Time to quit being bearish?
All major asset classes have rallied like crazy since late October. Many individual stocks and some stock indices have hit all-time, history-of-the-world highs. Bears are starving and dying. Is it time for Chicken Little to turn bullish?
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| Risk Assets are Soaring, Bears are Starving |
The thumbnail version of bearish case
The bearish case is straightforward. The US, and many other countries, are running large budget deficits, piling up debt at historic rates. Debt to GDP in the US is at, or near, all-time highs.
This enormous amount of overspending comes in spite of the fact that the US has budgetary tailwinds in the form of relatively low cost of debt, no recession, and relatively low military spending (see my post on historical context for current deficits). We should be stockpiling money for a rainy day, but we are splurging.
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| An Historic Pile of Debt |
What is the predicted consequence of the huge and rapidly-growing US debt? The most obvious prediction is that the cost of borrowing will go up. To get people to buy so many US government bonds, the price of bonds should drop. A bond price drop is a rise in interest rates.
With massive deficits and snowballing debt, why did interest rates go down? Part the reason is that the Federal Reserve cut interest rates and e-printed 8 trillion dollars (I am not joking - literally $8 trillion).
As the US debt-to-GDP rose dramatically starting in 2009, did interest rates rise? No, quite to the contrary, rates dropped to near 0% and stayed there for a long time.
The following chart is from the Federal Reserve. In broad strokes, the Fed e-printed just under $1 trillion in about a century (starting in 1913) and just over $8 trillion in about a decade. (It is funny, that the Fed was surprised by the inflation caused by their monetary shenanigans.)
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| $8 Trillion in Fed E-printing |
In summary, the bear case is: US government profligacy and Federal Reserve loose money will result in a financial disaster.
So far, the financial disaster has not appeared. The unemployment rate in the US is 3.7%. It is very easy to find a job, albeit perhaps not the job you want. Stocks are strong, and inflation appears to be waning. It appears to be morning in America again by these metrics.
I have been bearish and wrong for over a decade. There are two possible interpretations of this divergence between my opinion and reality. #1) I am wrong in thinking that financial disaster looms, or #2) I am wrong in being more than a decade off in timing. More on these two flavors of wrongness in 2024.
November 2023 performance
The Dow Jones Industrial Average soared 8.29% in November 2023. The Chicken Little Portfolio gained 0.49% from its short-term treasuries. Year to day, the Dow is up 10.46 % and Chicken Little is up 1.69%.
November 2023 was an explosively positive month for all asset classes - close to double digit returns in just one month for stocks, long-term bonds, and crypto. All major assets classes are now positive for the year except long-term treasuries. Bitcoin has more than doubled this year.
December 2023 portfolio position
As a curmudgeonly bear, the Chicken Little Portfolio remains unmoved and still prepared for financial disaster. The portfolio is 100% in cash and short-term US Treasuries. And, still holding significantly out-of-the-money puts on the S&P 500. No trades in the month of November.
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