1/25/18

Chicken Litttle is not bullish on US stocks

Chicken Little has been bullish on US stocks for a year and a half. As of January 25, 2018, Chicken Little is no longer bullish. 


Chicken Little is no longer bullish on US stocks.


Three parts to this post. 
1. Chicken Little has been correctly bullish since 2016.
2. Chicken Little sees Death.
3. Implications for the Chicken Little Portfolio. 





1. Chicken Little has been correctly bullish on US stocks since 2016. 

a. May 18, 2016: Criteria for bullishness.  
b. July 14, 2016: Chicken Little buys US stocks (Dow 18,300)
c. November 9, 2016: Chicken Little predicts Trump rally
d. January 30, 2017: The Raging Chicken Little Bull. (Dow 20,000) 


Death is coming

2. The End of the Bull Market.

The Bull market is dying. The gains in the market are too large relative to profits. Current explosive gains are typical of the end. Finally, this debt crisis will end with higher interest rates, just like all previous debt crises.

a) A decades worth of gains in a few months. 

In the last six months, the Dow has returned almost 25%. That is roughly a decades worth of growth in corporate profits. Over the last 30 years, corporate profits, adjusted for inflation, have grown about 2.5% per year. So stock market investors have earned almost a decade’s worth of returns in just a few months. 

Overall profits cannot grow faster than the economy; 4th quarter 2017 US economic growth was 2.6%. The stock market, at some point, will reflect profits. 




b. Rapid gains are typical at the end of bull markets

Bull markets often end with explosive, primal moves. This has been seen since the beginning of markets including the 17th century tulip mania and the NASDAQ in the year 2000. 

These final moves are biological manifestations of herding. Watching others make money pushes all but the strangest of people to uncontrollably take actions that cost them money. 

Largest one week removal of money from stocks? March of 2009 -- Dow 6,600

Largest one week addition of money to stocks? January 26, 2018 -- Dow 26,500. 

Here is an excerpt from a longer piece on our money losing brains: 


Imagine two of our human ancestors, with unisex names of Contrarian Casey and Momentum Morgan. Momentum Morgan anxiously attempts to imitate others, especially focusing on the “smart” hunters and gatherers (e.g, those with less hairy backs and soaring IQs approaching 75). Contrarian Casey, in contrast, follows idiosyncratic foraging strategies, and particularly likes to do the opposite of the Momentum Morgans.
Imagine further that the momentum approach brings overflowing bounty day after day for years. The Momentum Morgan foragers become so obese that they can hardly drag themselves to their next feast. Meanwhile, lean and hungry Contrarian Casey smugly starves to death wryly quipping about the lunacy of chasing returns.
We are built to sell at the bottom and buy at the top -- this is the top. 


Jay Powell will face a crisis 

c. Higher real interest rates are coming. 

Jay Powell is going to have some powerful learning opportunities. The world exists in a very strange state where the riskiest issuers of debt pay nothing in interest. Japan will default on its debt in real terms, yet can issue bonds that yield zero (see related post). 

We are in a debt crisis. All debt crises end with the bond market cutting off credit. The only mystery is the timing of the end. 

3. Chicken Little Investment changes. 

The bull market is over, the bull market is over, the bull market is over. So says Chicken Little. What changes has Chicken Little made in the portfolio? 

None. 


Chicken Little has infinite patience

Chicken Little follows an investment discipline that never fights market momentum. The initial criterion for Bear Market Operations remains that same - a minimum of a 10% decline in US stocks. Until then, no shorting stocks. Wake me when it is time to fight. (Postscript, the 10% trigger was quickly reached and by March 1, 2018, the bear market raid was underway -- click for post). 










2 comments :

  1. Nice call. What would a deflationary depression look like in your view? And how is chicken little preparing for it?

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  2. Dear Brittney,

    I believe that we will have to pay for all the mistakes made by the congress and the Fed. Too much debt and too much easy money.

    depression -- High unemployment, low growth or shrinking economy. Lots of economic pain.

    The fed can choose an inflationary depression or deflationary. In a deflationary depression, it is most important to have no debt.

    Terry

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