No shortage of doom analogs

In my last post I warned about a rug pull and that's exactly what happened. The market dropped 4.5% the subsequent week and this resulted in a sentiment reset as traders/investors ran for the exits en masse as per fund flows and positioning stats. The losses were recovered in the following week and then we hit new ATH yesterday, the day after the Fed cut .50.  Heading into the Fed meeting, the futures market was  60/40 in pricing in a .50 vs .25 cut. I was personally expecting a .50 cut.  Apparently only 10% of economists polled by CNBC were calling for .50...no surprise there. I was talking to a fellow advisor prior to the announcement and he echoed the consensus view that a .50 cut would signal a panic, i.e. that they know something we don't. This is nonsense. The Fed is simply catching up to the data. We've had plenty of evidence, painfully so, that inflation has moderated to the point where a 5.5% Fed fund rate is well into "restrictive" territory. The core PCE, the Fed's preferred inflation gauge has clocked in at a yoy rate of 2.6% for the past 3 months and add to that the recent soft non-farm payroll numbers and major downward revisions from prior months, it would be quite frankly, idiotic for the Fed to cut only .25%. Had they known about the downward revisions to payroll prior to their July meeting they probably would have cut .25% instead of doing nothing and so .50 cut is simply a catch up move. At 5% FF is still well above the neutral rate and so the Fed  has cover/justification to cut .50.,,, the FF should already be at 4% is you ask me. 

After the Fed announcement there was no shortage of hand wringing on twitter. If I had a dime for everytime someone made a reference to 2001 and 2007 I'd be a fucking millionaire.  Here's a few excerpts: 

"Today was the first rate cut of 50bps since March 2020, let's look back at rate cuts when the market was near highs in 2000 and 2007". 

"The last 3 times the Fed started a rate cut cycle with .5% was 2001, 2007, 2020"  

"Fed only cuts rates when the economy is in the gutter or about to go in the gutter. The fact that they did proves my point that we are in recession"

These types of post were flooding my "for you" page on twitter. If you're in this camp, you are in consensus. Please make note of the motto of this blog. The current doom analogs remind me of all the analogs in 2022 that compared the market to 2008. After the COVID crash it was the 1929 crash analogs were all over twitter. What you will hardly see on twitter are mentions of  1984, 1995 and 2019 whereby Fed cuts did not signal an immanent recession and were instead recalibration cuts. IMO, this is the most likely scenario we are dealing with here....at least for the next year or 2.  The economic conditions in the US although moderating are still healthy overall. I'm sure you can show me some stats that suggest otherwise but there's ALWAYS something negative you could point out whether it be this year, last year or any other year the economy was in expansion. Corporate profits are  healthy, layoffs are hovering near historical lows and credit spreads are calm....NOT something you see when there's an imminent recession. Also, private and corporate leverage is near 30 year lows. Before you point out rising credit card debt, please look at the trends in overall debt including mortgage debt which makes up 70% of  the total and make note of the percentage of disposable income being used to service all debts in the US - it's 9.8% which is at a 40+ year low. You will find similar benign stats regarding corporate leverage. Oh, but look at the huge increase in government debt! Yes, that's true, but government debt is not the same as private debt as governments have something you and me don't....a printing press, but that's a discussion for another day. For now, just look at Japan to see how far things can go with their 250% Debt to GDP ratio. 

The main message of this post is that there is plenty of moaning and worry about this rate cut cycle. Fears of a recession are acute and that suggests there is still a healthy wall of worry for the market to climb longer term. What happens in the next few weeks is probably more volatility. Once again, in the very ST, conditions don't look ideal but the more medium term indicators have cooled off/reset notably compared to how they looked like at the July market peak. If we get another bout of downside it would probably recharge the medium term indicators even more putting the market in a position to make a significant upside breakout later this year.   

The black hole of pessimism

This is going to be a philosophical post, but first some market comments. Jackass Hole and the balleyhooed NVDA  Q2 report turned out to be relatively non-events. The SPX is now one modest up day away from making all time high, with the NASDAQ notably lagging. The DOW has already made marginal new all time highs. What this is showing is that value/industrial type stocks have been market leaders as of late. Will this end up being temporary or long lasting? I've been meaning to do a post on this, but not this time. In the very short term I'm not very thrilled with the set up on the long side. We saw an extremely low put/call ratio reading on Friday coming into a weak seasonal period. I know it's just a single reading but more often than not, you'd be better off not entering the long side for at least a few days. Fear/Greed now at 63 which is moderate greed territory....still room to go higher before hitting extreme greed though. NAAIM exposure back to 81 which is on high side. Here’s another thing I’ve noticed….the CDN dollar has spiked lately and you typically see this near ST tops. Bottom line is that momentum is with the bulls and new all time highs are certainty doable this week but the ST sentiment backdrop shows that the risk of a rug pull is high. Unless your the daytrading type (which I am not), wait for a better pitch. 

I want to discuss pessimism, not only about when it comes to the market, but in general. I have found that once someone becomes a pessimist on the market or a pessimist in general it becomes very difficult for them to let go of it.  It seems once people cross the event horizon of the black hole that is pessimism, they get sucked in and can never escape. I'm not sure exactly why this is. I do know that many bearish/doomer arguments tend to be convincing and logical but the weakness of many of them is that they are rooted in dogma - "the market should be doing this because it's what I believe it ought to be doing" is at the heart of a lot of them. Perhaps the pull of pessimism is somehow tied into our natural inclination of being risk adverse.  I'm sure you've heard about the notion that for the average person, the pain felt after a loss is at least twice the intensity of the joy felt after a win. I know from my own experience the pull of market pessimism. When I started my career 24 years ago I had a bearish outlook on the market which was based on fundamental factors. As we went through the 2000-2002 bear market, my bearish beliefs become validated and even more entrenched. I consumed a lot of bearish content such Hussman, Fleckenstein and the late Richard Russell to name a few. When we had the first powerful rally from the March 2003 lows, I was able to snap out of the bearish stranglehold that was on me because I was open minded/aware enough to see that the market's character had changed. It wasn't just because the market was going up, but the way it was going up. Obviously I was grateful that I changed my posture so as to be on the right side of the market, but it was also good not to be a market pessimist anymore as it was impacting my outlook on things in general. When you're a bear/pessimist you are hoping to see bad news in order to validate your position.  This is toxic. This can turn you into a miserable son of bitch. I wasn't a miserable person from 2000-2002 but I was a doomer. I did notice however that most other bears were indeed miserable SOBs - they were also doomers in general and I suspected their bearish market disposition was a reflection of their general negative disposition and that there was probably a negative feedback loop in play. They seemed like depressed, miserable people - one guy even admitted it. When I was bearish back in 2000-2002 I remember expressing this to one of my friends at the time. At first he wasn't convinced but by 2002 he was. By mid 2003 when I was convinced that the market had changed tune and expressed this to my friend, he wasn't buying it and he never did all throughout the bull market of 2003-2007.  A co-worker/friend of mine whom I first me in 2006 was young and optimistic on the markets when he first started his career. The 2008 crash made him become more cynical but not overly. A couple of years ago he got caught up in the meme stock conspiracy and since then has become a doomer.  Everything is rigged according to him. He has also had some challenges in his personal life in recent years which likely makes him more susceptible to being a jaded doomer.  If you become a market bear when you are bearish on your personal life or world view in general, it would be toxic combination as these 2 dispositions will feed on each other causing you to lose market objectivity and simply turn you into a miserable, cynical SOB.

What good is it to be a pessimist in general? Let's say you end up being correct and the world ends up going to shit. Is that going to make you feel any better? It's not. You'll still be a miserable SOB. But what if your negative outlook doesn't come true and things turn out to be positive or a lot less bad than you were expecting? You will feel like such a fool as you realize you waisted your energy and your life being negative which no doubt would have caused you to miss opportunities. not living up to your full potential. When you're a pessimist, you will seek out bad news and probably hope for it, whether you realize or not. This is a sad and wasted life. All major human progress and innovation were the result of people being optimistic about an idea they had.  Yes, plenty of  people who had ideas failed but if everyone was a pessimist none of the successes would ever had happen. Imagine if the Wrights brothers were pessimists like many of their early critics There is no way they could have overcame the countless number of failures and roadblocks to eventually create a plane that could fly. Now, don't get me wrong. I know there's a difference between being an optimist and being delusional. Somethings are out of reach and no amount of optimism can change that. My daughter is a lifeguard level swimmer,  but she's a slow runner. If she were to tell me that she aspires to be an Olympic sprinter, I would definitely discourage her lol. 

I believe that the correct approach to life in general is to be a level headed optimist. Be mindful of what threats are out there and what can go wrong, but I don't see the point in living a jaded life, a life of fear always expecting the worst. It will be a wasted life. If you look back in history there were plenty of  times I'm sure a lot of folks thought the end was nigh.. Imagine how many doomers there must have been during the peak years of the cold war era shortly after the cuban missile crisis.  Somehow, someway we find ways to move forward,  we innovate, we change, we adapt, we advance and this can only come about by having a positive disposition - having the belief and drive to find the solutions, the advancements, ect.  Of course, advancements can create a whole new set of problems but are we better or worse off compared to 100 years ago? Anyhow, I digress here. The bottom line is that there's no benefit in being a pessimist. Problems don't  get solved by pessimists, advancements don't get made by pessimists whether it be on a personal or societal level. Let's say you're a pessimist about society and you end up being right and the world does go to shit... you're still going to be a miserable fuck,  but if you end up being wrong, like everyone else before you, you're going to be even more miserable and full of regret as you come to realize you waisted your life being worried and negative while you could have done so much more with your life by being an optimist.   

Circling back to the markets, when people first start investing, they are optimists by default because they buys some stocks in the hopes that they will go up. Then at some point they will experience a bear market and run the risk of getting sucked into the black hole of pessimism. I believe this was the case for a lot of investors/traders during the past 24 years, because during this time we have seen 3 major bear markets of 35-50%, and 3 mini bear markets of 20-25%.  When you experience a heavy loss, there's 2 ways to handling it - you get jaded and blame it on the "powers that be" or you take ownership, learn from it and try to improve. Most people fall under the former category because they tend to have this attitude on life in general. When something goes wrong, it's not my fault - it's the other guy's fault. It's easier to shift blame than to take ownership when something doesn't go our way.  You see it with sports fans too - "if it wasn't for the ref we would have won!"  It's easy to fall into the black hole of pessimism. For me, I was always able to avoid doing so. There have been a few dark times in my life both personally and financially when I could have easily fell into it. Of course, I felt down and negative when these bad things happened but it didn't last for a long time. I had the awareness to know that being negative wasn't going to make things any better, it would only  make it worse and the only way to make things better is to take positive actions. The longest I ever felt down was when a girl I had a big crush on ended up finding a boyfriend just as I was getting the courage to make a move.  I remember how I felt when I found out. It was the worst feeling I ever had and it left on scar on me....maybe that will be a story for another day.