海角大神

Did you miss us, Dear Reader?

You won鈥檛 believe this鈥�we hardly believe it ourselves鈥�but after months of planning and preparation for our expedition to the high, dry mountains of Argentina, we鈥檙e still here in the city of Salta鈥� Our project has been delayed鈥�by floods.

As you may recall, it is so dry up at the ranch that visitors wonder what the cows eat. We tell them we have developed a new race of low-fat, low cholesterol cattle we call 鈥渟and fed beef.鈥�

But what ho! Now we are still in Salta, a city about a 5-hour drive from the ranch, and we are stuck.

鈥淲ell鈥︹�� says our foreman 鈥溾��the road to Angastaco is blocked by the river. The road to Molinos is blocked by mud. But you don鈥檛 have to worry about that. You can鈥檛 get anywhere near there, because the road to Cafayate is impassable because of rockslides鈥�and the road over the mountain pass has been washed out completely.鈥�

Yes, dear reader, we have been hit by a low, unexpected blow鈥�from water! The ranch got only 120 mm, or about 5 inches, of rain last year. The year before it was only about 4 inches. It looked to us as though the whole place was going to dry up and blow away.

But so far this year, the gods have poured 15 inches of water on that parched ground鈥�and it keeps raining. Fifteen inches is not a lot. Not for Maryland. But up in the barren mountains, the water rolls of the rocks鈥�down through the gullies鈥�and fills the rivers. Soon, it is over its banks, floating automobiles and rolling boulders.

鈥淭hey鈥檙e clearing the main road now,鈥� says our friend. It should be passable tomorrow鈥�if it doesn鈥檛 rain tonight. But getting from Cafayate up to your ranch is another matter. Nobody knows what has happened up there. They鈥檝e been cut off for weeks.鈥�

贬尘尘尘鈥�

And so, we cool our heels鈥�we rest our heads鈥�we pace the room and watch the skies鈥�eager to see a ray of sunlight鈥�and some hope of proceeding to our objective.

And so鈥�we have time to reckon after all.

And we reckon that investors are in 鈥榟ope mode.鈥� How else to explain the recent bullishness? Albert Edwards elaborates:

One key lesson from Japan is that an essential ingredient to the end of a long valuation bear market is revulsion. It is when 鈥渂uyers-on-dips鈥� become 鈥渟ellers-on-rallies鈥�. It is when volume dries up to almost nothing. It is the loss of hope. In Japan we saw huge rallies in the Nikkei on the back of short-lived cyclical recoveries. Each cyclical failure and further new lows in the equity market saw hope being progressively crushed. Previous US valuation bear markets typically take 4 or 5 recessions to fully play out. We have only had two.

The market is once again in a hope phase 鈥� hoping that the US is now in a self-sustaining recovery; hoping that China might be soft-landing; hoping that the Greece bailout and the ECB liquidity polices have settled things down in the eurozone. These bursts of hope are essential in long bear markets. Essential in the sense that hope must be crushed. It will be crushed. Hope still beats in the breasts of equity investors. The market will rip out that hope and consume it in front of investors鈥� eyes. Only then can the bull market begin.

In our view, the real turning point came in the year 2000. That鈥檚 when America鈥檚 decline began to speed up. It鈥檚 when the credit-driven economy could no longer produce real jobs鈥�or real GDP鈥�or real wealth.

Stocks rose. But they were rising on a bubble of debt. Then, it was mostly private debt. Now, they rise again鈥�this time on public debt.

Either way, it can鈥檛 last. Eventually, the bear market will resume鈥�taking down the prices of assets until they are cheap again. At 16 times earnings, stocks are higher than usual鈥�and earnings are at near record levels. We expect earnings to fall鈥�and stocks to fall too鈥� Then, they will keep falling鈥�until they finally reach the bottom. Edwards:

A flattening of the profits cycle is exactly what you might expect as the easy, early cycle productivity gains come to an end. It is worth noting that the last time this occurred was just ahead of the start of the recession which the NBER date as having started in December 2007. Back then too, both markets and policymakers all felt the economy was still quite healthy. Indeed neither non-farm payrolls nor the headline ISM signaled the economy had already entered recession at the end of 2007 鈥� indeed like now, payrolls actually accelerated in the second half of 2007, just as profits began to slip!

But we can鈥檛 reach the bottom of this cycle unless and until investors give up hope. As long as they have hope they will buy the dips, hoping to catch the next up-move. Only when they become convinced that there will be no move to the upside, will they stop buying the dips and prices can finally fall to their ultimate low.

Hope must be destroyed. Then, a real bull market can begin.

Bill Bonner
听蹿辞谤 The Daily Reckoning