Zak Mir on The Bears Have Got It Wrong – Even If There Is A Crash Tomorrow

3 mins. to read

2014 was supposed to be the year of the new stock market crash. Indeed, the bears got off to a great start in January as the major indices seemed to flip schizophrenically from bull to bear almost as soon as 2013 expired. On the face of it there was something of a gift in terms of setups as we were reliably informed and it was almost inevitable that the plug would finally be pulled on the easy money of QE in the U.S. Tapering would soon be followed by interest rate rises, killing the “false” rally in stock of recent years.

For the UK a bubbling housing market, was the catalyst for rates to possibly be raised, given that Central London in particular had experienced a runaway move to the upside for prices. Indeed, the threat was that if nothing was done it was not only that those who had bet the farm on property would have made an easy killing, but there was a bubble which risked destabilising the wider economy.

Indeed, only someone employed specifically to engineer such a bricks and mortar based party in order to help The Coalition Government could have been complacent as to the result of not raising interest rates. Could that person be Bank of England Governor Mark Carney? Surely not?

The Unreliable Boyfriend has been dithering and switching triggers for raising rates for the best part of a year. Federal Reserve Chair Janet Yellen has been little better in terms of the conditions being right for an interest rate rise Stateside, but at least she was hired on the basis that she is a Dove.


In fact, moving forward from January to the present day it is evident that despite a flock of Black Swans, such as a deflationary spiral in the EU, Russia / Ukraine, Gaza and ISIS, record highs have been seen for stocks in the U.S., with even the curmudgeonly FTSE 100 managing a 14 year intraday high before the Scottish issue reared its head.

So what does all this mean? Why have stocks climbed a wall of worry?

The answer may not be that difficult to fathom even though the usual rule is that the stock market anticipates events 12 – 18 months ahead. On this occasion we are either to conclude that if there has been no crash yet then higher rates are not a problem, or they are still more than a year away. The only other scenario is  that the sell off will be a sudden one such as that of 1987, perhaps with a geopolitical trigger.

Either way the bears have got their timing wrong, by some 9 months or more and on this basis I venture to suggest that even if there is a decline in September / October, or even overnight they have to acknowledge their error. In other words, if the worst happens the prediction of a crash will be about as useful as a stopped watch – correct twice a day, but of no value in terms of timing or in this case, asset allocation.

Part of the error of course is a phenomenon that we often see in terms of the bears and the bulls.

The traditional pattern is that the “professional” traders and ex City types are permanently doom laden and tend to go for the idea of shorting the market. This is especially the case as markets tend to fall faster than they rise and perhaps most of all because the “herd” a.k.a. private investors, who they regard with contempt, tend to be long on a buy and hold basis.

The issue though, just as much as the bears so far getting it wrong, is also how to play equities for the rest of the year.

If pressed, it is tempting to go with the idea of an ongoing squeeze higher, especially given the way that an ambush in early August by the bears simply ended in a new squeeze. It would appear that in the absence of a shock like a geopolitical earthquake or widespread Ebola, the path of least resistance is to the upside.  Logically, this could be the case even until interest rates reach the level of average stock market dividends – for the UK, say 3% on FTSE 100 stocks.



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