Here’s Your Guide to The Bear Market – Whether You Like It Or Not

Ever since I opined that the February downturn was actually the beginning of “the Big One,” or the next bear market, you’ve been firing back with opinions of your own.

Some of them have been right, some have been wrong in my opinion, but I’ve enjoyed reading all of them.

I promised you last weekend that I’d have another Q&A issue for you soon. So without further ado, here are some of the most provocative bear-focused comments I’ve gotten lately – and my sometimes snarky answers.

We’ll start with a few dissenting voices.

Douglas: You stick with charts and analysis, an economist you are not. Anyone who took more than Econ 101 would know that Supply Side Effect will take at least a year. To call this a sarcastic name diminishes you. Same with tax cuts.

Lee: Thank God I am not an economist. Who would want to admit to such a thing, considering their record. Where did I say anything about the economy?

One thing that I have said is that markets top out and bear markets begin when the news is good. And I have opined that the tax cut and massive spending increase will keep the economy cooking. If you are an investor, you better pray that I’m wrong about that. Because strong economic data will keep the Fed on its tightening track. And that’s what kills bull markets and turns them into bear markets.

As for economic policy working with a lag, any time an economist gets the outlook wrong, they blame the “lag.” Or they warn about the lag when they know that the policy is a fraud and won’t work.   But there’s not a shred of evidence that any policy works with a lag. In fact, the more wrong the economists are, the longer they say the lag takes to work. It’s garbage.

But yes, I agree that tax cuts and spending increases are stimulative. I do not agree that there’s a lag. And furthermore, it’s irrelevant. I am only opining that bond yields will be higher and stock prices will be lower a year from now. CPI will be higher and the economy may still be growing. Or it may not by then. It’s irrelevant.

Sadik: I don’t believe it.

Lee: My sainted father, may he rest in peace, would often say that opinions are like rectums. Everybody has one. I try to populate my opinion with facts and logic so that readers can decide for themselves whether they agree or not.  If you’ve done your homework and have reached a conclusion different than mine, I respect that.

And now here are some really interesting comments from bear market believers – ranging from “This will be Great Depression 2.0!” to “Are leveraged ETFs a good crash play?”

Bryan: Lee, that has been a great call. You were spot on. Do you have a target to where you expect the stock market to fall (S&P, Dow, or NASDAQ)? Will this be a 20-30% correction? Or a 50-70% bear market like 2000 and 2008? And do you expect the revaluation in the stock markets to impact the dollar and push the economy into a recession?

Lee: Thanks for the kind words, Bryan. I use the Hurst cycle method for projecting likely price highs and lows. They’re not possible until there’s enough data to that a new trend is under way. That can be as much as a third of the way into that new trend. This market is still in the topping process, so it is way too early to project where the bottom might be.

However, I do expect this to be the Big One, a major bear market. The excesses of the central banks that drove this were just too extreme not to see a very major reaction now that the Fed has reversed policy. It’s only a matter of time until the ECB and BoJ stop printing as well.  Ironically, there will be so much stimulus from tax cuts and increased spending that the economy probably won’t slow down early in this scenario.  It will encourage the Fed to keep steady, or even increasing, pressure on the brakes.

I don’t know when or even if the economy will crater. I don’t think it matters. I suspect that at some point the upward pressure on interest rates and bond yields will result in economic dislocation, but that’s tangential. I also suspect that it’s a long way off. Typically rates don’t matter until they are truly punitive, in other words markedly positive versus the rate of asset inflation.  Once rates go materially positive against the expected internal rate of return of investment, business spending will crater.

Chuck: If we have a down market for 18- 30 months, with Trump following Hoover’s tariff path, we will have something much worse than the Great Depression. Putin was correct for his purposes, in wanting Trump to win the election. Vladimir knew Donald would destroy the American economy, therefore American political power in the world.

Lee: Chuck, call me a cockeyed optimist, but I don’t think that this will be worse than the Great Depression.

I agree with the rest of your take but my focus is steadfastly on the change of direction in the major market trend and what to do about it right now. We’ll worry about the next Great Depression when we get there.

And remember, when Roosevelt declared the great bank holiday, closing the banks in March 1933, it coincided with the bottom of the market. It was the greatest buying opportunity of the 20th century. Bear markets begin when the economic news is good. They end when there’s economic “blood in the streets.”

Steve: Appreciate your ursine view on the markets, supported by liquidity analysis. Question – what about all of the repatriation of corporate cash balances overseas. Understand that there is about $2 trillion. Can that negate – the Fed’s effort to shrink their balance sheet by about $2 trillion and contractionary effects on the US stock market – at least in good part. Thanks.

Lee: That’s a very good question, Steve. First, there’s no evidence in the weekly US banking data, or the Treasury bill auction data that there’s been any meaningful repatriation of corporate cash. Will there be eventually? I don’t know. But I watch the banking data and Treasury data closely and will be looking for any such movement. The first effect should be to lower T-bill rates.

Could such a massive transfer of cash back to the US mitigate the effects of Fed tightening. I would say, maybe, but it’s not certain. This is not like the Fed pumping money into the accounts of Primary Dealers. Corporations usually hold cash as T-bills or other short term instruments.

So the effect should show up first in bill rates, and that has absolutely not been happening. It’s not showing up in bank deposits either. But if it does in either case, I’ll report it, and I’ll adjust my market opinion accordingly when the time comes. We’re not there yet.

Carson: I’m not here to toot your horn for you either Lee but I also recall very clearly that you called the first downdraft that began on Feb 2nd right to the very day!

The die-hard bulls who have been leading the market pep rally for the last ten years are still convinced the party will never end up I think it’s pretty clear at this point that it’s game on!

Lee: Thanks Carson. The thing about tooting our own horn in this business is that invariably, it comes around to bite you in the butt or blow out your eardrum. So we’ve had a bit of a rally and the market has been resistant to further decline. But for those with a predisposition to short the market, I agree. It is game on!

Dina: Lee, thank you so much for all you do for us, you are honest and care about people, thank you for that!  Are you also buying inverse etf’s, or just staying in the cash position? Thanks so much for all you do!

Lee: Hi Dina. Thank you for the kind words. I have been writing about markets for a long time. I hope that readers find it helpful and it’s gratifying to hear that you do.

I think that leveraged inverse ETFs are only for experienced and nimble traders. Without going into detail on how this works, the math works in such a way that when they go against you initially it becomes extremely difficult to earn a profit, or even recover your original investment. They are for very short term plays only, and profits need to be taken quickly. Obviously, when the market goes into an extended collapse, you can make a lot of money. But if they start going against you, the losses can pile up fast.

The problem is less acute with unleveraged inverse ETFs but it’s still somewhat of an issue.  I prefer to sell short outright, with a clear stop level in mind for getting out if the trade goes against you.  That level should be just above a key chart resistance level.

However, trading the short side makes some folks uncomfortable. If you are one of those who has been in the market for a long time, you have made a lot of money. Instead of worrying about it, take it home and let it hug you for a year or two!  If I’m right and stock prices do decline a lot, you will feel just as good as when you were making money in the bull market.

Sincerely,


Lee Adler

Note: Questions have been edited for length and clarity.

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