14 Dec Cassandra and Permabearism

“Like a broken clock, permabears are right once every cycle.” – Cassandra

Last week’s TLR provided a compilation of permabear pretexts that led one reader to highlight an interview from Moneywise in which Mark Spitznagel, chief investment officer of Universa Investments, insisted that the “worst market crash since 1929” is coming, doubling down on his Bloomberg prediction earlier this year that America is witnessing the “greatest credit bubble in human history.” But, then, there are always prophets-of-doom who seek to distinguish themselves as modern-day Cassandras. Accuracy in such predictions, however, is rare. Selecting the timing of an economic storm is challenging enough and repeating that feat requires true prescience. Catastrophic predictions most often are derived from imaginative pessimistic predispositions rather than canny, timely analyses…, demonstrating once again that there is, indeed, only one Cassandra. As readers well know, Cassandra’s economic and political predictions in these pages have been uncannily accurate. She has been refreshingly bullish over the past several years when others have urged caution. It is not surprising, therefore, that her interest was piqued by last week’s “Permabear Defined”:

“Dear Mr. Realist:

I read with amusement last week’s The Lonely Realist that repeated the depressing refrain spewed by aspiring pundits who are forecasting an imminent end to America’s unprecedented capitalist advance. It’s a shame that they can’t accept the reality of American economic exceptionalism. Their doomsday predictions are tedious attempts to curry influence and attention. They represent the media mantra of “if it bleeds, it leads” in their efforts to attract eyeballs. Although America’s economy is far from bleeding, these times are economically raucous, providing excessive informational grist for the media mill. Today’s economic punditing (if I may coin a term) evidences a continuing progression of “news” into “entertainment.”

The economic realities, Mr. Realist, are quite clear. Inflation is coming down and, with lowering inflation, the Fed will continue to cut interest rates well into 2025, driving GDP and stock market prices higher. America’s corporations have seen their earnings in 2024 grow at 11.9%, their best rate since 2021, generating record highs with generative AI adding the likelihood of higher prices in the future. The fact is that the American economy is roaring, doing so even before President-elect Trump’s planned tax cuts and assault on red tape, both of which will improve productivity and corporate profitability. The once and future President also intends to boost oil and gas production, further increasing energy exports by the world’s leading oil producer, accelerating business profitability and making America even more energy dominant. The freeing of America’s animal spirits with tax reductions, regulatory reform, AI development and energy superiority can only strengthen the dominance of American industry. This at the same time as small business sentiment is at a >40-year high with the National Federation of Independent Business index having just enjoyed its biggest month-on-month increase since 1980. The belief of American businesses that now is a good time to invest will provide an additional tailwind for America’s economy that will ensure economic growth whatever the impact of Trumpian policies. Meanwhile, the rest of the world is struggling with economic stagnation even before the imposition of President Trump’s promised tariffs.

The American public nevertheless is perennially fearful. Each month since 2013 the New York Fed has asked consumers whether they expect U.S. stock prices to be higher or lower at the end of the following 12 months. In only one month since 2013 did the mean probability of rising share prices exceed 50%. That was in April 2020, when COVID lockdowns had knocked the bottom out of equity prices. Otherwise, consumers consistently have assumed that the stock market is more likely to fall than rise. That’s true today, where the mean perceived probability that U.S. stock prices will be higher at the end of 12 months is only 40.4%. Although there undoubtedly are negative outliers, the statistical probability is that the stock market will be higher at the end of the next 12 months, not lower. For any given one-year period, history has shown that the strong probability is of a rise, not a fall.

Of course, it doesn’t require an oracle to predict that, over time, stock prices will move higher. Absent a catastrophe, the direction of equity prices always will be up. There necessarily will be bumps in that road. After all, stocks do not move up every day, month or year and serious falls can be expected to occur once every few decades. The last such fall was in 2008 and the one before that was in 1987. Guessing precisely when the next fall will occur requires the power of foresight – such as that given to me by the Gods –, synthesizing massive amounts of data, and insights into public sentiment. The difficulty inherent in the latter two provides permabear pretenders with free reign to make wild guesses that feed on public fears. The reality is that those fears can be ignited only by actual adverse events that cause a cascading decline in business activity and employment. Signs that such a cascade is imminent are missing today. It’s of course easy for permabear pundits to talk about the market being overvalued. But investors have been and will continue investing increasing amounts of money in only ~60% of the companies that existed 30 years ago. More money chasing fewer stocks results in inflation in stock prices. That inflation will continue. In 1996, there were 8,090 listed companies. CNN reports that there were only 4,300 in April 2024, which is why investment demand has driven, and will continue to drive, stock prices higher.

I remain confident that the next 6+ months will see continuing expansion. A fall, however, is an inevitability. When that fall will occur is not yet clear. I will be in touch.

Yours faithfully,

Cassandra”

Finally (from a good friend)