07/29/10 Paris, France – Dow down 39 yesterday. Gold plus $2. And the noose tightens on Bernanke’s neck.
As of this writing, Wall Street is still in bull mode. Can you make money by joining it? Maybe. Is it worth it? Probably not.
If you do decide to play the game…just be sure you remember what game you’re playing. This is a Great Correction. Over time, prices are going to work their way down until the Dow has dropped below its March 2009 low.
And we’re not alone in this view. Here is Albert Edwards at Société Générale:
My views on the outlook could not be clearer. They may be wrong, but at least they are clear. We still call for sub-2% 10y bond yields and equities below March 2009 lows.
I have for a very long time likened events now unfolding with what we saw in Japan a decade ago. Of course there are some major differences, but one can still draw clear parallels to see how extreme equity overvaluations unwind in a post-credit bubble world.
Edwards then goes on to make an important point. As we keep saying, this is not a recovery. Instead, we’ll have on-again, off-again periods of recession, deflation, growth and apparent prosperity. Some of these movements will be sustained and important. But investors beware: don’t forget; we are in a Great Correction, not a recovery. Edwards:
…there are huge returns to be made in equities from participating in short-lived cyclical rallies like the one we have just seen. The Nikkei regularly used to enjoy 40-50% rallies as policy stimulus drove pronounced cyclical upturns in both GDP and profits. You had to remember however that you were still in a structural bear market and you had to get out when the cycle began to top out. A downturn in the leading indicators proved to be a very useful sell signal for equity investors.
Here’s a contrarian indicator: investors are more bullish than they’ve been in two years. Bloomberg is on the case:
Investors are exiting bearish bets on global equities, pushing bullish wagers on stocks to a two-year high versus short sales, according to Data Explorers.
The firm’s long-short ratio has risen to 9.5, having surged from 5.75 in September 2008 when Lehman Brothers Holdings Inc.’s collapse intensified the financial crisis, the London- and New York-based securities-research company said. The reading is the highest of the data that goes as far back as July 2008.
While investors are bullish, consumers are bearish. Small wonder the consumer is feeling blue. Corporate profits are up to a record of about 8% of revenues. But business achieves these numbers not by increasing sales and payrolls, but by cutting costs – usually labor costs. This leaves the poor consumer with less money to spend. This from The New York Times:
…the Conference Board said its index of consumer confidence slipped to 50.4 in July, down from a revised 54.3 in June.
“Despite better-than-expected earnings reports, especially last week, unfortunately the economic data continue to be weaker than expectations,” said Conrad F. DeQuadros, and economist with RDQ Economics. With consumer spending accounting for about 70 percent of the overall economy, analysts closely watch the moods swings of Americans as guideposts to the recovery.
Analysts said that many Americans were worried about the weak labor market. In its survey of 5,000 households, the Conference Board found that the percentage of consumers who said jobs were difficult to obtain increased to 45.8 percent in July, from 43.5 percent in June.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
The recovery is back on. Obama fixed things. Once again, it is the “capitalists” who benefit from the largesse of government. Without a strong labor movement in the US, the recovery will continue–big companies will get free money and continue to invest it in themselves and each other. This is a recovery of sorts.
Jason, if that is what you think, then act accordingly.
Invest in Stocks.
You made your comment sound like it was a bad thing, sounds like good bews to me.
Shawn, I agree that it’s not bad news from Jason, if you have already-existing capital.
But if the only way you can form capital is to try to sell enough of your own labour, then as Jason implies, you must wait for a significant and rapid correction in the political marketplace–which is what layman usually call a “Revolution.”