather cheer lead than investigate, which is what happens when too few mega-corporations control the flow of information and all have the same vested interest in the outcome.

If it weren't for the internet, I am sure I would still be looking to smoke some "green shoots" and simply agonize over which 401(k) bullish mutual fund was best. I think the government needs to shut the internet down or regulate it more - it is too democratic and there are WAY too many people telling the truth in cyberspace. Unfortunately, I have learned a little about this investing and speculating thing and the more I learn, the more I realize bearishness is an asset right now.

But even when bears are right and the markets go down, bear markets are typically more volatile than bull markets. Hard earned and well-researched profits can evaporate quickly without good risk management. The largest and fastest bullish thrusts occur during bear markets, not bull markets. For those who learn the tricks of the trade, bear markets can mean fantastic profits, but they don't come easy.

We have already been through one lost decade of stock investing in the United States and there is no question that we are headed for at least two. Japan is now deep into its 19th year of a secular bear market with no end in sight after having a simultaneous stock market and real estate peak and subsequent bubble collapse back in 1990. After a 19 year bear market, Japan's Nikkei stock market index remains 75% below its early 1990 peak as of the close on June 25th, 2009.

Are we different? Are we better? Are we really not making the same mistakes by keeping bloated, connected large banks alive with taxpayer money and hiding the true losses from full view? Are we really not engaging in the same perpetually failing quantitative easing program Japan did, which created no significant inflation and did nothing to rescue asset prices? Are Ben Bernanke and widdle Timmy Geithner really the economic dream team?

Because, to me, if one is ever going to get bearish on stocks, real estate and commodities, now is the time. The trend is your friend and the rally that began in March is over. There's nothing wrong with being in cash, although previous Kondratieff Winters in history suggest that you may want to hold physical Gold as your cash. Why? Because it can't be debased by desperate banksters and apparatchiks.

Let me re-visit, in painstaking detail, all the reasons this secular bear market is not close to being over:

*The price to earnings ratio for the S&P 500 is now well over 100, at the highest point in the last century.
*Real estate is not yet close to bottoming, which wipes out banks and other mortgage note holders.
*Unemployment is close to 10% and rising.
*California, which has an economy that is the same size as China's, is broke and about to start issuing IOUs because it has run out of money.
*Credit card charge-off rates are now over 10%, the highest ever recorded.
*The entire banking system of the United States, in aggregate, is insolvent. The largest banks, such as Citibank and Bank of America, consider plain old insolvency a goal (they are way worse off than insolvency at this point).
*Nearly half of the venerable Wall Street firms (i.e. Lehman Brothers and Bear Stearns) are already history and the ones remaining are only alive due to fraud/theft and the forced generosity of taxpayers.
*Our auto industry... I'm from Detroit, so I just don't want to finish the sentence.
*Walking away from one's mortgage is more "in" than Paris Hilton.
*Baby boomers are about to start being owed massive entitlements (i.e. Medicare and Social Security) en masse.
*The national deficit has now risen well above 12% of GDP, a level last seen during World War II (how fitting that now our enemies are imaginary, Third World and perpetual - Orwell would be proud).
*Our government is piling public debt on top of a secular private debt bubble collapse, the same scheme that caused and exacerbated our last economic depression in the 1930s and has led to Japan being in a 19 year bear market.
*We remain beholden to a private, non-federal banking corporation known as the federal reserve to "save us" from the mess that they helped cause - this despite the fact that their only solution is always to get anyone with a pulse into more debt (i.e. their rather profitable business plan).
*Our manufacturing base has been dismantled and shipped to other destinations around the globe, so there is little hope of "growing" our way out of the debt morass in the next few years.

Gloom and doom or simply the facts? Yes, I could spin it in a positive light and talk about Goldilocks, green shoots, or some other Wall Street marketing phrase du jour. All I know is that the last secular turn in the debt markets gave us an 89% drop in the Dow Jones over 3 years (i.e. 1929-1932). Markets don't repeat exactly, but they do rhyme.

I believe by the end of this year, people will be hoping and praying to get back to the June, 2009 highs. We will probably just be praying to get back to the March, 2009 lows by that time. With a PE ratio around 120 right now on the S&P 500, let's just say we've got some work to the downside left ahead of us.

So, despite the difficulties, I think I'll keep trying to trade this bear with a portion of my capital. With the rest, I'll just hold physical Gold, my preferred form of cash for a Kondratieff Winter based on history. And once I think this cyclical bear market for the ages is over, I'll put everything I've got into Gold miners, who are sure to thrive in the weak economic environment ahead.

And how will I know this cyclical bear market is over? That's the easy part. I'll just wait for the Dow to Gold ratio to get to 2 (though it could go even lower) and then I'll start looking for opportunities. When I find ones I like at that point, I'll trade in my Gold and invest in something else. For now, the bear market is still in force and risk is extremely high in stocks. Act accordingly.

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