May 2, 2007
Whistling Dixie To The Chicken Littles
Having stayed out of the limelight for far to long, the ‘bubbles forever!’ doctrine is roaring back:
“Speculative money needs to go somewhere. There is no question that some of it is moving away from housing and into the stock market." Van der Eb, of the Gamco Mathers Fund, Chicago Tribune
“...bulls argue that global stock market strength helps to offset the wealth lost in people's homes…” Street
There you have it – the wealth that will be destroyed in the U.S. housing market will simply reappear in the stock market. And here I thought that a severely overstretched U.S. consumer ensured that the next U.S. recession, unlike the last two, was going to be ugly. What a relief.
But exactly how ‘global stock market strength’ will offset the damage in housing isn’t entirely clear. Rather, with central banks around the world contemplating raising interest rates further and the U.S. economy slumping towards what could be recession, there is the real danger that an equities bear market is brewing. Fear not, say the bulls, these and other threats are covered:
“There virtually can't be a recession on the horizon. The world is awash in financial liquidity. Anything that goes wrong — like the housing slowdown or the subprime mess — is easily absorbed by the massive amount of money available in the world.”
The above quote from Donald Luskin – who eloquently adds “let the bonehead bears say whatever they want” – highlights the cheerleading bulls have been doing since the jarring correction in late February proved a blip. Apparently, and not unlike the Red Hat analyst calling bears a bunch of ‘chicken littles’ in 1999, people like Luskin have been awarded a license to make wildly antagonistic comments towards bears: “we bulls have to have someone dumb enough to sell us the stocks we want to buy”. Needless to say, for those that watched Luskin buy into the late 1990s ‘new economy’ only to be forced to shutter his funds after severe losses in 2001, there is really no need for a lengthy rebut.
‘Liquidity’ Divides But Does Little To Enlighten
The fascinating thing about the so called ‘liquidity’ situation today is that both bears and bulls can use ‘it’ to build their case. Bulls like Luskin can point to the liquidity forces that successfully navigated markets through wrecks like Amaranth by looking at their rear view mirrors, and bears can contend that excessive liquidity in the marketplace guarantees more blow-ups tomorrow. It doesn’t seem to matter to bears that ‘liquidity’ ducks a definitive definition and/or that slumping gold isn’t forecasting a lasting inflationary threat. Conversely, bulls do not seem at all concerned that during the 2000-2002 equities slump the Fed kept right on printing and trillions in paper equity wealth still vanished. No, what matters to both camps is that aggressive unregulated entities control an estimated $1.5+ trillion in wealth (before deploying leverage), private equity is buying out everything imaginable, world stock indices are hitting record highs, and the M3’s (M2 in U.S.) are raging. If these events do not titillate your crystal balls, nothing else can.
Unfortunately, using ‘liquidity’ speculations alone to guide your investment decisions is little more than gambling, and some steadfast bears have found this out the hard way. To be sure, February 27 did not mark a lasting return of volatility, the days of yen carry have not ended, and commodity currencies have not fallen this year. What each of these themes/gambles have in common is that they were/are backed by a contrarian ‘liquidity’ viewpoint - or the conclusion that when the liquidity bubble pops, destruction and chaos will follow.
Yet as untimely as many of the bearish liquidity bets have been in 2007, the most dangerous bet of all is, to reiterate, just restarting to make the rounds:
“...bulls argue that global stock market strength helps to offset the wealth lost in people's homes…”
During the 2001 recession U.S. consumers never stopped spending and the U.S. housing market did not correct. As unprecedented as these events were, nothing is more unthinkable than a U.S. recession combining with a bull market in stocks (unless brought about by hyperinflation). In short, ‘liquidity’ doesn’t explain why a slumping U.S. economy is being met with record highs in stocks, delusion does.
Dear Mr. Fantasy, Play Us A Tune...
As investors grow increasingly confident investing abroad, and as U.S. dollar weakness is met with an eerie applause by U.S. investors and policy makers, the bulls have decided not to not fret housing market weakness because the ‘liquidity’ situation supposedly guarantees that U.S. stocks will follow the perpetual uptrend in international equities. Taking currency into account you may not make as much investing in U.S. assets as most other places, but at least you are making some.
These are not reasons to be confident on U.S. stocks you say? Hmm. OK. Just shut up and buy because private equity will surely take your position out tomorrow.
...something to make us all happy.