General Ramblings On The Economy And Markets
I want to make a few comments about the economy and financial markets including a few reminders. Much of my core model work is based on risk. When the risk passes, I'll be cautiously optimistic again. I'm am confident but surely not arrogant that I know what needs to happen for the markets to recover. We see what happens to arrogance. Wall Street is imploding. To anticipate a date when this crisis will pass would only be guessing. It's an interesting undertaking but the reality is time elements are very difficult to divine. Many factors determine recovery. One, as an example, is the work the Federal Reserve is doing. That takes some amount of pressure off the markets for a period of time and, therefore, potentially stretches the time element of outcomes. The Fed's policies are actually working on some level but additionally it also has an effect on psychology. We saw how many market participants were enthused when the Fed started cutting rates. That means many may have been buying at that juncture instead of selling. There are just too many market forces including many that aren't understood at all. We are often told financial markets are discounting the future. A true statement. But so far the market isn't even close to discounting all of the risks likely to manifest themselves.
When I wrote on here the S&P could see a test of the 2003 lows or even 400-450, the general consensus was still very bullish. Too many still believe such moves are completely impossible. Yet, today, we already see many banking stocks falling well below their 1995 lows - the last time the S&P was at 400-450.
There are many market forces at work but as I wrote, 400-450 provides a reasonable valuation level. I don't know how many times I can say this market is extremely expensive but it is. And, if you have any doubt, simply look at financial stocks that have erased twenty years of gains in one year. Is anyone really thinking about what this means because the market is telling us something. Well, one way to look at it is the economic activity in the banking sector over the last twenty years is now being discounted. The market is taking it back. Or put more ominously, that growth wasn't necessarily reflective of fundamentals or wasn't sustainable and the market now realizes that fact. That everything we read over the last five or ten years about growth and Goldilocks was entirely false and the market finally realizes that fact. That is a very unsettling perspective. But, even though these are extremely unsettling times, this is all very bullish for the long term. Unfortunately, the intermediate term is not a good place to be for any of us.
Very few understand the risks facing the global economy. Ironically, Wall Street has been in the dark for many years while their world is now literally crumbling around them. Mind you, the world as they see it isn't coming back either. The American people clearly see the risks. Those risks are manifested in negative confidence surveys on a broad range of topics. That fact has led many to believe the market is a buy. This is a very dangerous belief for it is the American people that drive the economy and not Wall Street. And, in no way am I referencing the fact that 70% of the economy is the consumer. I'm talking about the American people driving the economy's production. A very popular myth is this concept of a consumer-led recession. I can assure you, anyone that understands economics - and that doesn't include most economists talking about a consumer-led recession - realizes that is a complete fallacy. There is no such thing as a consumer-led recession. What does this mean? It means everyone pointing to housing as the driver of this crisis are completely wrong.
Because this mess became larger and larger, the outcome has become messier and messier. Extending the bull markets by a single year adds many trillions of dollars, euros, pounds, yuan, etc. of very high-risk activities into the global economy.
Shorter term too many people think a rally is in the cards. Nearly every market technician in the world is showing oversold data of some sort that has led to a rally at nearly every point in the last fifteen years. There is little validity to such an analysis. We are seeing how the most brilliant minds in the world built quantitative models that are failing left and right. That is because few of these quantitative model builders (and technical analysts ) understand fundamentals - something Paul Volcker has talked about. I would add traditional intelligence measurements don't necessarily translate into emotional intelligence and awareness. A lack of those traits are surely at work in this monster we call Frankenstein finance.
I wrote the following comments some time ago but I am going to write the same thing again because for some reason it fails the investment community to understand this fact- technical analysis is a function of fundamentals. As fundamentals change so does the outcomes of technical analysis. Put another way, technical analysis is a self-fulfilling prophecy of underlying fundamentals. Therefore, what happened in the last five years is often irrelevant. What happened the last twenty years is completely irrelevant today. When in the last twenty years have you seen every major bank fall 60-95% in nine months? When in the last twenty years have you seen oil increase 1500%? Fundamentals are substantially different today. Quantitative finance today is different than it was at any time in the last twenty years - of course we already know that because most anything quantitative using leverage is imploding. I can assure you, on a go forward basis, technical analysis will produce results different than it did even two years ago. People looking for a repeat of the 2000-2003 market decline where we experienced very clearly defined and tradable rallies are using a completely inaccurate premise for their analysis. Fundamentals today have absolutely nothing in common with that environment. This market might not be able to rally. Let me use one fundamentals-based data point as an example to support that statement. There simply may be too much supply of shares to be able to mount a significant rally. Supply from deleveraging, supply from companies needing to raise capital, supply from spooked individual investors, supply from bearish money managers, supply from bankruptcies and on and on and on.
There almost seems to be a mentality amongst those that are bullish that it is a fact of life that rallies occur. We have had many declines over lengthy periods of time where markets did not rally any substantial amount. Maybe they paused for months but so far we have seen nothing like the rallies in the 2000-2003 decline in the broad markets. Right now we are seeing the type of market conditions that have often led to crashes. The general lack of respect for markets is not a good sign. Markets may improve next week or next month or next year. Or, they may not. Anticipating a cure to this crisis has already caused many long-time money managers to show the greatest losses in their career. Even greater than the last bear market.
When I wrote on here the S&P could see a test of the 2003 lows or even 400-450, the general consensus was still very bullish. Too many still believe such moves are completely impossible. Yet, today, we already see many banking stocks falling well below their 1995 lows - the last time the S&P was at 400-450.
There are many market forces at work but as I wrote, 400-450 provides a reasonable valuation level. I don't know how many times I can say this market is extremely expensive but it is. And, if you have any doubt, simply look at financial stocks that have erased twenty years of gains in one year. Is anyone really thinking about what this means because the market is telling us something. Well, one way to look at it is the economic activity in the banking sector over the last twenty years is now being discounted. The market is taking it back. Or put more ominously, that growth wasn't necessarily reflective of fundamentals or wasn't sustainable and the market now realizes that fact. That everything we read over the last five or ten years about growth and Goldilocks was entirely false and the market finally realizes that fact. That is a very unsettling perspective. But, even though these are extremely unsettling times, this is all very bullish for the long term. Unfortunately, the intermediate term is not a good place to be for any of us.
Very few understand the risks facing the global economy. Ironically, Wall Street has been in the dark for many years while their world is now literally crumbling around them. Mind you, the world as they see it isn't coming back either. The American people clearly see the risks. Those risks are manifested in negative confidence surveys on a broad range of topics. That fact has led many to believe the market is a buy. This is a very dangerous belief for it is the American people that drive the economy and not Wall Street. And, in no way am I referencing the fact that 70% of the economy is the consumer. I'm talking about the American people driving the economy's production. A very popular myth is this concept of a consumer-led recession. I can assure you, anyone that understands economics - and that doesn't include most economists talking about a consumer-led recession - realizes that is a complete fallacy. There is no such thing as a consumer-led recession. What does this mean? It means everyone pointing to housing as the driver of this crisis are completely wrong.
Because this mess became larger and larger, the outcome has become messier and messier. Extending the bull markets by a single year adds many trillions of dollars, euros, pounds, yuan, etc. of very high-risk activities into the global economy.
Shorter term too many people think a rally is in the cards. Nearly every market technician in the world is showing oversold data of some sort that has led to a rally at nearly every point in the last fifteen years. There is little validity to such an analysis. We are seeing how the most brilliant minds in the world built quantitative models that are failing left and right. That is because few of these quantitative model builders (and technical analysts ) understand fundamentals - something Paul Volcker has talked about. I would add traditional intelligence measurements don't necessarily translate into emotional intelligence and awareness. A lack of those traits are surely at work in this monster we call Frankenstein finance.
I wrote the following comments some time ago but I am going to write the same thing again because for some reason it fails the investment community to understand this fact- technical analysis is a function of fundamentals. As fundamentals change so does the outcomes of technical analysis. Put another way, technical analysis is a self-fulfilling prophecy of underlying fundamentals. Therefore, what happened in the last five years is often irrelevant. What happened the last twenty years is completely irrelevant today. When in the last twenty years have you seen every major bank fall 60-95% in nine months? When in the last twenty years have you seen oil increase 1500%? Fundamentals are substantially different today. Quantitative finance today is different than it was at any time in the last twenty years - of course we already know that because most anything quantitative using leverage is imploding. I can assure you, on a go forward basis, technical analysis will produce results different than it did even two years ago. People looking for a repeat of the 2000-2003 market decline where we experienced very clearly defined and tradable rallies are using a completely inaccurate premise for their analysis. Fundamentals today have absolutely nothing in common with that environment. This market might not be able to rally. Let me use one fundamentals-based data point as an example to support that statement. There simply may be too much supply of shares to be able to mount a significant rally. Supply from deleveraging, supply from companies needing to raise capital, supply from spooked individual investors, supply from bearish money managers, supply from bankruptcies and on and on and on.
There almost seems to be a mentality amongst those that are bullish that it is a fact of life that rallies occur. We have had many declines over lengthy periods of time where markets did not rally any substantial amount. Maybe they paused for months but so far we have seen nothing like the rallies in the 2000-2003 decline in the broad markets. Right now we are seeing the type of market conditions that have often led to crashes. The general lack of respect for markets is not a good sign. Markets may improve next week or next month or next year. Or, they may not. Anticipating a cure to this crisis has already caused many long-time money managers to show the greatest losses in their career. Even greater than the last bear market.
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