Taipan Daily: Get Ready for Crash Season by Justice Litle, Editorial Director, Taipan Publishing Group
Today we'll open with good news and bad news for the economy.
The good news is that high-profile economists are turning bullish. At the head of the pack is James Glassman, a senior economist at JP Morgan Chase & Co, who boldly predicts a full-on "V shaped" recovery.
And the bad news? Glassman's bold predictions from the past haven't fared so well. This, after all, is the same guy who co-authored a book called Dow 36,000 some nine years ago, neatly pegging the top of the late great bull market.
They don't ring a bell at market tops. But, based on historical evidence, you do see shameless pundits like "Dow 36,000" Glassman start coming out of the woodwork when the market hits extremes. The man and his ilk are the polar opposite of contrarian. As the crowd grows ever stronger in its conviction that an over-extended trend will run forever, the Glassmans of the world reach new heights of boldness in parallel.
This, in part, explains why it is no accident that, at the very peak of table-pounding bullishness from Wall Street and the popular press, the bull run tends to fizzle out. By definition, the crowd is always wrong at major turning points. And so, to draw one's greatest convictions from the emotional sweep of the crowd is to be dangerously wrong at the worst possible time.
Another useful silly season barometer is the quality of logic employed in support of a bullish point of view. Glassman flashes big red warning lights in this area too.
To justify his V-shaped recovery call, Glassman utterly rejects the "New Normal" outlook, which argues that factors such as high unemployment, high debt levels, and a rising consumer savings trend will dominate a tough new economic landscape that could last for years.
"The thing I object to most about the New Normal idea is that we are stuck and have to accept higher unemployment -- if you look at the Fed, they are doing everything they can to fight it," Glassman says.
The idea that the Fed can fight unemployment by printing money is so cockamamie it is hardly worth responding to. In this Glassman is "not even wrong," as theoretical physicists like to say. To properly address such an assertion would require a mop and bucket. But this is what passes for logic on Wall Street these days.
Crash Season Cometh
Glassman aside, the stock market is treading on very dangerous ground now. There are many reasons why this is true. First and foremost, "crash season" is almost upon us – that time of year when markets show a distressing tendency to blow up.
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It's hard to say why, but there is just something about the months of September and October that tends to make Mr. Market lose his lunch.
Consider the following events that occurred in the September/October timeframe:
The Panic of 1907
The Crash of 1929
The Crash of 1987
The Russian debt default and LTCM meltdown (August-September 1998)
The multi-billion dollar Amaranth Advisors blow-up (September 2006)
The Crash of 2008 (post Lehman Bros. bankruptcy, September 2008)
That is a short list drawn from the top of your humble editor's head. With a little digging, more examples would no doubt arise.
China Leads the World?
Another area of real concern is China.
The cover of The Economist this week boasts the provocative headline, "Asia's Astonishing Rebound." What has been truly astonishing, from the skeptics' point of view, is the sheer volume of Chinese bank loans being stuffed down the gullet of the Chinese economy.
Four weeks ago, Macro Trader members received a weekly briefing titled "China is Going to Blow Up." The central thesis, backed up with a litany of facts, was that the mandarins in Beijing were walking in Alan Greenspan's footsteps in trying to inflate their country back to prosperity. Just as Greenspan held interest rates at historically low levels for far too long a time, inflating the housing bubble, China has done much the same.
The briefing also noted how Chinese bank lenders have been saddled with quotas and "must lend" mandates little different than the free-for-all "we'll lend to anyone" mentality that fueled the housing bubble. China's version of the NINJA loan (no income, no job, no assets) is to throw sacks full of money at the collapsing manufacturer or exporter in the hopes of sustaining the unsustainable. And just as Greenspan's easy money spigot fueled an orgy of real estate speculation, Beijing's flood of cash has fueled an orgy of business speculation, with hundreds of billions in lent funds flowing into speculative commodity stockpiling and the Shanghai A shares market.
This would all end quite badly, and possibly soon, Macro Trader members were told some four weeks back. Notice how the Shanghai Composite has performed since then:
China's rough patch is yet another dilemma for the die-hard bulls. All summer we have heard the drumbeat of how China would lead the global economy back to the land of milk and honey. (Never mind that such an argument made little sense, given China's dependence on the rest of the world as an export-driven economy.) Now that the putative leader is getting whacked (see chart above), a new (and shakier) rationale may have to be ginned up.
Next time I write, I'll go into more detail as to why the opportunities served up in this year's "crash season" could prove extraordinary for those willing to buck conventional wisdom.
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