Is Being Bearish About the U.S. Market Unpatriotic?

Perhaps the most absurd statement anyone can make is that if you are not always bullish on US equities you are not patriotic. That type of talk is eerily similar to that of the Soviet Union or some other regime that discourages freedom of speech or thought. Unfortunately, that is what I get a lot from some readers and media personalities.

Last night, Dennis Kneale said, in his Blog You!, segment that because I am negative on US equities I am not a patriot. He seems to think that blind patriotism and belief that things will always get better because we are America is the way to go. He seems to think that things improved so much over the past 12 months that nothing can go wrong. That cannot be further from the truth and let us not forget that it was about 12 months ago that this guy had no idea what the VIX was and said Citi (C) was a screaming buy at 25 a share or so.

Forgetting his past indiscretions let’s just take a look at the facts which determines why I am bearish on US equities. Real estate, both commercial and residential, are in serious trouble and since most mortgages were securitized and sold to banks, later used as collateral, then it is safe to assume that banks have billions more in bad debt on their books. That fact alone should scare any normal person about the banking system by itself, not to mention that the Fed and the FDIC are both very concerned over commercial real estate as you read this post. A banking system that holds this much bad debt is not good and our actions will either postpone the inevitable or, in the best case scenario, create zombie banks.

Equities got way ahead of themselves and are currently trading about 130x their current earnings, 26x future earnings. The current pricing of the S&P 500 means that GDP has to have 4% growth in order to maintain these prices, I do not see that as a possibility no matter how they use hedonics to play with the numbers. I think a rational person would say 2% GDP growth is what we should expect which places the S&P 500’s fair valuation at about 850 or so. Earnings are down some 26% year-over-year and very few firms beat on revenue which means they are firing people to make their numbers, is that patriotic?

Monetary policy is a mess and I do not see how anyone could think differently. The Fed has monetized debt, propped up who knows how many banks, printed tons, literally, of money, have interest rates at zero, refuse to let us know exactly how bad the banking system really is and the list just goes on and on. While inflation is clearly not a problem, deflation is here for some time to come, it is highly unlikely that the Fed will be able to rein in this extremely accommodative monetary policy in a timely fashion and inflation will be a major problem in the future. Also, when foreign banks question the value of your currency and have voiced very public concerns over your currency, that is a major problem, especially as we depend on them to fund our deficit spending.

Unemployment is a catastrophic problem because consumption is 70% of our GDP and anyone who thinks that the consumer is coming back, you might want to reevaluate that thought. Considering unemployment is going up it is highly unlikely that the consumer will spend on anything other than the basics. There is no sign of unemployment declining in the near future which will remain a problem for economic growth until we either get used to the new normal or change the structure of our GDP, guess which will happen.

Government subsidized growth is not growth. We must pay for it through our taxes sometime in the future. The programs that have been successful such as cash for clunkers and the first time homebuyer tax credit are the cause of all the demand that we have seen and will more than likely skew the GDP to positive for 3Q09. However, this artificial demand is not sustainable and eventually we will have to pay for it through taxes. Essentially the government is in the banking business, financial services business and the mortgage business all of which is bad for the free markets.

Based on all this information how in the world can you be bullish? Long-term I am sure we will be fine, but if we look around the world I am sure we can find better investment opportunities than in the US at the moment. Until things get back to a new normal or until we are fully aware of the risks banks have on their books I think it is incredibly dangerous to just blindly invest on patriotism. After all, America is about opportunity to better yourself and if that means you invest in China or India to make more money than that is as patriotic as you can get.

It is unbelievable that a media personality would go to the, 'if you don’t invest in America then you’re a traitor’ level. I think that is childish and it looks desperate, kind of like picking a fight with bloggers I might add, for ratings. I am in fine company with my bearish call with the likes of Doug Cass, at the moment at least, Paul Tudor Jones, the folks at Horseman Capital, Peter Schiff and a whole host of others. Of course there is the possibility that I am wrong, but based on the evidence I see I really don’t think that is the case, but in the event that I am wrong I will admit it.

Anyone voicing their opposition to what they see as wrong is a patriot no matter if it is on healthcare or the way our politicians blatantly vote against their constituents. In the days of old it was the media who was inquisitive about the government and tried to get the real facts, but somewhere along the way the media thought that the latest Britney Spears news was more important than reporting on what our government is up to. I guess they forgot why the Constitution gave them such wide power.

Comments

[rickf:]

Screw the media - their job is to gather viewers and rally the masses. Right now anyone looking to go long most equities after this parabolic rally in recent months is nuts. Not patriotic, just nuts.

Sep 02 08:37 AM

[hoager:]

dennis neale and the "kidz"@cnbc are nitwits.nothing but market cheer leaders for the uninformed. pumpers is the correct term....

Sep 02 09:11 AM

[doubleguns:]

It appears that many of our politicians and media types that think they know what is best for us continue to panic when we think for our selves. Those of us that think for ourselves are getting a lot of name calling lately.

In the past 6 months I have been called a right wing extremist by my govt (napoalitano) and unamerican by Pelosi.

How dare they!!!!

Their arrogance is unforgivable.

Patriots think, they challenge ideas, they are not blind followers lead like lemmings to the sea. We take responsibility for ourselves and we are not easily buffaloed by bafoons.

Keep your chin up and when they call you unpatriotic just consider the source.

It simply appears its the pot trying to call the fine china black.

Sep 02 09:18 AM

[Graham and ...:]

Dennis Kneale and company will soon "get theirs." If they haven't already.

Sep 02 10:08 AM

[Roger Knights:]

"I think a rational person would say 2% GDP growth is what we should expect which places the S&P 500’s fair valuation at about 850 or so."

Or less. Much less.

Sep 02 10:21 AM

[conceptwizard:]

Ultimately its a "freedom of choice" that makes this a patriotic society. So if you are unpatriotic because you decide to go your own way,then those who call you so, dont really believe in freedom of choice. I find it overwhelming that people in high elected positions dont get this simple concept.

I have no idea how or why anyone would care what Dennis Kneale thought.

Sep 02 10:30 AM

[Dave Wrixon:]

Investment by definition about getting a return on capital. It has nothing to do with patriotism. Patriotism is, however, a very poor basis for investment decisions as many here will find to their cost. No amount of patriotism is going to save the Dollar or Wall Street.

Besides, when did Wall Street do the patriotic thing. The only time they wave the Stars and Stripes is when they need a bailout.

Sep 02 10:33 AM

[Dirtnap:]

To the contrary, I don't think you are very much of a patriot at all if you just blindly follow the bullish path laid before you by the mainstream media.

There are those in positions of power who might be upset, but I'm pretty sure our founders would consider it your duty to question the policies and fundamentals of our economic-political super structure.

Sep 02 10:34 AM

[BARAKA:]

I cannot understand what 'patriotism' has to do with the market. An investor or a trader just thinks one thing - $$$$. Patriots don't send you $$$$. Find good businesses and invest - you may not get GE at this price 2 years from now.

Sep 02 10:59 AM

[yank:]

Double:
Good for you. And you are correct that their arrogance is unforgivable. The way I see it is every day they choose to make an ass out of themselves (yesterday was Harry Reid's day) further tightens the noose around their neck. The Dems are in for a wicked surprise next November. I predict we will no longer have the "Wicked Witch of the West" Nancy Pelosi to kick around anymore. And as for poor Harry Reid, well he is trailing both Republican candidates for Senator badly as Vegas unemployment skyrockets above 13%. I will crack open a beer as the Dems "twist in the wind" next year. They deserve everything they get. This is the most incompetent Congressional leadership ever seen. They are "toast".

Yank


On Sep 02 09:18 AM doubleguns wrote:

> It appears that many of our politicians and media types that think
> they know what is best for us continue to panic when we think for
> our selves. Those of us that think for ourselves are getting a lot
> of name calling lately.
>
> In the past 6 months I have been called a right wing extremist by
> my govt (napoalitano) and unamerican by Pelosi.
>
> How dare they!!!!
>
> Their arrogance is unforgivable.
>
> Patriots think, they challenge ideas, they are not blind followers
> lead like lemmings to the sea. We take responsibility for ourselves
> and we are not easily buffaloed by bafoons.
>
> Keep your chin up and when they call you unpatriotic just consider
> the source.
>
> It simply appears its the pot trying to call the fine china black.

Sep 02 11:58 AM

[bmcon:]

Is buying a flag made in China unpatriotic? Perhaps Kneale should look at the flag he is waving to see where it is made. And perhaps congress should look at the flags that they are waving after passing the Commodity Futures Trading Modernization Act in 2000 that lead to derivative/CDS legalized gambling in the US market. Patriotism has nothing to do with the choices made to invest or trade in any market.

Sep 02 12:04 PM

[Tony Petroski:]

Ray. While I don't know your background, you sound like a patriot to me.

The answer to the title "Is Being Bearish About the U.S. Market Unpatriotic?" The answer is: No!

Ray put it exactly right: "After all, America is about opportunity to better yourself and if that means you invest in China or India to make more money than that is as patriotic as you can get."

America is about freedom. Freedom to invest your money (or not invest) in the way and in the places you want. It's also about buying the products you want whether made in China, America or Ethiopia. An American patriot would certainly consider buying an American flag made in China as long as the quality was good, the price was right, they got the colors right, and it had 13 stripes and 50 stars in the right places.

On the other hand: American patriots are becoming an endangered species. The vanguard of our intelligentsia style themselves as "Citizens of the World." Can you be a citizen of the world and an American patriot at the same time--that is a question worth asking. By the same token, if you live permanently in China, Singapore, Indonesia, etc., and you spend your waking hours running America down and touting the "Chinese Miracle," in what sense are you an American patriot, and wouldn't a patriot want to see his country once in a while?

Ray: There is a role for American patriots to point out what is wrong with America as long as their intention is to improve America, not make it worse or destroy it.

Keep going.

Sep 02 12:56 PM

[sstumpff:]

No, no, doubleguns. It is not a new thing. You are just now getting your first taste of it from that idiot congress. I've been called "unpatriotic" for years for thinking for myself.

One Congressman from Florida said about suggesting torture was a war crime:

"This isn't about free speech. This is about slandering the commander in chief at a time of war."

No, No. Being called "unpatriotic" for thinking for yourself is not a new thing.

On Sep 02 09:18 AM doubleguns wrote:

> It appears that many of our politicians and media types that think
> they know what is best for us continue to panic when we think for
> our selves. Those of us that think for ourselves are getting a lot
> of name calling lately.
>
> In the past 6 months I have been called a right wing extremist by
> my govt (napoalitano) and unamerican by Pelosi.
>
> How dare they!!!!
>
> Their arrogance is unforgivable.
>
> Patriots think, they challenge ideas, they are not blind followers
> lead like lemmings to the sea. We take responsibility for ourselves
> and we are not easily buffaloed by bafoons.
>
> Keep your chin up and when they call you unpatriotic just consider
> the source.
>
> It simply appears its the pot trying to call the fine china black.

Sep 02 04:41 PM

[APM:]

It is so easy to be patriotic these days ... there must be a manual for it somewhere. Maybe "Idiot's Guide to Patriotism" or "Dummy Book for Patriots" will hit the store soon.

You must buy it to be patriotic!

Sep 02 05:59 PM

[Moon Kil Woong:]

Good for you. In my view what is unpatriotic is not saying anything as shareholders and taxpayers rights get trampled and our economy becomes increasingly socialized. There is a difference between blind submission and patriotism. That being blind nationalism has no place in American patriotism as long as the US doesn't become Communist, Facist, or Totalitarian.

Sep 02 09:56 PM

[Old Rick:]

One could argue that the bearish argument may make people think seriously about their investments, and perhaps also come to the bearish conclusion, which would persuade them to sell down a bit thereby preserving capital. That sounds awfully patriotic to me!

Sep 02 11:35 PM

[bogoMIPs:]

Yank said: "..This is the most incompetent Congressional leadership ever seen. They are "toast"."


God, I sure hope you are right.

Sep 03 02:52 AM

[Mark Bern:]

A very Patriotic point of view!

What the MSM is up to: the biggest "pump & dump" history has ever seen. BoA, GS & others who have been propping up the market see the writing on the wall and really need the mutual funds and retail investors to keep buying so that they can take their profits out here as close as possible to the top. If the market falls too fast, they might not make enough profit to cover other losses during the quarter.

Sep 03 04:02 AM

[Michael Clark:]

I'm really glad you wrote this, Ray. I am expecting more of this. My thesis is that an economic depression is a cultural death experience (in fact, it's really the other way around: a cultural death experience includes an economic depression as one of its side effects)...and the supposed stages of the death experience, hammered out in the 1970's, another Night-Cycle death experience, (by E Kubler-Ross and others) looks like this:

Stage 1: denial. The 'green shoots' are the perfect example of this stage. 'Obama will save us,' is another. 'China will save us,' is another. 'This is really a Bull Market. The 'recession' is over, haven't you heard -- dud!' The classic denial statement came in 1930 when President Herbert Hoover actually responded to the press: "Gentleman, you have come sixty days too late. The depression is over." I'm waiting for our teddy bear, Ben Bernanke to utter something equally ridiculous -- then I'll know we are nearing the end of the denial state.

2. Anger. I'm expecting a pronounced anger experience -- and I'm thinking it will take the form of the bulls questioning the bears patriotism. I think it will be ugly. It may lead to bull questioning the patriotism of immigrants and those without lily white skin as well. I'm thinking this anger stage might be very ugly.

In my calculations our Night-Cycle does not start until 2010 (DUSK) -- and it runs through 2038 (DAWN). But 2010-2019 will be the darkest nationally and internationally. Hope is reborn in 2019, and begins to build from nothing to something. Pessimism will be utterly cast down in 2038, Dawn. But, by the same token, Pessimism will run rampant from 2010-2019. Pessimism and anger often run together.

Stage 3: Bargaining. I'll eat my peas every night, if you don't take away my GameBoy, Dear God. Or: I promise I'll pay my taxes if you don't bankrupt my corporation...

Stage 4: Acceptance. Ok, ok, it's a recession, maybe a depression. The green shoots, I agree: they look sort of brown in this light.

Stage 5: Depression. Everyone agrees we are absolutely in a depression. No one can be found to go on CNN and say that it is not a depression. No one is claiming that it is good news that a company lost money but beat the street estimate. This means we are actually close to a bottom. (By the same token, when everyone agrees -- including the National Real Estate Association -- that the Housing Crisis has no bottom and that houses will be worth $0 before they start to rebound -- that's when we'll be approaching a bottom.

Night Cycles are characterized by polarized class divisions -- especially hatred of the banking and capital class by the lower and middle classes. Day Cycles are characterized by relative unity and the idealization of entrepreuners, money-makers, city-builders and the glory of empire.

Sep 03 06:07 AM