Why God Loves Idiots And the Reasons Why Perma-Bulls Turn Tail & Run

“God must love idiots,” as the old joke goes… Because he made so damn many of them. That’s right folks; one down week. One down week for the broad stock market indices and all those perma-bulls on CNBC and in the WSJ are starting to change their tune.
Remember the guys like Cramer, who called this one a “new bull market” for the past few months? Well after last week’s quick shock, they’re all wearing the same face they had on in Q3 2008. I mean they look scared. I just find it fascinating. I hope you’ll commit the last few months to memory. Because for those few months, the vast majority of the investing community and financial media were dead, stupid wrong. Why We All Hate the Financial Media First – as a side-note – ignore any story where the headline begins “stocks rise/fall on…”
It’s hackish and unprofessional…one of the weakest moves in the journalist’s book…one that serves to fool readers into believing that correlation implies causation. That the stock markets are only reeling from the latest headlines. Hogwash, I say. For example, this morning’s new gem is “stocks fall on World Bank outlook.”
If you haven’t heard; the World Bank adjusted their outlook for the year. They see the world economy shrinking at 3% this year, rather than the 1.9% they expected just three months ago. Now, we covered that about a week ago in the A-Letter…but the financial media is just now coming around to the story.
After all, running it earlier might have stifled upward movement in stocks. Well, fortunately for you; that’s none of our concern. Instead, we’re focused on making sure your macro-view encompasses all critical developments. And for that we’ll need to take a … Top-Down Approach
Alrighty, so let’s crack our knuckles and dive right in, there’s a lot of ground to cover today…
You probably recall our review of the broad economy – Isn’t it Always Darkest Before the Dawn? – from a few Fridays ago. Charts from O’Rourke & Eichengreen confirmed that today’s crisis was on track with the Great Depression – at least economically speaking. But major economic factors like unemployment and housing prices…these things didn’t slow down the stock market bulls. “Unemployment is a lagging indicator,” they explain, “and the stock market is a leading indicator.”
Well…that’s at least half-true. Unemployment has lagged recovery in post WWII recessions. But isn’t this unlike any other post WWII recession? And – more importantly – is this just a recession?
As for the stock market being a leading indicator, it is…when it works. But anyone who saw stocks as a leading indicator back in 1930 or ’32 likely ended up in the poorhouse. So – in keeping with our top-down approach – let’s stick to our macro-view…

First is this grim chart from the analysts at Goldman Sachs…one that suggests most of the developed world is in for a Japanese-style “Lost Decade”…

Take a quick look and see where your country stands. This particular Goldman report doesn’t forecast the U.S. emerging from this mess ‘til sometime around 2018, with recovery even farther off for Italy, Japan and Spain – just to name a few.

Well that’s pretty grim.

But it still doesn’t stifle your average stock market bull. After all; the story today is still dollar inflation and the “Asian growth” miracle…the rise of a new global economic hegemon and booming commodities.

Well, you might want to hold your horses over there too…

If you’ve been following the emerging markets for some time now, you’ll recognize the name Albert Edwards. Back in 1997, he pointed to an oncoming crisis in Asia. He was first ridiculed…then praised when his predictions proved true.

Now, today, he’s back in the media. “I believe we will look back on the Chinese economic miracle as the sickest joke yet played on investors,” he wrote in a report last week… “The bullish group-think on China is just as vulnerable to massive disappointment as any other extreme example of bubble- nonsense I have seen over the last two decades,” his report said.

“The fall to earth will be equally as shocking.”

Wow. Big talk. How about a picture to back it up?

Ahh. Thanks Bloomberg.

This is a graph of Earnings growth at China’s Industrial Companies. Take a look at Q1 ’09 to see where Edwards’ story might be starting to gain some traction. For more details on China—and their 800,000 “phantom” bankruptcies—take a look at Green Tea Leaves from a few weeks ago.

Will that do the trick? Or do we have to show the bulls falling stock prices if we want to convince them that stocks can in fact fall?

Done.

Since June 1st, Russia’s rouble-denominated MICEX stock index has plummeted 20%...

Russian Decline a Forecast?

Capping off the downward spiral was a hellish 7.8% sell-off in today’s session. Brazil’s Bovespa index is already 8.4% off its yearly highs, and India’s Bombay stock exchange slid another 7.4%.

Green shoots? It’s all in where you look. And after looking in all the relevant places, I’m just not seeing any.

excerts from M. Collin
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