Category: Fred Hickey

Bears feeling the pressure

During manias, the pressure to conform becomes… well, unbearable.  Yesterday, CNBC reported that noted bear Doug Kass put an end to the scorn he constantly received on Twitter:

Doug Kass has had it with the haters and declared his intent Monday to leave Twitter and his 62,000 followers behind.

He has been consistently bearish during the current market rally and has taken substantial heat for his position that stocks are overvalued and headed for a fall.

But he said he’s tired of the constant procession of personal attacks and is packing it in.

This reminds us of the pressure to conform during the housing and credit bubbles from 2004-2007.  Prominent bear Fred Hickey wrote the following in the October 4, 2007 issue of his monthly newsletter, The High-Tech Strategist:

Fellow contrarians, it’s gut-check time.  As a standard bearer of the camp that believes that the Federal Reserve is not omnipotent, I can tell you that this moment is as difficult as any that we have had to endure in many years.  I speak to many of the most hard-core stock market bears (our circle is a small one) and it is clear that their confidence is on the ropes.  I’m not sure if I can characterize it as despondency, but it sure is close.  I can hear the depression over the phone.  Their tone is subdued and there’s an air of despondency.

I’d be lying if I said I wasn’t feeling the pressure.

Someone left me a message this week whining that with the housing market in a total collapse, the Fed will never allow the stock market to fall because the consequences would be so awful.  It was his conclusion, therefore, that stocks were destined to go higher.  Resistance was futile.

It is the notion that the Federal Reserve is in complete control of the markets that is propelling this latest bout of insanity.

History doesn’t always repeat, though it often rhymes.  The near extinction of the bears is perhaps the best sign that the investment winds are about to change as the Fed-induced economic storm clouds build.

Fred Hickey compares today’s central banks to 19th century patent medicine factories

Fred Hickey, editor of The High-Tech Strategist ($150/year, thehightechstrategist@yahoo.com), grew up in Lowell, Massachusetts, known as the “Birthplace of the American Industrial Revolution.”  In his latest HTS he discusses the genesis of the patent medicine industry in his hometown during the mid-1800s:

For a time, Lowell became America’s largest industrial center…  In addition to the textile factories, other industries grew up in the city around the same time, including patent medicine factories – Father John’s Medicine and J.C. Ayer & Co. among them.

Dr. J.C. Ayer founded J.C. Ayer & Co. in Lowell and his factory became one of the largest of its kind in the world.  Advertising was the key to success…, with the company distributing millions of copies of its free “almanac” (propaganda) annually around the world – in eight languages, including Chinese.  A sample from the almanac:

“The skillful pilot steers his ship through all dangers and guides her safely to port.  So the skillful physician pilots his patient through the perils of sickness to perfect health.  In cases of General Debility, so common at present day, he recommends the use of Ayer’s Sarsaparilla, because of its superior efficacy in aiding the formation of pure and vigorous blood, thereby restoring the normal condition to every fibre, organ, nerve, and muscle of the body.  It cures others and will cure you.  This standard remedy is compounded of the best tonics and alternatives known to science, and its superior qualities as blood-purifier and invigorator have stood the test of nearly half a century.”

Ayer became fabulously wealthy, amassing a fortune of some $20 million – quite a sum for the time.

Though Dr. Ayer never practiced medicine, the cover of each J.C. Ayer almanac was decorated with classical engravings such as one showing the Greek physician Hippocrates standing atop the earth declaring: “Heal the sick.”  What was not to believe with such evidence coming from a great doctor?

Hickey goes on the draw the parallel to central banking:

 Today, we look back and laugh – how could these people be so gullible?  Yet, the world is currently under the spell of its own modern-day quacks – known as central bankers.  Central bankers are touted as having the cure for all of our financial problems.  Their tonic, with the scientifically-sounding name of “quantitative easing,” or QE for short, is guaranteed to restore our financial health, to cleanse us from all our ills.  Whether the cause is spending beyond our means (perennial trillion dollar deficits and gigantic debts), making entitlement promises we cannot keep, building a gigantic welfare state of dependents, having a dysfunctional (and sometimes corrupt) government, constructing a byzantine tax system, tying up our businesses in a web of regulations, enabling “too-big-to-fail” banks to grow monstrously bigger – all can be cured with the magical elixir called QE.

Our skillful physician pilots (brandishing their doctorates from Princeton and M.I.T.) have discovered a miracle cure to be sure – at least that’s what one hears all day long from the talking heads on CNBC…  The media dissects Bernanke’s every utterance for clues as to whether he will supply more of the miracle or not.  The cameras are always on – even when he’s just laying out lame jokes at a Princeton commencement ceremony.

The QE medicine is seductive and addictive…

The best part yet – the QE medicine that he and other central bankers around the world are ladling out tastes so good… With QE, stocks will never fall on Tuesdays (20 straight up Tuesdays in a row), stock markets will never again have a 5% “correction,” (nearing 200 days without a 5% decline), investors can lever up with margin debt to record levels ($384 billion and counting – exceeding the 2007 pre-crash level)…  Investors have become so addicted to the QE wonder drug than even the merest hint of a lower dosage (tapering) sends up cries of anguish from the financial world.  Stock prices wobble; interest rates soar and CNBC anchors throw hissy-fits.

Other than the hallucinogenic effects, is the drug working?

Despite an additional $6 trillion of deficit spending, 0% interest rates and trillions of dollars of newly-created high-powered monetary reserves by the Federal Reserve (QE) that has driven asset inflation sharply higher (stocks, bonds, farmland, art and gold); over the past 4+ years we have experienced the slowest economic recovery in post-war history…  Last month investors celebrated a pathetic 165,000 jobs created, when 278,000 of those jobs were part-time.  In other words, we lost another 113,000 full-time jobs.  The U-6 unemployment rate (including part-time workers unable to find full-time work) ticked UP to 13.9%… With jobs hard to get and real inflation-adjusted incomes falling, the average American consumer is under pressure.  Witness the fairly miserable first quarter sales results from America’s largest retailers reported last month.  Same-store sales fell year-over-year at Wal-Mart, Target, Kohl’s and Sears…  Yesterday we received the Institute for Supply Management’s (ISM) report for May which, at a reading of 49.0, showed the biggest contraction in American manufacturing activity in four years – since the “Great Recession” of 2009…  I’ve been going through scores of first quarter earnings reports and conference calls from the largest technology companies.  The numbers and commentary were consistently gloomy – it was the worst batch of results I’ve seen since the end of the Great Recession.

At this stage of recovery something is terribly wrong.  Let me clue you in on a little secret – money printing doesn’t work.

The Japanese chugged plenty of this medicine…

Japan was the first to try “QE” to resolve its problems (though it was certainly not the first to try money printing).  They’ve been attempting to lift their economy out of a decades-long recession for many years.  The Bank of Japan (BOJ) tripled its balance sheet but did nothing to address the real underlying causes of the disease.  They did not address their lifetime employment system that hobbles business flexibility.  They did little to correct the ridiculous rules and regulations that suffocate the agricultural, medical and retail industries.  They raised taxes.  They massively increased government spending, wasting trillions of dollars and causing a debt pileup (235% of GDP and still rising) – the likes of which the world has never seen from a developed country.  As one would expect, the attempt failed spectacularly.

Yet the American snake oil salesmen claimed they didn’t drink enough!

Dr. Bernanke, and other high priests of central planning (including Paul Krugman) lectured the Japanese that their problem was they weren’t swilling enough of the QE tonic fast enough.  For a decade the BOJ resisted, always citing concerns over inflation.  Finally, Shinzo Abe was swept into power on the campaign promise of more licorice for everyone! After eliminating the key inflation-phobes (Masaaki Shirakawa) from the BOJ and replacing them with Bernanke-like clones (Haruhiko Kuroda), the new era of “Abenomics” was on…  The BOJ announced a plan to double its monetary base (high-powered money) within two years.  In other words, they opted to chug the whole bottle of medicine at once.

After discussing the post-WWI German experiment in money printing gone awry (Weimar hyperinflation), Hickey sees the American experiment ending badly:

Despite this horrific central banker record, U.S. investors still want to believe that Father Ben’s QE medicine will eventually work.  But just because the crowd believes this fantasy, doesn’t mean I have to.  As long as the Fed continues to print tens of billions of dollars a month, stocks can continue to climb higher, but the gap between the economic reality (poor) and the stock valuations (euphoric) widens to ever more dangerous levels.  Another crash is coming and I intend to avoid it – once again.

In conclusion, Fred Hickey offers an antidote to the QE drug:

Throughout history, the antidote to money debasement has always been gold.

Even the bears are afraid to short stocks

In past years, when I saw this kind of speculation building, I would begin building positions to take the other side (put options). But this time around, I’m more hesitant. As noted earlier, this Fed and U.S. Government are willing to do “whatever it takes” to reignite growth. In my opinion, the government doesn’t really care about deficits and the Fed would prefer to see inflation.

… The government will continue to push, but instead of job growth, they’re more likely to create asset price inflation (again). We may be seeing early signs of the next bubble(s). I worry that it will be even more difficult to take short positions against stocks than it was leading up to the market tops in 2000 and 2007 – as hard as that may be to believe.

I have not sworn off put options. But I’ll need really stupidly high tech stock prices and some sort of “trigger” catalysts in order for me to jump back in. Stock market sentiment will have to be higher than it is today. (emphasis mine)

~ Fred Hickey, editor, The High-Tech Strategist, August 3, 2009

Hmmm… stock market sentiment has to turn even more bullish? Consider:

  1. There were a record 33 secondary offerings this past week. The previous record was 32 on June 5th. Anything over 10 is high, 25 or over extremely rare.
  2. In early March the average discount of the funds in the Herzfeld Closed-End Average was at 20.2%. Today it is at 7.5%.
  3. The Investors Intelligence poll shows 28.1% more bulls than bears, the highest bullish reading since December, 2007 (with the S&P 500 at 1484).
  4. Weekly put option complacency was 56.5% of total unchanged options, up from 30.5% at the early March bottom. This is the most optimism since October, 2007 (with the S&P 500 at 1501).
  5. At Rydex, just 23.7% of timing assets are positioned for a downturn.
  6. The vast majority of talking heads on CNBC see “green shoots” and a mild correction at worst. Five months ago – before the S&P 500 vaulted 50% – these geniuses were convinced any upside was limited and repeated attempts at “stimulus” had failed.

We have been tracking investor sentiment for over 25 years, but do not recall such a dramatic change in mood from despair to elation in such a brief period. Perma-bears, such as Fred Hickey (who we highly respect), could be waiting a long time if they expect elevated levels of bullishness to go even higher. And the catalyst for lower stock prices? How about an economy that just swallowed a whole bottle of stimulants and is about to go into a coma.

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