The Misguided Cult of the Bear

 | Oct 15, 2013 | 11:30 AM EDT  | Comments
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Over the past month I've watched journalist after journalist trot out financial expert after financial expert to describe -- in quite graphic detail -- how exactly the world will come to an end should the U.S. fail to raise the debt ceiling and miss a coupon payment. These experts, who are accomplished people with long careers in finance, engaged in an arms race to find the most sensational adjective to describe the death and destruction that would inevitably ensue in such a scenario. Then there was one particular article making its rounds in the blogs and social media. It said that, since the amount of U.S. government debt outstanding was 24x what Lehman Brothers owed its creditors, the crisis resulting from a failure to raise the debt ceiling would be 24x as bad.

Look, a technical default would not be a good thing -- I am not trying to minimize the situation at all -- but that is stupid logic. For sure, there would be some market volatility. But let's use our heads for a second and compare this with two other defaults: Lehman and Greece, which were unbelievably hard on markets. The difference is: Lehman and Greece didn't have the money. In contrast, we do!

We are a few weeks into this shutdown, and equity markets and interest rates have barely budged. Political dysfunction makes us less creditworthy, to be sure, but I don't think even the most pessimistic of market analysts think that the missed coupon payment or payments won't be made up in arrears once the government reopens. But go on Twitter and it is half gloom and doom, and half moaning and groaning that stocks keep going higher.

It is a fact that the bearish argument always sounds smarter. The very nature of journalism, moreover, is such that "something bad is going to happen" sells a lot more newspapers and gets a lot more eyeballs than "nothing bad is going to happen."

Victor Niederhoffer, in his book Practical Speculations, wrote about what he called "The Cult of The Bear" -- the idea that people would rather sound smart than make money. He pointed out the obvious fact that, well, stock markets do go up most of the time. He called out the gloom-and-doom financial journalists, especially the now deceased Alan Abelson, to whom he devoted page after page of pointing out how his bearish predictions had gone horribly wrong.

I'm not an optimist per se, but it is fairly easy to trade against the permabear crowd. It is an old saw that the markets will do whatever hurts the most number of people. Quite clearly, the pain trade is higher: The price action is demonstrating that the majority of investors are either short or underinvested. Positioning is driving the market reaction to the debt ceiling. Positioning drives nearly everything.

I'm moderately net long in my long-short equity portfolio, and I'm looking to get longer. I could easily buy SPDR S&P 500 (SPY) or iShares Russell 2000 Index (IWM), but I would rather focus on individual names. When the debt ceiling is finally lifted -- and I mean when, not if -- there will be literally nothing standing in the way of this market, and we'll have just nominated a woman as Federal Reserve chairman who will focus on increasing employment to the exclusion of all else. Don't short a market that won't go down on bad news. That's the oldest trading wisdom in the world.

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