Hostility Towards the Bear View

I have been blogging since late summer 2006. Since then, I've spoken my mind, shared my thoughts and beliefs, and tried to clearly discriminate between facts and opinions. And I've presented much of both. I have, as long-time readers know, pretty blunt views on Fed policy, investors' behaviors and the motives of market actors. I feel like I was pretty on top of the pending train wreck, having written about both complacent volatility markets and the likely severity of the subprime fallout. I even talked about what I perceived to be a false market rebound, a bounce in the face of inexorable eroding market conditions. Further, I've also stated quite clearly that I expect this downturn to last not months but a few years, placing me somewhere between Wall Street consensus and the sky-is-falling perma-bears. But even with my track record, transparency and complete lack of any self-interest whatsoever, I continue to take shots from whose who see me as way, way too bearish, and their barbs make it seems as if I am almost unpatriotic. Barry Ritholtz recently wrote about this phenomenon, where financial bloggers, in general, have been chided for being way too bearish. Yeah, right.

Consider this: earlier this week I wrote a post titled Just an FYI... 8 Mega Themes for the Future. There are the eight themes mentioned in the post:

1. The economy sucks now, and will continue to do so well into 2009 and perhaps beyond.

2. The real estate bust is a major reason for our despair.

3. Fears across the financial sector will make things worse, thereby fueling more fear and making things worse, and on and on.

4. Municipalities will be hurting, placing tremendous financial strains on states and the Federal government just as tax revenues are declining.

5. Computer security will continue to be a pressing issue.

6. Previously closed systems will become increasingly open.

7. Seemingly recession-proof sectors prove not to be recession-proof.

8. Emerging markets will continue to progress, driving convergence with the developed markets.

This post was subsequently republished on Seeking Alpha. The comment thread is here. One comment in particular highlights what I am talking about. From commenter "Tony Saprano":

I love your article because it makes me so VERY BULLISH! Here is why: even before your 8 market trends you list all of those negative links. HARDLY ONE WAS POSITIVE. The Russians are coming. The Russian are coming. The Russians are coming. Do you remember this phrase? I guess not. The fear was that they were going to invade America by crossing over Siberia and invade Alaska and come down through Canada. lol.

#1

You say the economy will suck well into 2009 - 2009 is only ten months out. You say we have deeply embedded problems - Americans loves a difficult challenge the more difficult the better. You say that these problems will affect the world over - this contradicts your 8th trend - you cannot have it both ways.

#2

You say that real estate is a mayor reason for our despair - I like to hear words like "despair" - to me it means the bottom is within sight. You say that there is a ripple effect on Wall and Main street - duh I wonder how many times have heard this but keep it up - its bullish.
Will buyers from foreign lands come in as an investment and currency play? See the Reuters story at the end.

#3

I love this one. Fear fueling more fear. Whoa!!! Will I be able to look up into the sky and see dark clouds of locusts eating everything in site? The Dow better drop 2,000 pts on Monday.

#4

Another great word - tremendous. Tremendous financial strain on our states. I guess Warren Buffet made a mistake by getting into the muni business. Poor Warren or should it be more poor teachers pay? Warren will get richer and the teachers will get poorer. I can't believe I said that. Anyway you should love your profession more than you love your salary. lol.

#5

This is just plain lame. I'm more concerned about terrorist than this one. But I guess we'll  have to hire more FBI agents.

#6

From the macro to the micro. The internet is the internet and that's it. Let's not make too much out of it. Just sit back and watch Google, Apple, News Corp and Microsoft battle it out while your home is foreclosing. lol.

#7

They overbuilt. Its that simple. But aren't there other recession proof sectors that are still hiring. Even with the last unemployment report? I wonder which one it was?

#8

I'm bearish here and this is why. Inflation will eat (no pun intended) these countries alive. They now have a appetite for meat the pundits say. They want cars. They want homes. They have water and pollution issues. Gee what else can I say? 2 or 3 billion people will be eating T-bone steaks. It ain't going to happen. However, health care is an issue in the emerging markets and you have to address this issue before the t-bones. I guess this is why Warren has been loading up on JNJ, GSK and SNY.

Do you detect just a hint of sarcasm and hostility here? This kind of comment is not unique, and symbolizes to me the difference between being locked in a short-term historical mind-set and seeing what is really happening through a clear set of glasses. This is what Taleb writes about all the time. It is hard, even painful and highly dissonant, to consider possibilities outside of one's own experience. For the past 25 years, with some burps here and there, this generation has seen the market go up. Yes, NASDAQ got hurt, but the Dow and S&P 500 hit new highs, credit was abundant, deal activity was robust and real estate prices skyrocketed. It has generally been party time for smart investors.

But what we are seeing ripple through the system now is different than what we've experienced in the past 25 years. Financial markets are far more intertwined. The credit bubble has caused homeowners to over-leverage and overextend, setting themselves up for a brutal fall. And this is what we're seeing today. It isn't unpatriotic or merely negative to state these things. They are what they are. But for the collective mind-set to begin approximating economic reality, people will need to push themselves to imagine a future that is very, very different than the recent past. If not, it will all come as a big surprise when the depths of the problems persist well beyond most people's expectations. And the pain and suffering will hurt all the more.

Comments

[Timothy Post]

Just discovered your blog through Fred Wilson. Thanks Fred.

I am an American living in Krasnodar, Russia. It continues to amaze me that many Americans don't understand that we have spent most of our adult lives living in the post Bretton Woods global financial system and there are no guarantees that this US dollar based system will continue forever.

In fact, there are many obvious signs that the rest of the world is looking for a way to unplug the "Dollar Reserve" model in exchange for another. The key question is at what point will the pain of making one's exports more expensive will be outweighed by the increased consumer demand in the BRIC countries et al.

The key indicator I watch is what percentage of foreign reserves are being held in US dollar denominated assets.

Another key variable is the pricing of oil and other commodities in US dollars.

Both actions create "artificial" demand for the US dollar which lets the US run a trade deficit. This WILL NOT go on forever.

It's no longer a question of if but now just a question of when. When the dollar loses it place as the dominant reserve currency, I predict the US will go into a very painful Depression.

I think Fred's call for Bloomberg for President makes a lot of sense. How about Jim Rogers as the Fed Chairman?

[Agoracom]

Barry - I'm the guy betting "Don't Pass" that quietly collects a dividend all night long while the gamblers keep "pressing" until the 7 hits. Fortunately, I'm 6'3, 240, so I don't get much hostility.

Roger - As I posted here a couple of weeks ago, let's stop trying to save the masses - who do not want OR are not capable of - believing that we are heading towards a disaster. If I didn't convince you back then, Soprano should have convinced you today.

Rather, let's see more content about how to specifically profit from the situation.

I'd like to save everyone also but you can not save those who do not want to be saved.

We've covered the problems in the market to the point of boredom...Let's talk gold, gold stocks, puts, shorts, etc.

Keep up the good work.

Regards,
George

[Yaser Anwar]

I'm not sure why there is hostility towards a bearish view. To paraphrase Jim Rogers, "recessions are a great way to cleanse the system", not to mention one can build positions in good companies for the long-term.

Plus, that's why short and ultrashort ETFs were created, and shorting in general! People should just pick up some FXE, SDS (or its unleveraged cousin), GLD and invest in companies with foreign sales exposure (based on which CAM is releasing a new ETF), or simply hold cash and not be drawn to the MSM noise

What amazes me is YTD S&P has dropped like 13% or so, and CNBC/FOX (even Mr. Cramer) still feature guests who, on average, recommend people to buy stocks which according to their "proprietary" systems signal undervalued. Ya right pal.

Rarely have I seen any guest recommend good shorts or in general why investors should buy so and so ETF to either a) be hedged or b) simply short for the downside.

J.C. is right about one thing though- "there's always a bull market some where"- it's just this "bull" market is in the bearish ETFs (talk about irony), which are having their day after 4-5 yrs of a rally in the indexes.

According to BIS estimates of OTC derivatives vs. the underlying securities upon which these derivatives are based, leverage in the financial system is nearly 12x.

The ISDA numbers indicate leverage of more like 250x the collateral put up for these derivatives. So, I guess people should get used to bearish views.

The two main rallies (>3%) we've had this year, if one looks at which stocks rallied the most, it's the ones with the highest short squeeze.

[STS]

Seems to me your #3 should be closer to the top. And contrary to your "friendly commenter's" assertion, it isn't just "fear fueling more fear" -- it's insolvency fueling more insolvency. The fear is only smoke from the insolvency fire. And excessive leverage seems to be the main fuel feeding the fire.

It's interesting that deleveraging so rarely happens in an orderly manner. Maybe that's just selection bias -- we don't hear about it unless it's disorderly?

[howard lindzon]

you are extremely unamerican roger and I am unsubscribing. Please forward the link to soprano. he's on it!

[Paul Denlinger]

Let me tell you a little about what it looks like from outside the US. (I live in Beijing.) I suspect that some of your readers, like Tony Soprano, have not lived much outside the US and may not be sensitive to how the US is perceived.

For a long time, US capital markets were the first choice for IPOs because the US offered the best value for Chinese companies which wanted to IPO. With Sarbanes-Oxley and the high costs of liability, this is no longer the case.

Higher costs could be mitigated by the relatively transparency of the market. Now with all the unwinding of the credit derivatives and the nonsense which went into the valuation of what is essentially worthless paper which was highly leveraged, the Chinese government and investors question the true worth of this capital market.

In short, the US market and the US dollar attracted investors from all over the world because they were trusted as being better than gold. The US dollar became the world's reserve currency just for that reason. Now, that is no longer the case.

Now, investors are looking for other choices. The question Ben Bernanke and Hank Paulson need to ask is "What does the US need to do to earn back the trust of the rest of the world?"

Anything less than that is just a short-term expediency, not a long-term policy. The US government has thought in increasingly short-term views, which means that the choices eventually become more short-term, until the point we have reached now, where there are no good choices for the Fed and Treasury to select from. It's like the little Dutch boy trying to plug leaks in the wall with his thumb; eventually there are too many leaks.

And now, the rest of the world knows it.

[Michael Lazerow]

The truth hurts. It's much easier to ignore, deny, shine the turd, look at the glass as half full, etc. etc. etc. As an eternal realist, you are able to report things as they are and remove your emotions, wants, desires and passions from the equation. This is very Buddhist of you, Rog. Much of your writing and your views are not based on wishful thinking. I'm sure you wish, like many of us, that the real estate market continued to fly, oil was still $33 a barrel, the market was busting through new highs and cash flowed freely. The fact is we're in a crap sandwich of a domestic economy and are starting to take it up the you know what from the global economy. The pain won't go away anytime soon. But readers who bash your positions will be better off accepting the way things are and making decisions based on the best information on hand. As the Buddhists believe, we must not manipulate things as they are into things as we would like them to be. Sit with the sh**. Feel it. Understand it. Be with it the way it is. And only then can you make the right decisions.

[fred wilson]

comments are an important part of the blogging equation but you will always get jerks as a fraction of the people who comment

it comes with the territory unfortunately

fred

[Barry Campbell]

If you want to encounter hostility at a craps table, be the guy betting on the "don't pass" line.

[RichL]

The difference this time is that there are a great many shortsellers in the market that are backing up their opinion that the world is coming to an end with trades. Their honest belief in their position also makes them vocal advocates. Take a somewhat crappy economy, and add to it the chorus of bearish comments, and you could likely have market prices that over-discount the end of the world.

I own a bank stock that obviously has some problems, but is trading at 20% of book and has a short interest in excess of 50% of the float. I could easily be wrong, but to me the extent of the short position at the price is ridiculous. I've been in the markets since the 1970's, and have never seen such extremely large short positions that, to me, seem uneconomic. In the past, a short is covered into a bad tape, and sold into strength. Now it seems the trade is to continue to press.

There appears to be large scale trend following by supposedly sophisticated institutions. It seems less than helpful to the real economy when a Calpers decides to increase allocations to commodities 16 fold, as reported on Feb.28,2008 by Bloomberg.

The odds that the prices don't correctly reflect the underlying reality is, IMHO, quite high.