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The Year Of The Wimp

One by one, high-profile strategists are falling like dominoes.

They are changing their tunes from cautiously optimistic to outright bullish for 2020. The latest, and perhaps the most egregious example of this new trend comes from an article published on MarketWatch with the heady title:

‘Back up the truck and buy, buy buy,’ because there is no risk, says MUFG economist

It’s probably no accident that the headline writer at MarketWatch channeled Jim Cramer, the Prince of Hyperbole. (In case you’re wondering who MUFG is, they’re a financial institution in Japan. You know – the country that hosts the stock market that hit 39,000 in 1989 and has never recovered – trading at 24,000 today).

But I don’t mean to single out MUFG, or the ill-advised author of that market prediction, because it has become a popular meme now. Everybody seems to be jumping on the bull bandwagon. But is it too late? For answers let’s look at some facts instead of watching what the cheerleaders are doing.

Money is cheap and plentiful, but where is it going?

These newly converted bulls tend to point out a few things to support their case. Chief among them is the easy and cheap money being provided by central banks all over the world. Fair enough. Money is cheap and available, but what are companies doing with it?

Are they investing in capital expenditure projects like building new factories or creating new products? No. What they’re doing is buying back their stock on the open market. Who does this serve?

It serves shareholders for sure, and it serves management even more, especially since we’re in year-end bonus time. But do share buybacks grow the business? I don’t think so.

Are we in, or close to, a new debt bubble?

There seems to be a widely held belief among the market cognoscenti that budget deficits and sovereign debt levels don’t matter in the 21st century. The narrative goes something like this. Since the U.S. dollar is the world’s reserve currency, all other countries will have no choice but to accept our dollars in matters of trade and investment.

But here’s the real deal. It’s the American taxpayer who’s on the hook to pay Uncle Sam’s credit card bill when it comes due. What do we have now, $23 trillion in government debt? Every trillion in additional debt means a future tax increase for you and me. We can’t escape it, but we can delay it, which is just what our Fed and Treasury is doing – playing for time.


Implicit in the “buy, buy, buy” meme that has caught on like a virus is the assumption that stock valuations don’t matter because money is cheap. Really? Do you buy that argument? I don’t, and I can point to many past episodes where everyone was on board with this meme, only to wake up to a killer mean-reversion bear market.

2008 comes easily to mind. And 2001, 1991, 1987, 1973, and so on all the way back to 1929. And if you’re thinking that a 1929 class market crash and depression couldn’t possibly repeat in our sophisticated modern world of the Fed and banking regulations, well, think again. I don’t think it’s very likely, but it’s a possibility nonetheless.

What’s an investor to do?

First, don’t do anything yet. As long as the wildly bullish mentality is dominant just sit back and enjoy the ride. But keep one eye on the exit. When things turn south, there will be few places to hide. In past bear market episodes, one could hide in treasury bonds and make a decent return. Not so this time, thanks to our current low rate environment courtesy of an over-friendly Fed.

Companies that provide essential services and pay good dividends, like utilities and telecoms, should provide some protection as well. If you think you can hide in monster stocks like Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), or Microsoft (NASDAQ:MSFT) – think again. These are the first stocks that will be dumped by mutual funds and ETFs because they have lots of liquidity. Watch their prices drop along with the market and don’t assume they’ll rebound any faster than other stocks.

In a recession-linked bear market, no one is spared. So be prepared.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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