Wednesday, October 5, 2022

Bill Bonner and Joel Bowman, "It's YODO Time!"

"It's YODO Time!"
Forget HODL, TINA and YOLO...
 here's an acronym for our age...
by Bill Bonner and Joel Bowman

Baltimore, Maryland - "In the fever and fury of the Great Bubble Epoch a number of short-hand messages were developed.

YOLO – you only live once, was enough to convince risk takers to make their move.
TINA – there is no alternative, described the lack of yield from ‘safe’ treasury bonds, leaving investors with no other choice but to buy stocks.
HODL – ‘hold on for dear life’ was what believers in crypto coins were supposed to do, ignoring the ups and downs of prices.

But now, it’s a new market. You still only live once, but now there’s no guarantee that stocks will go up. As for TINA, now there is an alternative. The 10-year Treasury is paying 3.6%. Not much. But better than losing 10%- 20% more the next drawdown. And HODL if you want… but there are some things you can HODL forever… and they’ll still be worthless.

The world is still the same… humans haven’t changed; we are as dumb and as credulous as ever. But new market conditions require a new anthem. So, we introduce:

YODO – you only die once. Today, we explain why this is a YODO market, not a YOLO market.

The Big Pivot: Yesterday, the dead cat bounced again. Market Watch: "The Dow Jones Industrial Average surged more than 900 points at its session high and remained on track for its biggest one-day percentage jump since June 2020 as equities kicked off the new month and quarter with a sharp bounce. The Dow remained up 890 points, or 3.1%, which would be its largest percentage rise since June 5, 2020."

What’s behind it? Investors saw the Bank of England ‘pivot.’ They saw the Reserve Bank of Australia almost pivot. They saw the government of the UK pivot. Perhaps a bit dizzy, they believe the Fed will soon pivot too. Markets Insider: "The Fed will hike rates once more in November and then stop because the soaring dollar risks breaking markets, market veteran Ed Yardeni says."

That point of view runs counter to market consensus, which currently expects a 75 basis point rate hike in November, followed by a 50 basis point rate hike in December. Some even expect the Fed to raise rates by another 25 basis points in early 2023 before it ultimately pauses, with the Fed fund rate sitting around 4.50%. Apparently, everybody thinks the Fed will pivot – including us. But we do not see it as a buy-the-dip opportunity. Instead, it’s merely a way to lose more money.

In this opinion, we are joined by Morgan Stanley analyst Mike Wilson. Markets Insider again: "It appears increasingly likely that the Federal Reserve will pivot away from its currently hawkish monetary policy as global US dollar liquidity is now in the "danger zone where bad stuff happens," Morgan Stanley's Mike Wilson said in a Monday note. But investors shouldn't put too much stock into a potential pivot by the Fed, he added. That's because an earnings recession is imminent, and potential stock market downside from a sizable earnings decline would likely outweigh the potential upside from a Fed pivot."

The Cat is Dead: The pivot is just part of the trap. If the Fed stops inflating, the bubble economy dies – and stocks along with it. But if it continues to inflate, consumer prices go up… the damage is delayed… though more widespread and unpredictable. Once on the loose, inflation is a hard thing to get back in the barn. People need more and more money just to stay in the same place. Then, it’s almost impossible to tighten the money supply without setting off a depression, probably accompanied by riots and a revolution.

Pivoting will signal to novice investors that the Fed is going to let the good times roll again. But the problem is this: the bons temps are over. The cat is dead. Sales and profits are falling. Stock values will go down. Lowering the Fed Funds rate (still not even half the rate of consumer price increases) will make little difference. Yes, Wall Street may rally for a while. But then, the reality of a recession…or stagflation… is likely to nest in investors’ minds. Nominal prices may go up, but real prices – reduced by inflation – will probably fall.

And it’s not as if investment markets operate in a germ-free laboratory. Not at all. Inflation, recession, war… productivity in reverse, real wages falling, house prices declining… the US empire rolling over… climate alarmists threatening to cut off fuel… warmongers threatening to start WWIII… the most blockheaded Washington in memory… $31 trillion in US federal debt… and $300 trillion in worldwide debt –yes, it’s YODO time now.

As the old timers put it: “your first loss is your best loss.” Because, when your money dies, it is dead forever. It won’t be resurrected. And a U-turn by the Fed won’t take you back where you started. It’s just a different route to Hell."
Joel’s Note: It is not given to man to know his future, much less the next quarter’s performance of his stock market. But history can provide a little guidance. As noted in this space over the weekend, the S&P 500 closed out its worst September in two decades. Before the dead cat bounced this week, it was down ~25% year-to-date. The Dow Jones Industrial Average and the Nasdaq were left similarly sore, off ~21% and ~32%, respectively, for 2022.

Bottom line, as Dan Denning reminded Bonner Private Research members in his Friday note, it was the fourth worst ‘start’ to the year since, well… ever. Here’s Dan, with some history…"The index was down 31.9% through September in 1974 but rallied to finish down ‘just’ 29.6% for the year. In 1931, it was down 28.8% but finished down, gulp, 47.1% for the year. In 2002, it was down 27.2% at the end of September but rallied in the fourth quarter to finish down 23.4%."

Historically, bear market losses have depended on – among other factors – whether the economy fell into an accompanying recession. The Bureau of Economic Analysis confirmed last Thursday what every non-economist in the country already knew: that the US has been in recession for most of this year. Here’s Dan, again, putting some numbers on the table…"Since 1929, the average bear market lasts fourteen months and has a peak-to-trough drawdown of 36%. If there’s no recession, the average bear market lasts twelve months and the average drawdown is 29%."

If you take your bear markets with a side of recession, then the bear market lasts sixteen months and with a 42% drawdown. All these statistics are courtesy of Charlie Bilello, the CEO of Compound Capital Advisors (a must follow on Twitter). Since we’re in a recession (or since we had one in the first eight months of this year with two consecutive quarters of declining GDP), that means we could be looking at a sixteen month bear market with a fall to around 2,782 on the S&P 500 (a 42% decline from the January closing high at 4,796). That’s another 22% below today’s close at 3,585, which by the way breaks the support at 3,600.

As regular readers know, Dan and Tom have advised Maximum Safety Mode throughout this bear market. It’s been the right call so far. But what about the rest of the year? “It’s possible we see a fourth quarter bear market rally,” Dan concluded in Friday’s note, “but if so, we’re staying firmly on the sidelines. The Fed conducted a giant financial experiment by lowering interest rates and keeping them there. An asset price boom ensued. Now comes the bust.”

You know what to do: Engage Maximum Safety, Keep Calm… and Carry On."

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