People Are Still Bearish

by Jared Dillian, The 10th Man

19% off the lows, and people are still bearish.

Exhibit A:

I’ve seen a lot of bear market rallies. They are all hated, every single one of them, but none more hated than this one. Pretty much everyone is convinced that we’ll make new lows.  Michael Burry is out there dumping on the market every day, mostly because of the meme stock resurgence. I’m seeing a lot of tweets like this:

Source: Twitter

Eh.

Last week, I wrote that the bear market was over. Still believe that. I do think things will get a little choppy, since it seems like the Fed wants to raise rates above 4%. I’m not going to dissect all the central bank chatter, but ever since the 8.5% CPI print a few weeks ago, a long parade of Fed officials have said they’re not done yet.

Getting into the particulars, the Fed will probably hike 75 basis points in September (at the time of writing, there is a 60% chance of that), 50 basis points in November (right before the election), and then pause. After the election, the political urgency to raise rates will have passed. But maybe I am wrong.

It is also possible that gas prices will go up. Probable, in fact. Lots of things can happen. But you can’t deny that investor psychology has profoundly changed. At some point, FOMO is going to kick in, and hedge funds are going to have to chase this rally higher.

Don’t Worry About the Housing Market

I’m detecting some worry about the housing market in the Twittersphere. Some prominent macro accounts are doom-mongering about housing. We’re going to have a repeat of the financial crisis, etc.

If I took the time to refute every dumb claim I saw online, we would be here for a while. But this is about as dumb as it gets. Homeowners have spent the last 14 years deleveraging.  Homeowners’ equity of the housing stock is as high as it has ever been. 40% of homes are owned free and clear. There simply is no debt. And underwriting standards are stronger than ever. Take it from the guy who was just told to put 30% down on a construction loan instead of 20%. Banks are incredibly risk averse.

Add to that the fact that Millennials are far from done buying. Every downtick in housing prices will be met with more buying.

There are risks to the economy, for sure. But the housing market does not make my list.

Let me put this a different way: What would people least expect when it comes to housing? For the housing market to go on a nine-year run, similar to what happened in Canada, resulting in an enormous bubble. Nobody expects that.

Put another way: In an inflationary environment, what is the one asset you want to own? Real estate.

There are things I worry about, and housing doesn’t make the list. Maybe that’s a contrarian call, but it shouldn’t be. It’s just common sense.

The Role of Sentiment

If you waited for inflation to come in lower, you would have missed most of the rally.

The time to buy wasn’t the CPI print. The time to buy was when everyone was ready to hang themselves.

I’ve mentioned this before, but earlier this summer the AAII Sentiment Survey showed that sentiment was even worse than it was during the financial crisis. In fact, it was the worst it had been since 1989. And you know what? It hasn’t improved by much.

I did an interview recently where I talked about how the market goes up about 90% of the time on Fed meetings. Why is that? Because people worry that the Fed will be more hawkish than anticipated, and inevitably it isn’t, and then it turns out there was no reason to worry in the first place. Which is kind of a metaphor for life. We worry and worry, and it turns out to be nothing.

If you made two lists, “Reasons to be bullish” and "Reasons to be bearish,” the list of reasons to be bearish would be much longer. China could invade Taiwan. Russia could blow up a nuclear plant in Ukraine. Anything could happen. And yet, it never does. That isn’t to say that bad things don’t happen. The pandemic happened. But it’s never the things you worry about. Which means that worrying makes no sense.

The time to worry is when nobody is worrying, like in January of last year, when everyone was getting rich off SPACs and IPOs and crypto. I’m too lazy to go back into the archives, but I was probably warning about that at the time. (Actually, I looked, and I was warning people about crypto.)

There are always the unknown unknowns. Any day in the markets, you can get hit by a Mack truck. We should all be in touch with our own mortality in the financial world. But when people are as pessimistic as they are today, you should buy.

Jared Dillian