Times That Give Bears Illogical Pause

 | Feb 24, 2012 | 10:30 AM EST
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Financial market bears are running for cover everywhere and in some cases being savaged in the process by bulls and onlookers. It goes with the territory of being a prognosticator whose prognostications are public.

The US stock indices have risen about 100% from their March 2009 lows and there are now nascent signs of real economic stabilization in the U.S. 

Just a few months ago many economists and financial market technicians of various methodologies were anticipating renewed recession in the U.S., along with what must properly be described as dire stock market action.

But within the past few weeks an increasing number of these prominent bear have reversed or softened their positions to varying degrees with some even offering mea culpa's in the process. 

These include Lakshman Achuthan, Noriel Roubini, Tom DeMark, Bob Janjuah and Hugh Hendry. And there have been plenty of others.

My own study and thoughts puts me squarely in the camp of economic and financial market bears.

But if you're thinking this is the introduction to my own mea culpa, you're mistaken. That's not to say I won't provide such in the future. As Keynes famously (and possibly apocryphally) opined in response to a question: "When the facts change, I change my mind." For now the facts, as near as I have been able to ascertain, have not changed enough for me to alter my expectations for 2012.

Although all of the gentlemen listed above have logic systems they use to anticipate economic and market trajectory, they have failed to supply the logic to their most recent reversals. 

I understand the issues they are all facing. When the systems of logic being deployed are providing trajectories that are contrary to actual economic indicators or market action it can be disturbing. It is quite common in such a situation for even the best analysts to assume that their logic system is broken, rather than that the markets are exhibiting irrational behavior.  

Financial models all project logical, rational trajectories. When those trajectories are not borne out the next step is to find out why. Either the logic is wrong or the market participants are irrational.    

In reference to such events, Keynes also noted that "markets can remain irrational longer than you can remain solvent." 

In either case it is incumbent upon the prognosticators to explain this rather than just change their stance.  And this is what is very disturbing right now.  Tom DeMark simply changed his outlook for US equities in 2012 from a crash similar to 1973-4 to a mild 5-6% reduction to the indices and 10-12% for some sectors. But he never said why and nobody has challenged him on it.

Bob Janjuah just basically said, I don't understand the markets any longer. That's fine. But he does understand his system and he has an obligation to explain the divergence between his models and markets.

Roubini switched from bear to bull earlier this year, offering few clues as to why. Hugh Hendry has done an excellent job of bridging the divide between macroeconomic and market action. But even he just basically says it's wider now than at other times. And maybe that's all that really needs to be said.         

There are multiple asset class correlations that face these same issues continuously: stocks, bonds, dollar, gold/dollar, oil/dollar, euro, yen, the 2- to 10-year Treasury spread and many more. The mechanics of all of these relationships are the pillars of global liquidity.

The difference between capital market correlations and those of analysts vs. markets is often just human pride. Fear is a greater motivator than greed. And the fear of being wrong can lead to the fear of rejection by clients. And without clients, you have no money to pay your bills. 

This kind of fear is very real. It's a part of the human condition and obviously not limited to economists and market technicians. Fear also gives rise to the fight-or-flight response and the belief that there is safety by traveling in a group. 

It's also one of the reasons that economists and technicians have perpetually uniform predictions. It's safer and more prudent to be wrong in a group than alone.

I've been wrong before and I'll be wrong again. But my life and my business will not be ruled by fear. The economic trajectory for the US and the world more broadly is still negative with the risk of deflation being greater than inflation.    

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