Well, it looks like the drop I’m expecting is going to happen immediately. Futures are suggesting a gap down of nearly 2%. Once again, notice how difficult it has been to profit from any downside in the past 5 months unless you have a position trade short which for the most part has been a disastrous strategy.
I pointed out signs of froth with my previous few posts and anytime signs of froth have appeared in the past 5 months they have been quickly extinguished with downside action. That’s healthy for a bull trend to be sustained. Bulls need to be humbled when they get a little cocky and bears need to be emboldened when they get too discouraged….the complete opposite of last year. If there is complacency as the market drops then that would be indication of more substantial downside in store.
From a longer term expectations point of view, there’s also no shortage of concerns out there. Fears remain about a double dip recession, commercial real estate shoe to drop and below average growth rates for years. This is good fuel for a bull market….you might be saying “what the fuck is this clown talking about?” Well, the logic is counter intuitive. You need fear/worry for substantial advances to occur because long term market moves are driven by the re-pricings of expectations. So, if expectations are low, there’s room for them to get revised higher as these fears are alieviated and thus moving the market higher.
Late last year and early this year expectations were very low but they just kept getting lower as conditions deteriorated further. But since March there’s been a turnaround in expectations and right now we are in the sweet spot whereby expectations are slowly but surely rising from low levels. The time to be concerned was early last year when while the economy was showing clear signs of deceleration, a common view was that the housing crisis would be contained to subprime mortgages and not spill over into the rest of the economy. That gave room for expectations to be revised lower. Now we are seeing the opposite. The so called “green shoots” are being scoffed at by plenty of people out there. Bears are trying to be contrarian by saying “so many people expect a recovery so that means we aren’t going to get it”. This is flawed thinking because last year so many people expected a slowdown, even a recession, in early in 2008 but markets still tanked hard. Why then? Because even though a slowdown/recession was expected, nobody in their right mind expected the type of collapse we saw….most felt a mild recession at the worst would occur. This is the complete opposite of now. People expect a recovery but a modest and fragile one.
Sometimes it’s best to keep it simple and yet the simplest but most reliable economist in the world is saying NO CHANCE for a double dip recession but rather it is yelling and screaming that strong economic growth lies ahead in the next 12 months.…This economist I’m referring to is Mr. Yield curve. Bar none, it has been the best predictor of economic activity in history. Its signals usually take about 6-18 months to come to pass. The yield curve is such a well known predictor of economic activity yet it seems that every time it sends a strong message people seem to rationalize why the message should be ignored and yet every time it proves these people wrong. I believe this happens because of the lag associated with the yield curve which I touched upon and also the difficulty in accepting a radical change in fundamental conditions at the time.
The only time we saw a double dip recession was in 1980 and 1982 (please correct me if I’m mistaken). The economy bottomed and rebounded out of a recession in the second half of 1980 but then stalled by the second half of 1981 and fell into recession again by early 1982. This double dip recession was well predicted by the yield curve which became well inverted towards the latter months of 1980.
Right now the yield curve right now is extremely steeply sloped and has been so for several months which make the likelihood of a double dip recession close to nil. In fact, it is predicting ROBUST GROWTH in the economy over the next 9-18 months. Right now you’re probably saying “bullshit! no fucking way that happens!” Well, you can go ahead and argue with the best economist in the world if you want….just keep in mind its stellar track record and also keep in mind that the typical amateur investor right now is as skeptical as ever about the notion of a recovery.
So who do you want to side with? The best economist in the world or the rest? I’ll choose the former thank you. But you know what? I really don’t care which way the wind blows. If it turns out that we are going back into the abyss in the months ahead, hopefully, I will see the warning signs and I’ll gladly join the bears. ..but I strongly suggest you do some research to see how equities did 12-18 months after the yield curve has been this steeply sloped....oh wait, don’t tell me…the yield curve is rigged by Goldman Sachs.
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