May

15

One of the never-ending bearish ideas promulgated by the chronic pessimists is that the consumer was really punk in April 2007. The idea, according to a certain weekly financial columnist and his camp, is that whereas the 1990-1999 bull market (which he was consistently bearish during) just went up without raising warning flags, the rise in the markets in 2007 has raised a million warning flags. And that this is now bearish.

Some people have actually read the chronic bear columnist's columns in 1990-1999, and contrary to what is stated, there was nary a week during that period that warning signals of imminent decline were not hauled out by one or another of the curmudgeon's friends. Such bearish reasons are memorialized in Practical Speculation.

It seems petty on my part to constantly point out the fallacies in the chronic pessimists' (the Abelprecbuffgrosoros') arguments. Eventually they will be right, and I have no idea if the current market is more bullish or more bearish than at any other time, and I certainly don't find this a more than usually good time to establish positions — but the point is that there is no reason to think that the reasons for bearishness are greater today than at any other time in the last 100 years. Nor is a decline in previous or prospective consumer spending or real estate prices good or bad for the market — that would depend on the totality of market interrelations and forecasts of discounted earnings for the market for the indefinite future. All the chronic pessimists I know of who actually trade, (in contrast to the weekly financial columnist) and who must take responsibility for their calls, are scratching the backs of solvent members from their perches and living quarters in the vicinity of the Trinity Church graveyard. Such will continue into the indefinite future, because of the creative power of the individual when placed in a system with proper incentives and the protection of property rights, as memorialized in the work of Dimson, Marsh and Staunton.

Chronic pessimists often have surface reasons for being bearish. For example, several years ago they talked about how P/Es were too high. Of course this didn't take account of interest rates or growth or past prospective relations between P/Es and market moves. The bearish P/E relation is specious, based on retrospective, part/whole fallacious, out-of-date relations from the Shiller database. And these, by transference from the academic world, have so much more credibility (if you didn't know he's been saying the same thing since Dow 1000, like the weekly financial columnist).

The question is, whenever the ratio goes the other way, like P/Es, now the lowest in 20 years, or oil, down 5% over the past year, or now the dollar up against the yen over the past year, why do you never hear about the relation that was formerly bearish and is now bullish?

Another purported reason to be bearish is that the dollar is very low and when you look at things in terms of the Great Man sitting on a platform above the world with the lever, he's not really making money on his dollar holdings, and this is bearish. You could substitute any other market, like oil or food prices, that is going down or up when stocks are rising as a reason for bearishness. None of these putative reasons for bearishness is ever tested. Instead, vague qualitative statements are posited about the unwanted dollars piling up in foreign coffers that could create a landslide.

From Stefan Jovanovich:

There is at least one reason to think that the "record highs" in the stock market averages reflect faulty counting: those averages are being measured in U.S. dollars. Adjusted for the fluctuations in the Federal Reserve Bank's Broad and Major Currency Indices, the S&P 500 Index (excluding reinvestment of dividends) is still well below where it was in June 2000. Scaled to the Broad Index the S&P 500 is still 6.7% below where it was nearly 7 years ago.

The Major Currency Index is probably the more appropriate measure to use since it reflects the change in the value of the U.S. $ against the other currencies used in the world's capital markets. Scaled to the Major Currency Index the S&P 500 is right now at 72% of its June 2000 price.


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