Why this bear market still has a ways to go

A bear comes out of the woods

My father sent me this photo from one of his outdoor cameras. An unusual sight, as bears are quite rare where I grew up. I’ve never seen one in fact, so this is kind of a big deal. A portend.

I started this post a few days ago when the market still looked like it might break to 4,000 and there was hope left for the human race. Since then the bear market has reasserted itself and the following take is no longer particularly contrarian.

Anyways, here’s why I think this market still has plenty of downside left in it. A story told in the key of Tweets…

Recession in the US

Genevieve Roch-Decter, CFA @GRDecter

Did you hear? Biden believes we will not see a recession - while Bloomberg said there’s a 100% chance of a recession. So who’s right? 🧵

Even once the Fed pivots, it’s not a magical cure. Markets can still go down, even after the Fed has started easing!

Alf @MacroAlf

In early 2001, the Fed pivoted as earnings & the labor market were weakening after animal spirits ran hot in 2000 The Fed cut by 150 bps in a few months and yet: - The USD appreciated by 6% - Equities dropped another 10% A pivot due to material economic weakness isn't bullish

There’s more QT where that came from

John P. Hussman, Ph.D. @hussmanjp

@RudyHavenstein @concodanomics This quantitative tightening stuff has gone too far

Interest rates are at multi-decade highs and the yield curve is drunk

Preston Pysh @PrestonPysh

The 3 month treasury bill now provides a better return than the 30 year bond. Chart from @DylanLeClair_ .

The housing market is not doing well

Sven Henrich @NorthmanTrader

PMI came in at 45, housing is collapsing as is manufacturing data. The personal savings rate has collapsed, credit card debt is exploding. 37% of small businesses are behind on their rent. Don't tell me the consumer is strong & there is no recession in sight.

Unemployment is still low. Why is that bearish? It’s bearish because if we’re in this drek now with unemployment low, how much worse is it going to get once unemployment rises?

Pentoshi 🐧 @Pentosh1

Market is at an interesting point where we have record low unemployment, Early GDP estimate for Q4 is at 3.1%. So if labor remains hot and economy “strong” there’s no need to pivot. Higher rates for longer fixes this. It is the leak in the tire. A blowout = true pivot https://t.co/MsXYRIzmq4

Pentoshi 🐧 @Pentosh1

Imo it’s like we are driving a car and just ran over a nail. There’s a small leak that’s not noticeable yet. But will be in time https://t.co/wONnAVGTHU

Consumers spending is tapped out, record high credit card debt

Genevieve Roch-Decter, CFA @GRDecter

This is not oil, a meme stock or even a shitcoin. It’s credit card debt in America.

A divided government appears likely, which makes fiscal spending more difficult

OUTRIGHT @outrightnews

JPM: Midterms = Divided Government

outrightnews.ioJPM: Midterms = Divided GovernmentWith U.S. midterms fifteen days away, JPM has released what we can be sure is the first of many reports in the coming weeks. Roughly, expectations are the below: JPM shares that they receive a number of questions from clients about different scenarios surrounding the elections, and have come

Counterpoint

Arguing why the market might not go down, there was some talk that China was going to end their insane zero Covid policy. Hard to tell whether that’s actually happening or not, but if it does, that would be bullish.

Alf @MacroAlf

Rumors are out that China has formed a committee to assess strategies to exit the Covid Zero policy and reopen the economy. If true, this is a big change for global macro conditions.

There’s some talk about the Yellen twist, where treasury will buy long term debt and sell short term bills to juice the market. From what I gather, this absolutely could be good for markets. However, it seems like more of a band-aid measure than a long-term solution

Joseph Wang @FedGuy12

A Treasury buyback program funded by bill issuance would be mechanically equivalent to QE and risk positive. This post shows why it would be mechanically equivalent to QE and reviews two channel through which QE impacts markets.

fedguy.comQuantitative Buybacks - Fed GuyTreasury buybacks financed out of the RRP is mechanically equivalent to QE. Financial conditions may be easing when they shouldn’t.

Conclusion

Even ignoring all the forward looking data that’s oh so bearish, just take a look at the market of today. We still haven’t seen a big VIX spike, we haven’t seen true capitulation selling. The sentiment is still too bullish. People still want to touch stocks! People still believe in the markets!

Gross, I know, but here we are. We need to get to the point where the perception is that only hucksters and the criminally insane invest in equities. We need people to believe that buying stocks is a guaranteed way to lose money. We’re not there yet, which suggests to me that there’s more pain to come.

That’s all the peace love and joy I have for today. Wishing you all a great weekend and a lovely start to November.