I pulled a few key lines from an interview in Barrons last week with Ned Davis, a technician and quant wonk whose institutional service is top notch.

Here’s the relevant excerpt:

Barron’s: Is this simply a "stiff correction," as you have said, or a new bear market?

Davis: I’m concentrating on the downside risk. We are in a pretty defensive position, and in our investment strategy we are underweight stocks at 45%, market weight bonds at 35% and overweight cash. In my hotline trading strategy, I have a market-neutral stance currently, which I define as about as many shorts as longs.

How related is this market performance to the second year of the four-year cycle?

In the case of the four-year cycle, we plotted it against stimulus from the Federal Reserve and the federal government budget deficits and money-supply growth, and we found they correspond very well. Problems in a mid-term election year are generally because the Fed is tightening, and so the fundamentals fit with the cycle. As you get closer to the election, you know, there is uncertainty that is going to weigh on the market. As we get closer to October, it will become clearer. This is going to be a particularly bitter election with a lot of divisiveness. The country is as polarized as I have ever seen it. One of the unusual aspects of this period is how quiet labor has been. Job growth has been okay, but wage rates have not been good and the spread between the rich and the poor has gotten bigger and bigger.

If rates aren’t too high, what’s the problem?

When you look at the historical averages, they’re not. But when you look at it versus $42 trillion in debt and wonder how we are going to service all that debt, then you get a little different feeling about it. In the last year the federal government is paying 21% more in net interest then it did a year ago. They have to keep rolling it over and are running deficits on top of that. That tends to be more deflationary than not.

How much downside risk to the market could there be if the economy stays strong?

There have been a lot of bear markets when earnings kept rising. In the 1973-74 bear market, earnings rose the entire period. A lot of that was inflationary, but a lot of the earnings today are coming from energy and other sectors that are inflationary. In 1946 we had a big crash and a bear market and yet earnings exploded. In 1962 we had a crash while earnings exploded. In 1987 we had a crash and earnings did very well. Just because we don’t see a recession on the horizon doesn’t mean there is not risk in the stock market.

What about profit margins?

High profit margins tend not to be bullish. They tend not to be bearish, though. High profit margins tend to translate into a flat market.

What’s your view on the dollar here?

My view on the dollar is that it is structurally very, very weak. Even though currency depreciation really does not solve the trade-deficit problem, it has to be part of the solution. There will be a tendency for the dollar to go down. The problem is that it is in nobody’s interest for the dollar to go down. It is not in the Fed’s interest because of inflation. It is not in Europe’s or Japan’s interest because those economies are growing more slowly than ours. All the central banks in the world maybe want the dollar to go down, but only very slightly and very slowly. It will be a controlled slide. Right now, our economy is running particularly strong. The Fed is still tightening. Our rates at 5¼% are way above global rates at about 2½%. The dollar has a lot going for it, and it has been rallying a little bit. But the trend is down.

Is it for that reason you have been bullish on gold?

Yes. When you consider alternatives to the dollar, one of them is gold. Gold is such a small market, it doesn’t take much to push it up. I’m pretty bullish on gold even after its unbelievable run. We’ve had a big correction here after it got beyond its fair value of about $540 an ounce. Being bullish on bonds and gold is a strange combination because one is deflationary and one is inflationary, but I think gold is acting now as a currency replacement and, in that light, it looks pretty bullish.

Good stuff from Barron’s.

Source:
Signs of the Bear
Interview with Ned Davis, President and senior investment strategist, Ned Davis Research
SANDRA WARD
Monday, July 3, 2006
http://online.barrons.com/article/SB115170849821395833.html

Category: Data Analysis, Investing, Markets, Psychology, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

47 Responses to “Signs of the Bear: Ned Davis”

  1. Davis on Stocks

    A Barron’s interview with Ned Davis from The Big Picture I missed while on vacation.

  2. Mr. Beach says:

    The sad fact is that we’re living in a debt fueled economy as opposed to an income fueled economy.

    The largest buyers of goods and services, the American consumer and the Federal Government, have been financing their purchases without any real plan for re-payment.

    Neither the American Consumer, nor the Federal Government has spent the borrowed money on new income generating assets. In the case of the consumer, the borrowed money has been used to drive the savings rate negative and in the case of the government, the borrowed money has been spent with shocking in-efficiency.

    Where does this leave us?

    The answer is really out of our control. Given our druthers, our fine system of borrow-and-spend would continue forever.

    The real control lies in the hands of our largest lenders: the foreign central banks. These lenders are setting our market rates. Everyone else is just following in their slipstream.

    So the question comes down to this: when will foreign central banks wake up and realize that the 5% treasuries they’ve been buying can’t make up for inflation or more-importantly currecy risk.

    Of course, the answer is that foreign central banks have not been making rational economic decisions. They have been making political decisions.

    And there you have it: we in the economic world are errantly trying to determine our fate through data and numbers, when we would do ourselves a lot more good by learning to read the political signals coming out of China and Japan.

    I would dare say that a good 1/3 of our time should be spent in decoding the intent of the Chinese and the Japanese. When their economic & political intentions shift, we will see tidal changes in our economies.

  3. drey says:

    great post Mr. Beach – thanks.

  4. Bob A says:

    So we borrow from China at 5% and simultaneously the value of the dollar goes down 5% and they net 0. But… who else are they going to loan it to??

  5. BDG123 says:

    I am sour on the economy, but necessarily the reason the doomers and gloomers are. If I could laugh at this in any way, I’d laugh that somehow the bankrupt Chinese and Japanese hold some power over the richest country on earth. Forget about wealth created by housing, our wealth is and will remain the envy of the world for our life time. Will the future suck for a while? Maybe. It has in the past so there is a likelihood it will again at some point. That might be just around the corner or it may not be. But, it sure as hell won’t be because China has $900 billion in US government securities. If anyone likely has a gloomy future, it’s bankrupt China and Japan if continued economic reforms don’t materialize. Given they haven’t materialized since the beginning of man, it’s highly unlikely they have the stomach to do it before they suffer serious economic outcomes. We ain’t gonna buy all the shit they can pump into our country forever. At least Japan understands that and has smartly and aggressively invested in the US creating tremendous wealth for Americans and continued success for Japanese multinationals. And, if anyone thinks that’s an American statement, just ask the second wealthiest group of people in the the world over at the EU if they plan to let this Chinese imbalance materializing in their system continue ad infinitum.

    I have alot of respect for NDR as it pertains to technical and quantitative analysis but he should stick to what he’s good at. Blathering about our debt isn’t one of them. The markets have had tremendous runs historically when we were at debt levels much higher than they are today in percentage terms. Obviously the numbers look astronomical in absolute terms because our economy’s GDP is astronomical in absolute terms. We have issues we need to deal with as far as future obligations but he’s been smoking some ganja with $42 trillion. I’d like to know how he got to 500% higher debt than we actually have. Is that new math? Our debt level is far from $42 trillion and the rest of the world is in a bigger pickle including Japan and China’s future obligations as it pertains to pensions, retirement, healthcare, etc. China’s mess is so bad, they’ll likely have a repeat of Russia of sorts OR worse at some point.

    While future obligations for Medicare and SS are large, all it takes is one fell swoop reform of healthcare in the US to make that dynamic change drastically for the better. We might have obligations of $42 trillion in Social Security or Medicare or whatever he is spewing over the next 50 years but why is that different than the trillions in obligations of the past? Reagan had a SS mess and they seemed to put their mind to it and fixed it with a bipartisan committee. In the next 50 years, the US will likely take in nearly $200 trillion in tax revenue. China gonna do that? Yea right. So, who has the fiscal problem? How about the country with 5x our population where 80% of people still make less than $2 a day.

    We’ve got some imbalances. It might get hellaciously messy before its all said and done. But, China, Japan and future obligations for Social Security aren’t likely to be major drivers in our future any more than is if McDonald’s uses animal fat to make their fries.

  6. Mr. Beach says:

    BDG123: Your argument can be summed us 1) Their problems are bigger than ours. 2) We are better than them. 3) We’ll have some problems but it won’t be too bad.

    As a matter of judgement, all three of your points are off the mark.

    1. The American consumer and Federal government are not investing in income producing assets for the future. This decision has dire long term consequences. Asian economies are building roads, airports, power plants and factories. When was the last time you saw something like that built in your neigborhood?

    2. It is the height of arrogances and presumption to continue to believe that the American economy will always to dominate the world. Ask the British about their Empire for comparison. Obviously you’ve never been to Shanghai, Taipei or Seoul.

    3. If by “hellaciously messy”, you might consider 15% interest rates, the collapse of housing, the collapse of state budgets and bankruptcies as far as the as the eye can see, you might be onto something.

    Here is the fundamental problem: money borrowed at 5% is not being used to create assets that produce returns above 5%. The housing bubble ponzi scheme world, money borrowed at 1% could be leveraged and turned into 20% y-o-y returns. That ponzi scheme is coming to an end.

    Where is the income in the American economy?

  7. Mr. Beach says:

    BobA: You are grossly mistaken about the fall of the dollar. It has been much worse than 5%.

    In the beginning of 2002, one USD would buy a little over 1.10 Euros. Today, one USD will buy a little less than 0.80 Euros.

    That is a fall in value exceeding 25%!

    Yahoo 5 Year USD to EUR Chart

  8. Craig says:

    Mr. Beach, you’re the man!

    The unseen/unaccounted for is the issue.
    I think 42 trillion is conservative.

  9. ss says:

    “Where is the income in the American economy?”

    Beach…define income. The gov’t doesn’t include capital gains or retirement income as income. No we are not “savers” in the traditional (gov’t defined) sense. We stopped using passbook savings in the late ’70′s…we now make our money and assets “work” for us…though investing — in our homes, IRA/401k’s, and investment portfolios. All of these investment vehicles are not counted in the narrowly defined gov’t definition of saving. Take a peek at the slope of the curve of the net worth of this country….even after the bubble years that were produced from the 1990′s — the DECADE OF LIES.

  10. BDG123 says:

    I love the incessant ramblings of perma bears. Is this Malthus back from the dead? You can’t defend your original post so you go on to try to reframe your argument? Now your argument isn’t that China and Japan hold our future in their hands because they own some of our debt but now it’s because we aren’t investing and it isn’t our God given right to rule the world.

    Well, second one first. Please spare me the lecture on Asia. I’ve likely been there many more times than you have. I’m not quite sure where you get that Korea or Taiwan now play into this? More diversion in your defenseless argument? Is Taiwan now holding the key to our future? Additionally, why does increased wealth globally have to mean the demise of the US? I think your comparisons are just a tad off from a historical perspective in comparing the US to Britain.

    Talk about Ponzi schemes. I think you might be referring to centrally planned economics in China.

    So, now am I to take up the argument that China is the future or we are not the future because they are building roads and bridges? When was the last time I saw a road built in my neighborhood? Well, you got me there. They paved my road from a dirt path well before I was born. Not that I’d mind if they repaved my street some time in the future. So, your argument is that China builds roads but we only decode the human genome,design the future of advanced semiconductors, drive innovation into bio-energy, lead the world in medical technology, manufacture 20% of the world’s output, lead the world in advanced materials research, lead the world in aviation, lead the world in military technology, lead the world in software, lead the world in IT, lead the world in financial services, make the best bbq, do 40% of the world’s basic research, have 40% of the world’s wealth, generate 50% of the world’s business profits, educate the world’s citizens in our world leading universities and, again, China is building roads so we are doomed? Can you tell me anything China does better than us from a business perspective? For Christ’s sake, we even make better Chinese food than they do. You want to eat alot of the snot they eat? Heck no, you’d rather eat like a pig at Yank Sing’s with white table cloth and the best service in the world. Any global leadership they dominate? Anything? Oh, yea, they are the best at ripping off our inventions illegally.

    I’m sorry but if that’s all you can come up with, I am headed off to do something more productive, taking a nap.

  11. BDG123 says:

    Btw, Mr. Beach, it’s MR. BDG123! lol

  12. wcw says:

    BDG, you’re going to have to stop using phrases like “bankrupt China.” When I saw that I thought, OK, NPLs versus currency reserves, saw how long you’d written, and stopped reading.

  13. Mark says:

    ….and winner of The Big Picture’s Tony Montana Award as well.

  14. ss says:

    Mr BDG…you will soon be swarmed by the cult. Let it slide off yer back like water off a duck. We NEED perma bears to preach guns and butter in the mountains. We need every brink in the wall they can carry.

    Great post amigo.

  15. Number Six says:

    I have to agree. We do make fantastic Bar-B-Que.

  16. BDG123 says:

    bankrupt china, bankrupt china, bankrupt china. na na na na! lol. Did I ask you to read my post? Remember, I won the Tony Montana Award so you can guess what you can do.

    JUST KIDDING. But, I don’t want you to read my posts. You might read something offensive.

  17. alan says:

    Mr BDG123:

    Is that you “B” doing all that rantin and ravin? Now that u won the TM award, take your medicine and go to bed before Barry takes out that rolled up newspaper.

  18. me2200 says:

    Very timely little piece. My oil portfolio fell 3% in an hour today for no apparent reason. All low P/E stocks, oil over $74 a barrel today. Demand is strong. Hurricane season is coming. Earnings season starts next week. Earnings should be very strong.

    I sold and locked in gains. The market’s stupidity exceeds my desire to lose capital.

    I suspect a big correction next week.

  19. wcw says:

    For those here who have not read BDG’s rants, they may be summarized thus: “America, fuck yeah.”

    It is a powerful argument, but I prefer its succinct expression, P+C Matt and Trey.

    Next time I am going with my initial instinct.

  20. Mr. Beach says:

    BDG123:

    Asian Central banks, including China/Japan/Korea/Taiwan/Singapore/etc. now hold trillions of dollars of American Debt.

    As the largest buyers of these securities, they are setting the market price.

    Perhaps you didn’t notice the hiccup in the bond market in late February on a rumor that the Korean bank was diversifying.

    To refresh your memory: CNN: Dollar tumble bonds Slide…South Korea…

    As long as our lenders continue to lend to us at non-economic rates, everything will be fine.

    The moment they begin to turn, all bets are off. To underestimate the financial siginificance of Asia on the American economy is at some point laughable.

    These guys are our largest lenders. They decide what interest rates we pay. Not us.

    Your argument about innovation is also off the mark and woefully ignorant of the power of compounding growth rates. It isn’t enough to be the leader today, what matters is that our growth rate ensures that we’ll be the leaders 50 or 100 years from now.

    There is shockingly inadequate investment in public schooling and infrastructure in the United States. We are now coasting on the investments of the previous generation. As exciting and fantastic as it is today, future wealth cannot be preserved without concentrated investment in education and infrastructure.

    China’s GDP is growing at 10% annually. Wheras America is moving along at 3.5%. Put in China’s $2 Trillion economy and America’s $12 Trillion economy with these rates and you get some intersting results:

    China matches the US in GDP in 30 years and doubles the American GDP in a little over 40 years.

    You sound like an old man — with your nap and all. What happens in 40 years may not matter to you.

    It matters to us young-uns.

  21. ss says:

    “These guys are our largest lenders.”

    Yep, and we are their biggest customers. It’s not in their interest to screw their best customers. Ya dig?

  22. alan says:

    And 1 and 1 is tree, da new math, ss? And money grows on trees too. Ya dig ?

  23. Mr. Beach says:

    ss & bdg123:

    You two would both learn something by reading Warren Buffett’s allegory about spender vs. producer nations, or as he calls them, Squanderville and Thriftville.

    Read the article here.

  24. ss says:

    Head for the bunker, Beach…there’s incoming!

    It’s so much fun debating data miners, liberals, and the Cult of the Bears.

    Thank God they’re hear to tech us everything we need to know!

    lol…Guns and Butter baby!

  25. ss says:

    Here’s “the rest of the story”. Open your “data mining eyes” to a larger picture.

    http://www.fxstreet.com/images/graf/investors-inteligence/InInUSdollar.pdf

    Hint…lop the bubble induced hysteria numbers from this chart (1997-2000) and you’ll see a chart of the US dollar that is a trading range…again ex the bubble.

    It is approaching the neutral range it should be in. Do you honestly think Asia will let their currencies get so strong that their products will be priced out?

  26. Cherry says:

    Beach gets it, most of you don’t. I love the 2 myths from this expansion:
    1.The economy is booming: Is it really? Compared to the peeks of the dot.com boom, it isn’t on par nor will it reach those levels. Nor is it doing nearly as well as the 60′s gun and butter days of the coms. I am not sure it will end up doing better than the 80′s. Warm economy right now, sure, hot, nope.
    2.There is a bull market. No there is not. As this site has said quite abit, we are in a bear cycle.

    The end result is, we hit our industrial peek during the first half of 2006, now we decline during the 2nd half into recession by 2007. January people will know what people like Mr. Beach have known for awhile: Things have gone to hell!!

    The questions we should be asking now is: How bad will the recession be and what will happen after it?

  27. ss says:

    “As this site has said quite abit, we are in a bear cycle. ”

    There you have it!! This IS the Cult of the Bear site.

    Build my wailing wall of worry…toute suite!

  28. Craig H says:

    I’m going interrupt all this fundamentalist macro-eco-sniping for some pure-voodoo, technical mumbo-jumbo. ;-)

    Today sure turned out to be fugly – for the bulls that is. Even oil closing down a buck couldn’t prop up the market, and the rally in bonds looked more like “flight to quality” than a bet that the Fed is done. I knew things were going to be nasty when Haynes and Pisani came on at 9am and looked wan and worried. LAB’s blowup (specialists were long in June while retail was short – so says MLCO) must have contributed to the mood on the floor. And I thought we retail suckers are supposed to be the dumb money?

    Anyway…

    What stands out to me right now is the COMPQX slipped back under the trendline that connects the ’04 and ’05 lows. It, along with the NDX, looks set to test the June lows next week. Tech’s a wreck for sure and the permabulls on my TV told me we can’t rally without tech. I don’t necessarily believe that, I think tech’s just been dragged along for the ride for the past 2 years, but as long as they believe it, fine by me.

    The past month’s action on the Dow daily chart is looking to me more like a double-top than a V bottom from which we rally to new highs. I still see a head and shoulders top from March to May that measures down to 10,500. It was technically violated when the Dow rallied back up above the neckline at around 11,090, but (interestingly) that’s where we closed today. Close under it and it should get the bears more excited. Another interesting thing about Dow 10,500 is it’s where the trendline of the ’04 and ’05 is presently.

    S&P500 also looks like a double-top, but a weaker one since it couldn’t get back to 1290. It has its trendline, and June consolidation, at 1240 to retest.

    The indexes are coming down from overbought, but not oversold on a short term basis. Closest to oversold is NDX. VIX was eerily not hysterical today, but it is rising off the June low.

    Things are set up for our guru-du-jour, Charlie Nenner, to add to his fame if his call for July 10th to kick off a resumed downtrend comes true. I don’t believe in gurus, but when they develop a following their prophecies can turn out to be self-fulfilling for a spell – until they mess up.

    I wonder if Charlie saw the flick “Pi”? Bring on that kosher kaballah voodoo!

  29. Kevin says:

    Projecting current Chinese growth rates indefinitely into the future is not sensible. They are on the same trajectory Japan and the little tigers all followed and always with the same result: growth slowed down drastically long before they reached par with the US.
    Also, as hard as it is going to be for us to stop overconsuming, they will have an equally hard time stopping overproduction. They are as addicted to exports as we are to imports. None of the Asian economies has managed to wean itself from being driven by exports.
    And China’s authoritarian political structure will make this task even harder for them than it has been for Japan.
    This is not to minimise the seriousness of our imbalances.

  30. V L says:

    You are looking at only one aspect – the slowing economy. You forgot the inflation and the possibility of stagflation.
    Bonehead economists used to say that Bernanke is over-reacting to a non-existent inflation threat given the absence of wage pressures. However, this naive view misses the point that rising wages, just like other prices (wages are the price paid for labor), do not cause inflation, but result from it. More importantly, wages usually are among the last prices to adjust upwards in response to inflation, which is one reason that inflation is so damaging. “Waiting for an up tick in wages to confirm inflation is analogous to waiting for the caboose to evidence an oncoming train.”
    Today these boneheads received the healthy dose of reality. Average hourly earnings in June rose 0.5 percent, up from 0.1 percent a month ago. Boneheads expected a 0.3 percent gain. This jump makes year over year wage inflation the highest since 2000.
    Wage costs are accounting for 70% of the expenses for an average business (compare it to energy as 5% of the expenses, the price of oil that everybody is so worrying about)
    I hope you understand now why the markets are freaking out today. By the way this is only the beginning of the things to come.

  31. Detroit Dan says:

    The attitude of some Americans (perhaps the majority) reminds me of how the Chinese used to think of themselves as far superior to the rest of the world.

    From China – Evolution of Foreign Policy:

    China’s long and rich history as the world’s oldest continuous civilization has affected Chinese foreign relations in various ways. For centuries the Chinese empire enjoyed basically unchallenged greatness and self-sufficiency. China saw itself as the cultural center of the universe, a view reflected in the concept of the Middle Kingdom (Zhongguo, the Chinese word for China). For the most part, it viewed non-Chinese peoples as uncivilized barbarians…Because the Chinese emperor was considered the ruler of all mankind by virtue of his innate superiority, relations with other states or entities were tributary, rather than state-to-state relations between equals… China’s view of itself as the undisputed center of civilization–a phenomenon called sinocentrism–remained basically unchanged until the nineteenth century, when the Qing dynasty began to deteriorate under Western pressure.

  32. BDG123 says:

    Well considering I’ve been bearish on stocks for the better part of a year and have been calling a recession and a bubble in metals and oil for longer than that, I’d say my getting it is pretty accurate. As for those who say only they get it and everyone else doesn’t, well those are typically the ones who are very rigid in their thinking and somehow think they’ve got some particular insight that us stupid folks just don’t have the intellectual capital to understand.

    As for the doom and gloom along with America going to hell in a handbasket, we’ll all just have to wait and see. But, meet me on the other side to collect your kudos or take your lumps. My bet is you’ll be taking your lumps as the perma bears always do. Recessions and imbalances are part of history. They always find a way of working out. Sometimes poorly and sometimes not. If you think this is “bad”, you haven’t been around long enough or studied history enough to know what bad is. Oh, and I’m placing bets on who’ll come out on top. It won’t be China and I’d belly up to the bar with everything I own on that one.

    Until then, I guess I’ll just have to let all of you intellectually superior types help lil ole me through it. Maybe you could share your McDonald’s paycheck with me when I’m tin cupping.

  33. rick says:

    Come on guys, it ain’t that bad in america,
    we have a roaring service sector and a retail sector
    to sell all that cheap stuff from china.
    The transports are hot, transporting all the stuff
    manufactured from overseas.
    I saw a very bullish chart on swb,,,, another example
    of a sector with US dominance.

  34. drey says:

    Here’s a simple prediction for some of you flag waving nitwits: dollar will be down 7-8% against major currencies by the end of the year.

    My recommendation is that you start dealing in reality – you’ll lose a lot less money that way.

  35. juan says:

    Given all the ‘A’ vs ‘B’ in most of the above, it’s time to break out a favorite quote, a short excerpt from Leon Trotsky’s *1914* ‘The War and the International’:

    “The forces of production which capitalism has evolved have outgrown the limits of nation and state. The national state, the present political form, is too narrow for the exploitation of these productive forces. The natural tendency of our economic system, therefore, is to seek to break through the state boundaries. The whole globe, the land and the sea, the surface as well as the interior has become one economic workshop, the different parts of which are inseparably connected with each other. This work was accomplished by capitalism. But in accomplishing it the capitalist states were led to struggle for the subjection of the world-embracing economic system to the profit interests of the bourgeoisie of each country. What the politics of imperialism has demonstrated more than anything else is that the old national state that was created in the revolutions and the wars [5] of 1789-1815, 1848-1859, 1864-1866, and 1870 has outlived itself, and is now an intolerable hindrance to economic development.

    The present war is at bottom a revolt of the forces of production against the political form of nation and state. It means the collapse of the national state as an independent economic unit.

    The nation must continue to exist as a cultural, ideologic and psychological fact, but its economic foundation has been pulled from under its feet. All talk of the present bloody clash being a work of national defense is either hypocrisy or blindness. On the contrary, the real, objective significance of the War is the breakdown of the present national economic centers, and the substitution of a world economy in its stead.”

    We tend to think of globalization as a recent phenomenon – it is not, but has been punctuated by discontinuities such as the Great Depression. As Trotsky said, it combines the planet, but as he didn’t say in that quote, the combining is and can only be uneven – no ‘convergence’.

  36. Mark says:

    VL has apparently read some economics and understood it. As I posted elsewhere, today’s report was about the worst combination The Bulls could have hoped for. This is a continuation of a series of data points that have been evidencing rising inflation and a slowing economy. Not a particularly robust combination for equities.

    The herky-jerkiness of this market to data is unhealthy. I think it’s the signal of bull run exhaustion. The market is pleading for any bit of good news to buy on. Right now those are few and far between unless you consider end of cycle M&A activity a good thing. It may be but only for one of the participants. It is not a reason to take THE MARKET higher.

    So what do we have as prevailing trends? Interest rates– higher. Inflationary pressures– increasing. Guidance- starting to lower. GDP- guiding lower. PCE- ah this one is key. We see the Great American Consumer increasingly tapping savings to finance purchases(look at the increasingly negative savings rate), which are starting to weaken. They have to if they want to keep buying because the MEW game apparently ended for most 2H 2005. When the PCE data series starts to show decisive slowing ROC there won’t be any question what happens next.

    I’m with “B”/ BDG123/Tony Montana on this one. I have been holding lots of cash and my longs are hedged to the hilt. Although I was playing the metals and oils that too has stopped.

    I’m no permabear as I can’t wait for the next bull run. I’d rather we all take our lumps quickly on this one but that is going to require some maturity on the part of the Fed on monetary policy and our politicians to get us back to investing in productive assets again. I don’t see it this cycle so I think we are in for some prolonged pain. History shows us that this isn’t unusual either as we work off the excesses.

  37. brian says:

    Mr. “B”….. I enjoy reading your posts here very much. You seem like Axel Rose with a money clip.
    As to “..the ones who are very rigid in their thinking and Permabears..” i think most of the folks visiting PB are quite the opposite (yourself included).

    “doom and gloom” tendencies? You’ve been to China…Most here are just people seeking an “unofficial” viewpoint because your -imbalances- are here and your -recession- IS right around the corner. Yes, these are part of history….(human history….especially the “imbalances” part) but you won’t hear them discussed as pleasantly (or prematurely?lol) as you do here…..
    my 2 cents

  38. samuel says:

    bdg123 claimed that NDR made up the numbers on the 42 trillion in total debt within the US. What he may be surprised to learn is that number comes directly from the Federal Reseve which collects this data and publishes it in its quarterly Flow of Funds report. If you do a little research you can get it yourself.

    And yes, America does have a debt load that is that huge and it is scary. It also continues to grow at a ridiculous rate.

    And bdg’s other point that the market has had great runs at higher debt levels than this is equally absurd. That is because America’s debt load has never been higher than it is today. The only comparable period is the debt bubble that imploded into the Great Depression where GDP collapsed by a third.

    Yes, there is a debt bubble in the current US economy and investors had better pay attention or they risk losing a lot of money.

  39. BDG123 says:

    Thanks Brian. I wish I had AR’s money clip. While I joke about being crazy, he really is crazy. But, he’s one hell of a rocker. I believe Mark and I will be proven right in the long term. That doesn’t mean the world may not experience deflation, recession or worse. I’m simply saying those who say America is doomed for all of these perma bear reasons are just plain wrong. I can’t wait for the next bull run too. While there are no guarantees, I believe it will be the best time to buy stocks in the last thirty years.

    Samuel,
    I was referring to government debt. And assumed the NDR numbers were in reference to future obligations as my follow on post clearly pointed out. I’ve seen numbers double $42 trillion as a form of future obligations for SS and MC. That is what I am talking about as I outlined. And, as a percent of GDP, we have had historical situations where government debt was extremely high and the markets did very well so my statement was indeed accurate. If you noticed, my note pointed out that in relative and absolute terms. I’m hoping you understand that difference.

    If NDR is talking about the total debt, and he may or may not be for all I know, in the form of all government, businesses and all individuals in the US as loans, bonds, etc, then it might be $42 trillion. That to me means absolutely nothing. Our companies have record cash on their books and individual wealth is as high as $55 trillion depending on how it is measured. So, what does $42 trillion mean? It’s alot of money and that’s about it.

    So, in one hundred years if our economy is $240 trillion in size, and using 3% growth annually will indeed yield an economy of that size, will you be freaking out because our debt if 50 bazillion dollars or whatever it may be? Even if it is historically low as a percentage of GDP, household debt, corporate debt or whatever measure it is? But we would need to be worried simply because it’s a large number? Do you know what the tax base would be? Enough to pay off that entire $42 trillion in one year. But, do you know what that $42 trillion will be in 2106 dollars? 5 cents. That’s right. 5 cents. It’s based on some assumptions doing a cash flow analysis but it won’t be too far from that. So, you might want to thank your lucky stars for inflation and a fiat money system which makes future payments easier to manage. You see, the Fed and your government that set up the Fed isn’t quite as stupid as all of the perma bears would have them be. Remember, Ben Bernanke is smarter and better able to manage The Fed than any posters on this board. Wall Street may not like him but that has actually endeared me to him. We might need someone Wall Street doesn’t like to put a hammer on global hot money which always wants to create imbalances that prematurely ruin the party.

    As to $42 trillion, if that is really the total debt of our entire American populace, well, I don’t really care, per se. It’s sort of like saying you owe the bank $1 million. I don’t know if your ability to repay it is based on a $40,000 salary or a $4 billion salary. But, I will say this. Corporate America is very, very, very smart on average. Smarter than posters on this board. You think they were out issuing massive amounts of debt when long term rates were 3%? You bet they were. And they were goddamn smart for doing so. So, let me ask, if the American consumer did some of that same thing are they not also to be commended for doing so as long as much of it was used for investment? Education? New kitchen? Buying a new car to get them to work? What’s the difference? Oh, I forgot, we have no faith in the American consumer because they are all stupid yet all of the perma bears on this board are more than capable of pointing out their high level of stupidity with the superior intellect. ie, I get it and you don’t. Remember the difference between professional traders and yerk offs Barry posted on here recently? Wasn’t one, paraphrasing, that I believe I know something everyone else simply doesn’t get? That was the yerk off trader. Uh huh.

    Howsa bout a little secret. Do you know what creates national wealth? Do you think it’s savings? If so, it would be Japan and China. Both are in much more dire debt situations relatively and have many more problems than the US has. No, what creates national wealth is a consumer based economy. Consumers who spend. Spending creates wealth. Sounds stupid huh? I’ll let you figure that one out.

    Let me ask you, even though we have some imbalanaces that will find a way to work themselves out, whether it be violently or not, do you think the American economy has grown richer over the last four years even though we have this massive debt? Even though we have a current account deficit that will likely rectify itself, whether nastily or not, to the long term benefit of our economy, our worth has grown at a much more rapid pace than the imbalances. So, what’s the chance our wealth will continue to resume its upward path once these imbalances are cleansed? I’d say quite good. So, would much of the smart money.

  40. BDG123 says:

    5 cents on a 2016 dollar before I get someone telling me I am saying $42 trillion will be 5 cents. (Which the perma bears would likely agree with anyway.)

  41. RB says:

    BDG123,
    I like your optimistic outlook because it makes me feel good.

    In any case, one of the biggest unknowns and potential failing for China is probably whether it would be stable in the event of an economic crisis and how the political system reacts in that case.

  42. drey says:

    China has a bigger reckoning coming than we do…how the hell do you keep your currency artificially depressed for this long and hope to escape the consequences?

  43. rick says:

    “China has a bigger reckoning coming than we do…how the hell do you keep your currency artificially depressed for this long and hope to escape the consequences?”

    Is that because they have a trade surplus, and
    1 trillion of US debt they are holding ??
    Would they be in a better position if they had
    trade deficits and owed 1 trillion ??

    You statement defies conventional logic.

  44. BDG123 says:

    RB,
    I’m actually not that optimistic shorter term. I think we are about to head into a likely severe recession. But, then, we just have to see.

    I’m optimistic relative to America, Europe and Japan’s economic positions globally because of the reforms they have made or the economic policies they have in place. That said, could we be starting the Great Depression Part Deux? I dunno and neither does anyone else. But, there’s likely a mess of some size brewing. My bet is that it will be felt the hardest in areas other than the US, Europe or Japan for a multitude of reasons.

  45. whipsaw says:

    Mr. B, if we can agree that whatever is coming is likely to be severe and global, what do you think happens within China? The inequalities there currently rival those of the last dynasty and there are still plenty of Marxists if not Maoists around, so do we see a coup d’etat once the People’s Plastic Lawn Chair Factory closes due to lack of orders from Walmart and the peasants can’t get back to their villages from Shanghai?

    Or is it a mistake to view the Chinese from within a capitalist framework at all? What they’ve been practicing is not capitalism, it’s mercantilism and it would not amaze me if turned out that they have just been playing Rope A Dope with us the entire time.

  46. Alex Grey says:

    Did anyone see the interview with Dennis Gartman of the Gartman Letter onWednesday July 5, 7:10 am on Bloomberg Morning Call. I have been trying to find the trnascript of the show but to no avail. Here is an earlier comment by Gartman:

    PETER BRIMELOW (see http://www.cbsmarketwatch)
    Stocks rebound, and battered bulls hang on
    Commentary: What’s all this about a bear market?
    Last Update: 7:35 PM ET Jun 14, 2006
    NEW YORK (MarketWatch) — I’m still getting angry emails whenever I quote bears, so here’s something to show how moderate I really am: Dennis (The Gartman Letter) Gartman’s comments after Tuesday’s tumble.

    “It is not all safe to buy stocks … not here in the U.S.; not in Europe; not in Asia; not in the emerged nor in the emerging markets. This is a bear market, and we must understand that. Weakness is not to be bought; strength is to be sold into.”
    Perhaps ominously, Gartman anticipated Wednesday’s rebound: “The markets will rally today; they will likely rally tomorrow, and they may rally into Friday, but we shall be a seller into that strength. We can readily see the DJIA rallying from last night’s 10.700 level to something closer to 11,100-11,200 before this corrective rally has run its course.” I’m not, as my emailers seem to think, making this up. Gartman is an institutional service with a vaunted hedge fund following.

    And from another source:

    “One doesn’t just see a 50% selloff in Dubai or 40% in Saudi Arabia or 18% down in Germany and say this is a mere correction. This is a global bear market.”
    – Dennis Gartman, The Gartman Letter