bullbear

STAFF NEWS & ANALYSIS
ROI!
By Daily Bell Staff - January 01, 2016

Why the bull market in stocks isn't dead yet … Don't write off the bull market in stocks … Market professionals surveyed by CNNMoney believe that the U.S. stock market will claw its way past these obstacles and reach new heights next year. – CNN Money

Dominant Social Theme: Things will go on. They always do.

Free-Market Analysis: In this analysis we'll cover a predictable stock market meme and then provide an alternative media examination that makes more sense to us.

We'll draw a conclusion from it – a famous one.

Begin, however, with this CNN article. What could be more predictable in the mainstream media than another report explaining that doom and gloom are greatly exaggerated and that the system is a good deal more resilient than it seems?

Here's more.

The S&P 500 is down over 2% so far this year, putting it on track for its worst year since the 2008 financial crisis. "We think this cyclical bull market has more room to run and expect a good (but not great) return for the stock market in 2016," wrote Scott Wren, senior equity strategist at the Wells Fargo Investment Institute

…"The good outweighs the bad," said Phil Blancato, CEO of Ladenburg Thalmann Asset Management. "Two straight months of great job growth, early signs of wage inflation and low energy prices create a resilient consumer that should keep the U.S. moving forward."

Great job growth? We don't believe federal economic numbers when it comes to employment, wages or inflation. But nonetheless, statistics provide a foundation for this … meme.

And to be fair, the article does provide some negatives including China's instability and equity drawdown. Investors are watching China "nervously" for signs that its lagging equity market will have an impact on the larger economy.

Yellen's decision to hike may prove problematic as well, or at least it may inject considerable market volatility into the 2016 market. However, optimists are advising that such volatility will allow investors to "buy on the dips."

But let's examine an analysis with a bit more substance, from our point of view. The article in question was posted at LewRockwell.com and is entitled, "The Big Short's Michael Burry on the Crash."

Here's how it begins:

What Does Michael Burry Say About Today's Economy and Investment Scene? … Michael Burry was the hero of Michael Lewis's book The Big Short, about the Crash of 2008, and also the hero of the popular film of the same name.

Burry is a hedge fund investor (Scion Asset Management) who normally keeps a low profile. Lewis is perhaps the most readable writer on Wall Street today. His articles and books are always hard to put down, partly because he finds either very colorful figures or thoughtful, interesting, and little-known figures such as Burry and builds his story around them.

New York Magazine had the good idea to interview Burry for an update of his views and fortunately he agreed to respond by email. The resulting article, entitled "Michael Burry, Real Life Market Genius From The Big Short Thinks Another Financial Crisis is Looming," appeared on December 28.

The Burry article does us the favor of summarizing his observations. It explains that a central point of Burry's insights is that the crash and subsequent Great Recession didn't fundamentally change the texture of Western culture. Finger pointing continued and people refused to take personal responsibility. This disappoints him.

Other points? The banking sector, including the Federal Reserve, has gained even more power in the past half-decade. The Dodd-Frank reform legislation has done little or nothing to restructure investing or make another crash less likely.

Wall Street's use of "free" money – printed obligingly by the Federal Reserve – benefited the biggest investors while the middle class paid. This is part of a larger problem that has to do with the Fed's corrosive price fixing of the volume and value of currency. "Government is creating the very economic inequality it claims to deplore," Burry explains.

Finally, we learn what is perhaps the most important, that "risk cannot be priced without market interest rates, so the economy is floundering without reliable road markers." Another way to say this is that a valid money price cannot be established without the competition that monopoly central banks consistently deny to the market.

These are much more cogent points, in our view, than the ones CNN makes – simply because they are far broader. To confine oneself to a market analysis in this day and age strikes us as facile.

There are so many deeply embedded problems in the current economic environment that whether the market goes up and down is probably of secondary importance to many savers, especially those that have a broadly diversified portfolio.

Ultimately, this is probably the best approach given current tumultuous times. There are epochs when the business cycle provides us with clues that can lead to overweighting but this probably is not one of them.

The prudent investors will likely include a variety of asset classes in his or her portfolio – including precious metals, real estate, perhaps pre-market equity, second homes and a good deal of cash, preferably not all of it in a bank.

After Thoughts

One should also bear in mind that the current sociopolitical environment is not much more stable than the economic one. In such times, one should pay close attention to Will Rogers's singular insight, "I'm not as concerned about the return on my money as I am the return of my money."

Posted in STAFF NEWS & ANALYSIS
  • Shark-Proof

    ROI, a topic interesting for everyone.

    Fortunately (or unfortunately in terms of volume) I can think of better places to put my meager resources than in the cloak and dagger markets. Money talks, and in terms of fundamentals – if you need a bunch of hype and buzzwords to sell it, that is great for the salesmen. I wish them luck. For myself, I’ve other ideas.

  • Injun Holbrook

    I know many smart analysts, who are just that….analysts. They couldn’t pull a trigger on a trade if their own life depended on it! But they all freely pretend to have extraordinary crystal balls when they have no skin in the game, especially when they are selling some snake oil to the general public.

  • Bruce C.

    I actually don’t see any fundamental difference between the two “analyses”. The CNN article claims that the bull market in stocks will claw its way higher (despite whatever), and Burry essentially backs that up by saying that the Fed is even stronger now and Dodd-Frank has made things “worse” (depending on who you are) and “risk cannot be priced without market interest rates”, etc. That’s been true for 7 years now.

    Neither “camp” is saying things will last forever, just CNN thinks it will last at least another year and Burry thinks a reset is “looming.”

    Considering how fast 2015 went by (even faster than 2014) in my experience, I don’t know what “looming” means any more. Maybe if there is a PTB who wants to submarine Trump’s efforts that means next year, but I have a feeling that the more obvious it becomes that Trump is going to win (big) the less likely that will happen.

    In any case, I still wouldn’t put more money into the financial system. Gold, cash, and tangibles. At worst you’ll be called “an old fool” in 10 or 20 years, but not a broke one.

  • Bruce C.

    Another deceiving thing about job “growth” is that’s growth only compared to 2009 at the depths of the “Great Recession.” There are still 900,000 fewer jobs than existed in 2007, and they’re also of lower quality and the population has grown. Therefore, there hasn’t been any real job growth since then, when the DOW was 2600 +/- points lower.

    Here are some more “fun facts”: http://theeconomiccollapseblog.com/archives/58-facts-about-the-u-s-economy-from-2015-that-are-almost-too-crazy-to-believe

  • Danny B

    Things seem pretty quiet. The new year looks to get off to a rocky start.
    Harry Dent; “Despite such endless financial engineering, sales for the S&P 500 have been declining for the last three quarters. And profits have declined for the first time since the 2009 expansion.

    “My forecast today: the stock market will start to crash by early February, if not sooner, when it gets this clear realization.”
    http://economyandmarkets.com/economy/business-cycle/the-deadly-truth-about-the-great-boom-and-this-recovery/
    Martin Armstrong; “The Forecaster shares his stock market forecast: expect 26,000 – 27,000, with a potential for 40,000 on the Dow Jones
    Industrials followed by extreme volatility into 2017-2020.”
    http://marketsanity.com/martin-armstrong-talks-interest-rates-markets-cashless-society-trend-forecasting-much-more/
    Armstrong calls for the stock market to go to nose-bleed heights. I hate to disagree with him and Socrates but, maybe he missed something.
    He says that the stock market will go WAY up because “money has to go somewhere”. I’m not so sure. A LOT of money has just evaporated because it wasn’t real wealth,,, only a hologram.

    US stocks close out the worst year for the market since 2008. We can look forward to 2016 being worse.
    David Einhorn is a very competent investor; “Einhorn’s Greenlight Fund Ends Second-Worst Year Down 20%”

    Armstrong has lots to say about 2016 AND 2017. He has written that investment will flow out of public debt and into private debt. I can’t see that. 50% of U.S. corporate bonds are junk rated. There are about 4,000 publicly traded companies in the U.S. Only three possess the top-most credit rating, which, in the judgement of the three big ratings agencies, means that these businesses will likely meet its obligations under most situations.

    Consumption is crashing. Why should anyone buy stock in a company that has few customers?

    • Bruce C.

      If Armstrong’s “money” is called “credit” instead (which is what all legal tender used today is) then his claim sounds all the more dubious. I suspect 2016 is going have record amounts of defaults in many areas and that means money/credit will be imploding. THAT’s where else “money” can go. It was created from “thin air” and ultimately returns to that.

      Also, the stock market is not a piggy bank. For every stock share bought someone else sells it. Ownership simply is transferred. The question becomes, what happens to the proceeds collected by the seller? What does “he” do with that money?

      And who could the stock buyers be? Corporate buybacks are winding down because junk bond rates are making that too expensive. In fact, with falling corporate profits the corps may have to start selling what Treasury shares they already have to service the debts they incurred to buy them.

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