Is a 'Shock and Awe' Rally Imminent?

As a sign of how hysterical and overextended the bear case has become, I note the most idiotic piece of analysis since that GS and CIBC $200 oil forecast a few months back is ricocheting around the financial media. Bloomberg has been quoting Jim Bianco, who totted up the cost of the biggest historical US government programs such as WW2, the New Deal, the Korean and Iraq Wars etc and worked out that on an inflation adjusted basis, the credit crisis bailout at $8 trillion is bigger that the whole lot combined.

What utter, economically illiterate, nonsense. Simply multiplying the cost of a war many decades ago by a cumulative inflation factor ignores the changing relative value of economic inputs over that time frame, as well as huge qualitative differences due to technological change and social expectations. On this crude analysis, WW2 cost $288 billion at the time (129% of GDP), so $3.6 trillion in today's money. Economist Joseph Stiglitz has estimated the ultimate cost of the second Gulf War at $3 trillion, a conflict that involved a conventional war lasting a few weeks in a single country and a subsequent 5 year (and counting) occupation by at most 150,000 troops with 4,000 dead, as against a 5 year intense conventional war across the globe involving 16m servicemen and almost 300,000 deaths.

Based on 129% of GDP, a similar conflict would tally to $18 trillion for today's US economy, but the Iraq experience gives us a better idea of the huge increase in the real cost of fielding and supporting a US combat soldier and suggest it would be more like $50 trillion.

So keep the bailout in perspective, and ignore simplistic, headline-grabbing analysis. The fiscal deficit and ballooning Fed balance sheet are terrifying enough for anybody holding US government bonds without invoking spurious historical comparisons.

In fact the real comparison should be with the brutal wealth destruction we have seen; US homeowners look set to lose about $7 trillion in wealth from the housing crash, and financial institutions $1 trillion more; the scale of wealth destruction in equity markets is about $30 trillion globally as of mid November from peak levels. That puts the bailout numbers in truly relevant context.

Meanwhile, the equity market reaction to Friday's truly grim employment data was instructive (adjusting for labor force 'drop-outs' unemployment is now north of 7%, and over 10% for those without a high school education); as I've declared consistently in recent posts, the probability of a very dramatic bear rally in equity markets in coming weeks is high and rising, quite possibly taking the Dow over 10,000 again.

Some bears will pin Friday's move on manipulation by some mysterious 'plunge protection team' lurking in the bowels of the Treasury; so the same geniuses who invented the TARP are cunningly pulling the market's daily strings?

Get real. Conspiracy theories are the refuge of the failed investor. Having warned of a looming Crash back in August and September, I now believe that the phenomenal increase in US money supply in recent weeks, a steady decline in interbank lending and 30yr mortgage rates, and sheer psychological exhaustion should prove enough to temporarily lift the gloom. The path of least resistance is up near-term, so make the most of the opportunity while it lasts.

Comments

[investor88:]

OK a realistic assessment of the situation. Shock and awe rally is in place alright, Dow 10k also in sight. Longer term still not clear. Nimble traders may find going long profitable for some time until the trend changes again.

2008 Dec 08 08:35 AM

[CLH:]

Very very good article. I expect a minimum rally of 3 months but a maximum of 3 years with 50% retracement of this years bull. Even 3 years will not get us out of the bear. Leveraged shorts will be destroyed.

2008 Dec 08 08:52 AM

[PWE Owner:]

Nice article---NOT! Attention-grabbing headline supported solely with sniping about something totally unrelated and a few other ignorant opinions. No facts, no analysis. And they wonder why journalism is dead.

The ultimate irony from this article is this line, "ignore simplistic, headline-grabbing analysis."

2008 Dec 08 09:12 AM

[BillyBear:]

"Hysterical and overextended Bear case", "Sheer psychological exhaustion"..........o... WOW, that's a much better technical explanation for a huge rally than some weirdo conspiracy theory like.......uh............ intervention !

NOT ! what a lame "analysis"........you could have a job on CNBC !

2008 Dec 08 10:00 AM

[BillyBear:]

"Hysterical and overextended Bear case", "Sheer psychological exhaustion"..........o... WOW, that's a much better technical explanation for a huge rally than some weirdo conspiracy theory like.......uh............ intervention !

NOT ! what a lame "analysis"........you could have a job on CNBC !

2008 Dec 08 10:00 AM

[KKR:]

He does indicate that Dow will climb beyond 10K in this Shock and Awe Rally.

"the probability of a very dramatic bear rally in equity markets in coming weeks is high and rising, quite possibly taking the Dow over 10,000 again"


On Dec 08 09:12 AM User 315124 wrote:

> Nice article---NOT! Attention-grabbing headline supported solely
> with sniping about something totally unrelated and a few other ignorant
> opinions. No facts, no analysis. And they wonder why journalism is
> dead.
>
> The ultimate irony from this article is this line, "ignore simplistic,
> headline-grabbing analysis."

2008 Dec 08 10:04 AM

[mr clark:]

Love to see these kind of articles in the face of some of the worst economic news in modern times, great contrarian indicator!

add short today and tomorrow if u want $$

2008 Dec 08 10:46 AM

[Pete C.:]

Good article.

"In fact the real comparison should be with the brutal wealth destruction we have seen"

That is so true. And it really makes me sick when you think about all of those golden parachutes out there floating on by, while we look for a way to protect what little wealth we have left. This article reminded me of a piece I read: www.wealthdaily.com/re...

Keep shooting straight - these times call for some seriously blunt commentary. Luckily there are ways to make money regardless of the market.

Pete

2008 Dec 08 02:34 PM

[User 316293:]

"Get real. Conspiracy theories are the refuge of the failed investor."

Failed? I traded in my tin foil hat for a gold one. Not only is there blatant equity market manipulation, but it is getting rather predictable. For example, I called the pre-election and Thanksgiving week Paulson Pump and Dumps and rewarded myself handsomely via long SPY calls.

Stocks may appear cheap fom the trailing PE perspective, but certainly not when looking forward. Once the effects of unemployment start to cycle through our 70% consumer based GDP, things will deteriorate further. I know this, the Treasury/Fed knows this, and I suspect that you do to. Except for speculators, who in their right mind would go long right now?


Although Elvis is may not be pulling the strings from behind the grassy knoll, government intervention in the equity markets makes perfect sense. For one several large pension funds and insurance companies won't likely survive a DJIA at 6000. Most importantly, though, is the 10,000 lb elephant in the room that none of you clowns in the media will discuss: The significance of 401(k)/IRA funds in total market capitalization. Go check it out and start thinking about what will happen if the retirement fund market inflows go negative for any length of time.

2008 Dec 09 04:59 PM