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

by: Ray

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 (NYSE: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.

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