Friday, September 22, 2017

Prepare For The Worst Bear Market Ever?

Barbara Kollmeyer of MarketWatch reports, Jim Rogers says ETF holders will get mauled by ‘the worst’ bear market ever:
Now that the Fed has finally started to peel off the quantitative-tightening Band-Aid, things should start getting back to normal.

That's a good one, given no one really knows what normal is these days. A pullback from the record highs of yesterday looks to be in store, and gold bugs should cover their eyes, because the market has been playing catchup to Fed rate-hike hints.

We’re diving right into our call of the day, which comes from Jim Rogers. In a sweeping interview with RealVision TV, the veteran investor warns another bear market is coming, and that it will be “horrendous, the worst.” It’s the level of debt across global economies that will be to blame, he says.

And retail investors who have been piling into exchange-traded funds will be particularly vulnerable to that next big mauling. For those ETF owners — who are all in on easy S&P plays right now — here’s his message:
“When we have the bear market, a lot of people are going to find that, ‘Oh my God, I own an ETF, and they collapsed. It went down more than anything else.’ And the reason it will go down more than anything else is because that’s what everybody owns,” he says.
Like others, the chairman of Rogers Holdings is worried about bond and stock valuations right now, and about breadth in the market — that is, the number of stocks moving higher versus those heading the other way.

But within this disaster in the making, he sees one opportunity.

“If somebody can just take the time to focus on the stocks that are not in the ETFs, there must be fabulous opportunities in those stocks because they’re ignored,” he says. “Some of them have got to be doing very, very well. And nobody’s buying them, because only the ETFs buy stocks.”

What does Rogers like? Overlooked and hated markets — agriculture and Russian stocks — and he remains a fan of Chinese stocks. The Singapore-based investor owns gold, but says the metal isn't hated enough to buy right now and it’s going to get “very, very, very overpriced” before the current run is over.

It’s a fascinating interview, chock-full of advice. Check it out on Real Vision here.

Final note here, if you were paying attention, you would have heard Rogers‘s prior warnings about dire collapses and crashes over the summer. Here’s another look at some of his crash predictions.
Ah, Jim Rogers is at it again, scaring people on markets with his dire predictions and telling them to find refuge in commodities, agriculture, Russian and Chinese stocks.

Roger's claim to fame was being the co-founder of the Quantum Fund along with George Soros and he still has a very wide following of devoted fans even though he's been utterly wrong on so many of his dire macro calls. He's partially right above and I will get to it in a minute.

It's Friday folks, it's time to sit back, relax and write about what I love most: markets, markets, MARKETS! No more discussions on pension storms from nowhere, whether fully-funded US pensions are worth it or rants on Bridgewater's culture and principles.

Today, we take a deep dive into markets so all my cheap broker buddies who absolutely hate pensions but love my market comments can stop whining like little girlie men and gain some much-needed macro insights (I tell them, if you don't like the content of my blog, pay up and then we can talk about it).

Alright, where is Jim Rogers right and where is he wrong? Like most market participants, Rogers doesn't understand the baffling mystery of inflation-deflation, because if he did, there is no way he would be recommending agriculture (DBA), commodities (GSC), Russian (RSX) or Chinese (FXI) stocks.

In fact, if Rogers understood that global deflation is gaining strength and headed for the US, he would be terrified and shorting the crap out of all these stocks he publicly recommended.

Where is Rogers right? In my recent comment on pension storms from nowhere, going over John Mauldin's dire warning on pensions, I wrote this:
I have been covering America's public and private pension crisis for a long time. It's a disaster and John is right, it's only going to get worse and a lot of innocent public-sector workers and retirees and private-sector businesses are going to get hurt in the process.

But it's even worse than even John can imagine. With global deflation headed to the US, when the pension storm cometh, it will wreak havoc on public and private pensions for a decade or longer. At that point, it won't just be companies breaking the pension promise, everyone will be at risk.

Importantly, if my worst fears materialize, this isn't going to be like the 2008 crisis where you follow Warren Buffett who bought preferred shares of Goldman Sachs and Bank of America at the bottom, and everything comes roaring back to new highs in subsequent years.

When the next crisis hits, it will be Chinese water torture for years, a bear market even worse than 1973-74, one that will potentially drag on a lot longer than we can imagine.

This will be the death knell for many chronically underfunded US public and private pensions for two reasons:
  1. First, and most importantly, rates will plunge to new secular lows and remain ultra-low for years. Because the duration of pension liabilities is much bigger than the duration of assets, any decline in rates will disproportionately hurt pensions, especially chronically underfunded pensions.
  2. Second, a prolonged bear market will strike public and private assets too. Not only are pensions going to see pension deficits soar as rates plunge to new secular lows, they will see their assets shrink, a perfect double-whammy storm for pensions. 
No doubt, some pensions will be hit much harder than others, but all pensions will be hit.
So, I agree with Jim Rogers, the next bear market will be a lot worse than anything we have seen before. And lot of unsuspecting retail and institutional investors riding the Big Beta ETF wave higher and higher are in for a very rude awakening in the years ahead.

What else? Let there be no doubt, exchange-traded funds (ETFs) are driving the market higher, along with central banks and companies buying back shares like there's no tomorrow.

Ben Carlson, publisher of A Wealth of Common Sense blog, recently wrote that saying there's a bubble in ETFs makes no sense, pointing out the following instead:
Closet indexing was the real bubble that is currently popping. You’ve never heard about it because the fund companies could extract such high fees in these funds.
No doubt, closet indexing was the real bubble, and I've discussed this before on my blog, but if Ben thinks the $3 $4 trillion shift in investing isn't a bubble in the making, he too is out to lunch.

Importantly, while Bitcoin is a glaring bubble to me (don't touch anything you can't hedge against!), there is a huge passive beta bubble going on in recent years that has effectively displaced and swamped the previous active alpha bubble and when it breaks, it will  wreak unfathomable damage to markets (overall indexes) for a very long time. ETF disciples will be crushed for years.

Equally important to remember, there is a symbiotic relationship between active and passive investing which Jack Bogle is well aware of. One cannot exist without the other and when everyone jumps on any investment bandwagon -- be it stocks, bonds, commodities, ETFs, etc. -- it doesn't bode well for future returns.

I rolled my eyes this morning when I read Pimco, BlackRock see a multi-year rally for emerging markets. Good luck with that trade, in a deflationary world, I recommend being underweight or even shorting emerging market stocks (EEM) and bonds (EMB).

It was interesting to see bank stocks surge higher this week as the yield curve collapsed but in a deflationary world, I'd be cautious on financials (XLF), they will perform miserably for a very long time.

Of course, the big news this week was the Federal Reserve and the 'great unwinding' of its balance sheet. The Fed didn't raise rates but hinted that rate hikes are coming and that it will proceed with an orderly but significant reduction in its balance sheet (read the FOMC statement here).

And I thought the Bank of Canada is flirting with disaster. The Fed is either oblivious to deflation headed to the US or it's terrified and wants to try to shore up big banks to prepare them for the catastrophic losses that lie ahead (ironically, this tightening will prop up the US dollar, lower import prices and exacerbate deflationary headwinds but it's a race to shore up banks before deflation strikes to mitigate the damage).

Maybe I'm wrong on deflation. This week, my friend Fred Lecoq sent me a comment from Pennock, A Possible Secular Bottom For Inflation, which you can all read here.

And my former colleague from the Caisse, Caroline Miller who is now the Global Strategist of BCA Research, put out a conference call titled "Should Bond Bears Come Out of Hibernation Or Will They Face Extinction?". You can watch it for free here.

Is the Maestro right on bonds? I don't think so. I respect Caroline a lot but I remain firmly in the deflation camp and following the Fed's statement, the bond market remains unimpressed and unconvinced that growth or reflation is coming back anytime soon.

In fact, I even called out bond king Jeffrey Gundlach on Twitter after he tweeted something silly following the Fed's announcement (click on image):


I think what is going on right now is the bond market is waiting for some announcement on tax cuts but it will be too little too late. Tax cuts will provide temporary relief but by the time they work through, the US economy will be well on its way to recession.

Again, let me be crystal clear here on my top three macro conviction trades going forward:
  1. Load up on US long bonds (TLT) while you still can before deflation strikes the US. This remains my top macro trade on a risk-adjusted basis.
  2. A couple of months ago I said it's time to start nibbling on the US dollar (UUP) and it continued to decline but I think the worst is behind us, and if a crisis strikes, everyone will want US assets, especially Treasuries. I'm particularly bearish on the Canadian dollar (FXC) and would use its appreciation this year to load up on US long bonds (TLT).
  3. My third macro conviction trade is to underweight/ short oil (USO), energy (XLE) and metals and mining (XME) as the global economy slows. Sell commodity indexes and currencies too.
Admittedly, oil prices are stubbornly hovering around $50 a barrel, and the higher they go, the better for energy, commodities and commodity currencies but I would be very careful here, this isn't another major reflation trade like in early 2016, it's just a counter-cyclical move in a major downtrend. 

What about tech stocks (XLK) and biotech stocks (XBI)? They look toppish to me and while there are some fantastic moves in individual biotech shares, I would tread carefully here too. 

Again, I'm not worried about when the tech bubble will burst. I'm far more worried about deflation headed to the US, wreaking havoc on the global economy and public and private risk assets for years to come. 

Be very careful in these markets. there is no question there is plenty of liquidity and trading opportunities abound. Every day, I look at ETFs and thousands of stocks I track and even my personal watch list and see lots of green and red (click on images): 



But I'm still in full-on defensive mode, all my money remains in US long bonds (TLT) and I'm undecided on whether I'm going to get back into trading biotech and tech companies for the remainder of the year.

These are markets for traders but you need to be good and take huge risks to make the big coin, buying the right stocks on big dips which sounds easy until you get caught and get your head handed to you.

Going into the end of the quarter, I expect some window dressing from big funds, there will be trading opportunities but you need to be very careful here, the US economy is definitely slowing. A lot of this slowdown has been reflected in the weak USD but as the rest of the world also slows, you will see their currencies sell off relative to the greenback.

Stay sharp, don't get too excited, sweep the table when you see profits, and be prepared for the worst bear market we have yet to experience (forget all your trading and investment books, read Hegel, Marx, and Nietzsche instead).

Or you can relax and listen to the Oracle of Omaha who recently predicted the Dow will hit 1 million and that may actually be pessimistic. He may be right but he won't be around to witness this and neither will you or I.

In the meantime, I'm with the former New York City mayor who said Tuesday in an interview with CBS News' Anthony Mason: "I cannot for the life of me understand why the market keeps going up."

The reason why the US market keeps going up is that it's the best and most liquid market in the world and after the USD slide, it's relatively cheap (on a currency, not valuation basis) but not without risks.

Second, take the time to watch the FOMC press conference from earlier this week. Madame Chair doesn't understand why inflation expectations aren't picking up yet. I suggest she and everyone else read this comment on retail sales and the end of reflation as well as my comment on deflation headed to the US. Does anyone else think Neel Kashkari should be named the next Fed Chair?

Lastly, the New York Times published a nice article last weekend, False Peace for Markets?, profiling a young 38-year old trader, Christopher Cole who runs Artemis Capital, and is betting big that volatility won't stay at historic lows for long. Watch him below discussing taking the long road with volatility.

I've already covered the silence of the VIX in great detail and it's worth noting Mr. Cole could come out of this a hero or a big zero depending on when markets break down. He could be right, and I myself am defensive right now, but markets can stay irrational longer than you can stay solvent.



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