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3 Stock-Market Bears Emerge From Hibernation to Growl Again

3 Stock-Market Bears Emerge From Hibernation to Growl Again

By Wednesday, 13 June 2018 12:02 PM Current | Bio | Archive

I don’t expect a recession in the foreseeable future, so I don’t see a bear market in stocks anytime soon. That’s all the more reason to pay attention to the views of the bears.

This morning, I’ve rounded up the three most bearish of them all. They’ve missed most or all of the current bull market. One day, they may be right.

So let’s see what they have to say now:

(1) Icy long-view. “Permabear” Albert Edwards of Société Générale first formulated his “ice age” long view for the markets during the 1990s. Edwards’ thesis posited that developed nations’ economies were set to follow the lead of Japan’s deflationary spiral coupled with zero bond yields and a steep drop in equity values. So far, Edwards hasn’t been entirely wrong about inflationary pressures and persistently low bond yields. Edwards admits that he has missed the mark on the equity market so far, according to a 4/25 Barron’s article.

However, Edwards hasn’t let go of his bearish predictions, according to a 6/9 FT article. Edwards bases his current pessimistic outlook on his view that central bankers have inflated “the biggest credit bubble in history,” which is attributable in large part to quantitative easing. To support his thinking, he cites the IMF’s warning that 20% of US businesses are vulnerable to a rise in interest rates. Indeed, the IMF has been pretty bearish about rising interest rates in the US for some time. However, rising corporate debt might be an issue worth further consideration.

(2) No Trump bump. David Rosenberg, chief economist with Gluskin Sheff + Associates, is bearish again after a short stint as a bull. In a 6/8 op-ed for The Globe & Mail, he wrote that Trump’s tax cuts aren’t going to boost stock prices. Instead, he notes that large-cap tech stocks have done well this year for reasons having little to do with Trump’s policies. “Absent technology, the median stock is unchanged for the year and down more than 6 percent from the highs,” he says.

Rosenberg takes a bearish view of the deficit-financed tax cut. The economist believes that it’s likely to be “met by rising interest rates.” Rosenberg thinks that inflationary pressures are likely to “intensify,” forcing the Fed to “move from being behind the curve.” I’ve observed that there are powerful secular forces keeping a lid on inflation, suggesting that interest rates might rise less than Rosenberg expects.

Rosenberg also takes issue with Trump’s America First policy. “Changing trade incentives and imposing tariffs creates losers in aggregate, not winners,” in his opinion. In my opinion, Trump seems to be after fairer bilateral trade deals rather than protectionism. Working through these deals might be messy in the short term but create a more level competitive playing field for US businesses in the long term.

Rosenberg admits that deregulation is a positive, which added to real GDP growth last year. But he says that “the effects have largely played out.” That may not be the case, based on the latest small business survey discussed above.

(3) Ponzi scheme. John Hussman, a former economics professor who is now president of the Hussman Investment Trust, is another outspoken bear, as highlighted in a 6/10 Business Insider Prime article. Hussman says that an “economic Ponzi scheme” is playing out in the markets whereby low-grade consumer debt is financing consumption. He argues that that must be the case because wage growth has been sluggish.

In my view, consumers have actually been experiencing a fair share of personal income growth. I do acknowledge, as the article notes, that household saving is at a low, which is another point worthy of concern.

I don’t fault the bears for their bearish views. I do fault them for tuning out anything that might be significantly bullish. For example, the recent cut in the statutory corporate tax rate from 35% to 21% is only starting to boost profits, which might be set to further expand as the extra cash is put to work along with the repatriated earnings as a result of the tax reform.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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I don’t expect a recession in the foreseeable future, so I don’t see a bear market in stocks anytime soon. That’s all the more reason to pay attention to the views of the bears.
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Wednesday, 13 June 2018 12:02 PM
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