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In over 30 years on Wall Street, I cannot remember such a prolonged period of time
when the Bulls and Bears were in such agitated disagreement.
Zero Hedge has an excellent collection of specific factors suggesting that the economy
and the marketsare going to get worse. There is a blunt force of impact to such ZH
topics as Quant Divergence, Backup Liquidity Providers, Volatility, CRE, Stress Test
Shenanigans, Bailout/Stimulus Alphabet Soup, Administration Thuggery, Breakdown of
the Rule of Law, etc. “Why I am Freaking Out” is a good summary of how this affects
the regular reader, and Lira correctly argues that much is explained by self-fulfilling
prophesies from the Main Stream Media (not to mention CNBC - poster-boy for the
Green Shoots and Mustard Seeds advocates), and correctly points out that that is
neither good nor bad. “Gonzalo Lira” also very effectively ‘lifts the veil’ on the
arguments of the optimists to examine their sorely lacking fundamental underpinnings.
But while entertaining, Lira’s arguments have the feel of debating points, and the ‘self-
fulfilling prophesies’ view of macroeconomics doesn’t fully explain Mr. Market driving
into the camp of the optimists. While also a Bear, I have been searching for a more
comprehensive explanation, and this exposition is an attempt to connect more of the
dots (albeit with the usually disclaimer that such an exposition must skim the wave-tops,
and of course, most of the topics covered are outside my sphere of expertise), without
concluding that we should all head into the bunker. In other words, can a Bear with
conviction still have Hope?
Occam’s Razor suggests that we find the simplest explanation, the one with the fewest
unsupported assertions.
The simplest explanation, it seems clear to me, is that THE BULLS AND BEARS ARE
BOTH RIGHT. Certainly this is simpler thanone or the other being right. Of course,
another simple explanation is that BOTH ARE WRONG. More about that later.
Is it even possible for both to be right? To test this, I break the process into three
steps. First by reducing the competing arguments to simple statements (which
reduction is necessarily subjective), Second by laying out a conceptual framework for
the markets, and Third, by suggesting a set of behavioral rules that – possibly - ties
everything together.
FIRST. Reducing the arguments sets to a minimum.
BEARS:
1. The real values (the new low ones) and credit losses are not properly reflected in
the markets
2. The economy has not turned the corner and may be getting worse, and the
stimulus plans won’t work
3. Government expansion will lead to higher interest rates, currency deflation and
commodity inflation
BULLS:
1. The market always anticipates a recovery, there are reserves of liquidity, and
credit is flowing
2. The World Economy is fundamentally strong, and the stimulus plans have
worked (and indomitable human spirit, etc.)
3. The necessary evil of deficits will be cured by growth and nudging the economy
into more productive and efficient directions