It's been a rough ride this year so far no doubt. I already highlighted my concerns in prior posts and the market has been sliding due to them. Back in September I mentioned that it didn't feel like quite like a bear market at that time but I admitted that I personally wasn't afraid enough and that was a red flag suggesting we were not out of the woods yet. I said
I know that in the depths of 2011 I had more doubts about the market although I gave the benefit of the doubt for a bullish resolution. You know you're near the end of a correction when even the bulls like me start having second thoughts!
Well, I can say now that I have genuine doubts much like near the depths of 2011, in fact more so. I'm not alone in my doubts. Doom and gloom is thick. Talk of recession is on everyone's lips. Most people are comfortable calling this a bear market - and quite frankly, it is. A bull market is characterized by a grinding uptrend punctuated by sharp but short pullbacks while a bear market is a down-trending highly volatile, environment punctuated by both severe declines and vicious snap back short covering rallies. We have definitely seen this type of bear market action and so it has to be respected. However, with everyone so quick to embrace it, fearing the worst, from a contrarian perspective this leaves the door open to the possibility that at the very least, an intermediate term counter trend rally is not too far off, much like the rally from March 2008-May 2008 and from March 2001-May 2008. Those rallies ultimately failed but they were doozies. For me to be more confident that we're at the cusp of a mulit-month rally I would like to see a spike in the VIX and outflows. Both have been increasing but only grudgingly so which could indicate not enough fear. Although from anecdotal evidence, I've seen quite a lot of fear such as contacts I have who deal directly with retail investors
There are legitimate worries out there no doubt and it seems like this time it's a culmination of many factors. There's the hard landing in China, European Bank stress, US high yield debt stress and the general deceleration of the global economy. For a good chunk of these problems, the collapse in the energy sector and the strength of the US dollar aided by fed tightening are the culprits. Government authorities have the ability to reverse these negatives to some degree if they have the political will to do so. If somehow OPEC and Russia can come to an agreement to cut oil production the price of oil can rocket to $50 in a heartbeat. If the Fed decides to back off hiking rates for the rest of the year there would be relief in the currency markets (the fed might signal that in their next meeting mid March) . Now, perhaps the damage is already done and any rally would ultimately fail, but if the above happens it would be one hell of a rally and one that could erase all the losses year to date. Memories of 2008 are still fresh and government authorities around the world have learned their lesson to pay more attention to the message of the markets and be proactive.
There is a popular notion that government authorities have already used up all their bullets to stimulate the economy. The latest attempt has been negative interest rates which so far has fallen flat on it's face. I think it's pretty sick to see savers get punished. What's this world coming to? There's another option that nobody is talking about which I think could ultimately be used. It's the "helicopter money drop" idea proposed by Ben Bernanke in 2002. What if governments announced they are going to give every adult citizen a monthly paycheck of $500/month and they financed this by simply printing money? You might say this is ludicrous, it will lead to high inflation, it's a moral hazard, ect but whatever you say it would be a huge fiscal stimulus and unlike QE, it puts money directly into people's pockets, it reduces debt burdens. You don't think this could happen? Well, I bet 5 years ago nobody thought negative interest rates could even happen either. Now, I'm no economist and I'm not going to debate the consequences of such a policy but I do know that in paper based currency economy there is no limit as to how money can be printed which gives governments the ability to give it's a citizens a "mulligan" if they wanted to. Theoretically,the government can pay off all our mortgages with the stroke of a pen.Will it get to that point where we literally get free money? Don't think it can't happen....don't underestimate the ability of the government to intervene in the economy.
