Paul Farrell's 10 Reasons Not To Buy Stocks Until After The Next Market Crash

Paul Farrell lights it up in his latest market commentary, which puts even some of the more hard-core realists out there to shame: "Wall Street is a loser. Stocks are Wall Street’s ultimate sucker bet. And it’ll sucker you again. You’ll lose, worse than in the last decade. Wake up before Wall Street banks trigger the next meltdown, igniting mass bankruptcy." Um, wow. And seeing how we have been saying that only absolutely immaculate top tickers should be in this market, we agree wholeheartedly with Farrel.

And here are his 10 reasons to stay away until after the next crash, via Market Watch.

1. American stocks are a high-risk sucker bet

That’s the view of Peter Morici, the former chief economist at the International Trade Commission: that U.S. stocks are a sucker bet. Is Main Street waking up to Wall Street’s con? Maybe. “With corporate profits breaking records, Wall Street anxiously anticipates the return of the individual investors to the stock market. It may be a long wait, because the little guy may have concluded investing in stocks is a sucker bet.”

America’s divided into two stock markets: one for Wall Street’s rich insiders, another for Main Street’s suckers: “Investors, as opposed to traders, buy stocks in companies whose profits they expect to rise. The conventional wisdom says stock prices will follow profits up, but over the last two business cycles, that simply has not happened.”

From 1998 to 2010, profits rose 203%. But the S&P 500 was up just 7%. And still, naive investors buy into Wall Street’s sucker bet.

Who’s pocketing the huge profits? Rich insiders. “Because most of the increased value created by higher profits,” says Morici, “has been captured by hedge funds, electronic traders, private equity funds, and aggressive M&A shops, free standing and at major investment banks, which have multiplied over the last two decades.”

Warning: With the resurrection of the GOP and Reaganomics, Wall Street will skim more from Main Street, get even richer. And yes, you’ll lose more.

2. New ‘big short’ dead ahead: Derivatives con game will crash again

In a Bloomberg story, “Big Short” author Michael Lewis asks: “Why are the same Wall Street banks that lobbied so hard to dilute the passages in the Dodd-Frank financial overhaul bill banning proprietary trading now jettisoning their proprietary-trading groups, without so much as a whimper?”

The answer’s simple: Wall Street’s sneaky and will do anything to keep the derivatives casino running hot. Insiders “have no intention of ceasing their prop trading,” according to Lewis. “They are merely disguising the activity, by giving it some other name.”

3. Hedge funds shorting China: Warning — U.S. faces collateral damage

Get it? China may well crash first. Fortune’s Bill Powell interviewed hedge-fund kingpin Jim Chanos of Kynikos Associates, who’s “betting that China’s economy is about to implode in a spectacular real estate bust.” China is “an economy on steroids.” In a Charlie Rose interview, Chanos said “China’s on an economic treadmill to hell.” If so, then all of Wall Street’s highly promoted emerging markets are also sucker bets.

Another hedge-fund player warned: Chanos “is shorting the entire country,” including a company “Goldman Sachs recommended as a buy … the listing for the Hong Kong Stock Exchange … China’s Merchants Bank, one of Beijing’s largest.”

Back in the 1980s, Japan “grew largely on the back of capital investment” and then turned into “a capital-destruction machine, and that’s what China is now. You have an economy that’s 60% fixed-asset investment, and not even in the developing world is that sustainable.”

Chanos won’t pinpoint the timing or the trigger: “He just believes it’s coming,” and he is betting on it. Reminds us of Henry Paulson shorting Goldman Sachs’ crooked deals before the 2008 crash.

4. New insider-trading indictments killing Main Street confidence

Investor distrust of Wall Street’s casino will skyrocket in 2011. Before the elections in November, an AP-CNBC poll found 61% of investors had already lost confidence in the market, thanks to extreme volatility; 55% believe the market’s rigged to favor insiders.

It’ll get much worse as the FBI/DOJ investigations of insider trading add indictments and perp walks. As more facts surface, this could get bigger than Enron and the SEC mutual-fund fraud suits combined: more proof of Wall Street’s rigged game.

5. Banksters’ perfect gambling record proves stocks a rigged game

Last year we reported that Goldman Sachs made more than $100 million in profit a day for 23 days in one month. This year the con game has gotten bolder.

Morici says “J.P. Morgan and Bank of America went through the entire third quarter without a negative trading day, no losing days on proprietary trades. Unless you believe in perfection, something stinks about the information they are using. If someone is winning all the time, then someone else is losing. That’s the ordinary investor. Stocks have become a rigged game.”

Yes, America’s 95 million average investors are suckers in a rigged game.

6. Wall Street is socially worthless, existing only to make insiders rich

In the New Yorker, John Cassidy writes: “Much of what investment bankers do is socially worthless.” Wall Street exists solely “to make itself very, very rich.”

Yes “worthless,” but “for a long time, economists and policy makers have accepted the financial industry’s appraisal of its own worth, ignoring the market failures and other pathologies that plague it.”

Worse, continues Cassidy, “even after all that has happened, there is a tendency in Congress and the White House to defer to Wall Street.” Why? Wall Street’s huge lobbying war chest. Soon all this will come to a disastrous climax, Wall Street will implode on blind greed.

7. The Fed is America’s worst nightmare, a $3.3 trillion moral hazard

Moral hazard simply means no consequences for Wall Street’s complicity in triggering the 2008 catastrophe. As a result, Wall Street insiders came away believing they can take bigger and riskier bets in the future because they will get away with it next time, too.

Why? Because America’s suckers will be dumb enough to bail them out the next time, too, with no consequences when they fail miserably again.

Last week the Fed made the moral-hazard risks more obvious by releasing 21,000 documents showing how an arrogant Ben Bernanke approved $3.3 trillion in cheap-money taxpayer bailouts to incompetent Wall Street banks, blue chips and even banks in Switzerland, France, etc. Bernanke’s making fiscal policy, and he’s a tragic disaster. When President Obama reappointed him last year, we echoed author Nassim Nicholas Taleb, calling it Obama’s worst domestic-policy blunder.

But it can get worse: Caving in to the GOP on Bush tax cuts to the rich will funnel billions more of our tax dollars into the rigged game. Final proof Obama is Wall Street’s co-conspirator in the class war against 300 million average Americans.

8. Wake up to a new normal: no growth, deflation

In his latest newsletter, economist Gary Shilling, a longtime Forbes columnist, warns: “Real economic growth rates of 2% or less are likely through 2011.” But we need 3.3% just to keep up with population growth.

So “high unemployment remains a political problem … with weak economic growth, looming deflation, and the dollar and Treasurys remaining the safe havens in a sea of global trouble.”

Warning: America’s new era, featuring no growth, deflation and a jobless recovery, will continue for years, resembling Japan over the past two decades. Worse, brutal deficit cuts will trigger riots, as in England, France.

9. Privatize Social Security: New GOP Congress loves dumb ideas

Here’s political Reaganomics at its numbest. Alan Sloan writes in Fortune: “Privatizing Social Security: Still a Dumb Idea.” The idea was “slaughtered when George W. Bush proposed it.” Yet many GOP millionaires in the new Congress campaigned on privatization.

“You’d think,” Sloan posits, “that the stock market’s stomach-churning gyrations — two 50%-plus drops in just over a decade — would have shown conclusively the folly of retirees having to bet their eating money on the market. But you’d be wrong.” They’re about to resurrect it. Why? Simple. Because the GOP is the party of the rich.

Yes, it’s that simple: Wall Street’s casino would love to get their hands on another $20 trillion of your retirement money, to gamble in their derivatives casino.

“Why is privatizing Social Security such a turkey?” asks Sloan. “Because retirees shouldn’t have to depend on the market’s vagaries for survival money. More than half of married couples over 65 and 72% of singles get more than half their income from Social Security.” And “for 20% of 65-and-up couples and 41% of singles, Social Security is 90% or more of their income.”

Imagine if our Social Security had been privatized in the 2008 meltdown: It would have done more damage than nuclear warheads, totally wiping out the American economy.

10. Warning: Wall Street will lose another 20% of your money by 2020

We have been making these same arguments for a long time: Wall Street has lost trillions in the stock market since 2000, a year in which the Dow Jones Industrial Average peaked at 11,722. It’s barely at 11,000 today. Adjusted for inflation, Wall Street has lost 20% of your money in the past decade.

Wall Street’s a loser. And, worse, Wall Street will do it again by 2020. That’s right: It will lose another 20% of your retirement money.

Warning: Stocks are a sucker bet at Wall Street’s rigged casino. Buy stocks and lose. In fact, you’ll probably lose more that 20% when the third meltdown of the 21st century explodes. Bigger losses than in 2000 and 2008 combined. When Wall Street’s too-greedy-to-fail banks finally collapse. When they cannot push the second Great Depression downhill one more time. When taxpayers revolt, refusing to bail out our corrupt banking system. When the American people force Congress to return to tough 1930s regulation.

Folks, Wall Street is suicidal. It’s kamikaze. A deadly game of Russian roulette with America’s future. Wall Street’s self-destructive greed is driving America to the edge of total failure. Yet Wall Street’s behavior is so predictable — like a blind addict trapped in denial, unable to see the deadly consequences of his behavior.

READ MORE - Paul Farrell's 10 Reasons Not To Buy Stocks Until After The Next Market Crash

Bob Janjuah On The Market: "Like Bulls In A China Shop"

From the exquisite stream of consciousness of Nomura's recent addition: Bob Janjuah, who luckily discovered he was far too smart to be held back by the D-grade bailed out banker-clowns at RBS  (we can only hope Bob will next discover the carriage return button).

Bulls In A China Shop

Since our debut notes here at Nomura (see The Sceptical Strategists: Has anything changed? And Enjoy the rest of 2010) Kevin and I have been around the world seeing clients and it is now time to put pen to paper again. Kevin published his latest report on 29 November (see The Sceptical Strategists: Battle royal between the haves and have nots) and here I share my latest thinking, based in large part on what we have learnt during our travels. I am going to do this in reverse order, starting with our key trading and positioning recommendations, and then moving on to the major macro themes and issues that we judge are currently occupying the investor community.

Trading and positioning recommendations

Following the same format as our first note, we review our previous views and also look forward:

1 – Short term, the “buy the rumour, sell the story” theme seems to have played out pretty well. The reflation trade peaked in the few days either side of the QE2 and mid-term election announcements. This is clear from the performance of FX, equity, credit, bond and emerging markets. Part of the disappointment came from the scale of the QE2 package, which was much less than some market participants were hoping for. Part of the disappointment came from the credibility issues concerning the doves on the FOMC, including Bernanke himself. In particular, some clients thought the FOMC doves were almost too desperate to justify QE2 after the fact – and the credibility issues of the FOMC were not helped by the release of the FOMC minutes last week. The other big issue and driver of disappointment – other than extreme positioning for the reflation trade into the announcements – were the problems in the eurozone. Not just the Irish situation, but also the broader based worries about eurozone credibility.

2 – Beyond the shorter term, we judged that there would be a brief “risk on” phase from late November through to early 2011. We are less sure now for two main reasons. One is the issue of eurozone credibility and bailouts. The market now appears to share our view – that the eurozone is facing not a liquidity crisis but rather a solvency crisis. And in this respect the market – since the Irish bailout – seems to be realising that the bailouts and linked austerity are neither credible nor  beneficial to the eurozone as a whole. After all, the logical extension of the bailout route is to damage and put at risk the hard-won inflation credibility of the Bundesbank and ECB, faced with a booming Germany and a very weak periphery. 

The ECB is now perceived as so compromised that it is unclear how it can now raise rates if Germany continues to power ahead. At the same time, it must now also be clear that if Germany and the other core countries are now back-stopping all credit risk from eurozone peripheral sovereigns and their banking sectors, then the Bund must now be seen as a risk asset and its yield must reflect all the credit risk it (the Bund) is meant to back-stop. 

This is not a situation which Germany and the other core countries are likely to accept in the medium and long term because now Spain and possibly even Italy and Belgium may be dragged into the mire. We have long been fans of BTPs and Tremonti, but the Irish “solution” – in particular the lack of credibility – could undermine the whole eurozone, not just the four well defined peripheral nations. Our second major concern is price action, where the S&P500 index is our global risk proxy. 

During the run-up in the reflation trade earlier this month the S&P500 yet again failed at 1220. This was the point of failure back in April, which was followed by a near 20% fall. It failed again in November. It did exceed 1220 but we always look for key technical levels to be cleared, on a closing basis, for four consecutive days. The move above 1220 failed to last beyond three consecutive days. It may be premature to talk about a double-top in (Western) equities, but we think the risk is clear. Kevin and I still think that the trailing data from the US and Germany may continue to surprise slightly to the upside over the weeks ahead, and we may  see enough out of the eurozone, after the negative market response to the Irish bailout, to (attempt to) placate the market's concerns (but it may be too little too late). In particular, the ECB may make further offers of help. Nonetheless, it now seems prudent to clarify the call over the rest of this year. For now, we see 1220 S&P as a formidable barrier and the burden of proof now is on the bulls and those who buy into a successful reflation trade. 

Given the current situation, we think that until we can clear 1220 S&P on a closing basis for four consecutive days, then 1220 S&P looks like a ceiling and risks becoming not just a double-top but also a potentially dangerous triple-top (if there is a little run-up over December). 

As such, unless we get this sort of clearance of 1220, then we think the risk reward does not favour a bullish outlook nor any joy for the reflationist camp. Over the next week or so, we see 1130 S&P as some form of floor. If this floor does not hold, then there could be a repeat move back down to low 1000s S&P. The implications are clear for the reflation trade, in FX (USD positive), bonds (front end UST positive), credit/euro periphery (wider) and EM (negative risk assets) – it will be  “risk off” time. Between 1130 S&P and 1220, we are range trading the reflation trade so recommend light and liquid positioning until there is a break out one way or the other.

3 – Beyond 2010 and focusing on 2011, we remain negative on the reflation trade and favour a “risk off” stance to markets. We are concerned about global growth. We are concerned that policymakers are running out of credibility, ammunition and the support of their electorates. And we are concerned that policymaker interests around the world are now diverging. One of the great successes of our times was how, globally, all policymakers seemed to get on the same page in response to the 2008 crisis. It now seems to us that serious divergences have set in, both in Europe (Germany vs the periphery) and globally (the US vs EM). This is a worrying development. 

For asset allocation purposes we recommend caution with respect to risk assets, bullishness on USD and the front end of the US curve, and any long positions should we think be driven by one primary rule – favour strong balance sheet entities, whether looking at equity risk, credit risk, government risk, FX or EM. For avoidance of doubt, based on the Irish bailout and assuming that the bailout route is the preferred policy choice in the eurozone (for now), we no longer see Germany, the euro or bunds as safe havens.

Using balance sheets as an asset allocation driver may not result in absolute return success, but should allow relative return outperformance. One final point to add: in the context of asset allocation for 2011 and in the search for strong balance sheets, do not forget Japan. Japan has one of the safest and strongest private sector balance sheets around – including the banking sector, which has been in balance sheet repair/risk reduction mode for nearly rwo decades now. And the balance sheet strength of the consumer and non-financial big cap corporate sector is well understood. We would also stress that while weak growth, persistent budget deficits and high public sector debt levels may be long-term issues for Japan, for now and for the next few years at least Japan is not a sovereign credit risk to anyone in our view. Simply put, Japan funds itself, and the country's substantial foreign net asset position means that this self-funding is under no real risk for the next few years. The real issue rather is that if Japan has to repatriate capital from the world to fund itself, then this is a far bigger concern for the rest of the world. Why? Because the rest of the world has grown very used to relying on these “cheap” Japanese capital outflows to fund itself. Should these outflows from Japan reverse meaningfully, the cost of capital to the rest of the world would surely rise – a potentially significant negative for the risk on/reflation trade.

Major macro themes and issues

Based on our travels, we see the following as the key themes and issues in the macro space:

1 – Emerging policy divergence: There seems to be a divergence in policy between the strong balance sheet surplus nations and the weak balance sheet deficit nations. The surplus nations seem to have realised that the deficit nations have structural, not cyclical, problems which will require a long period of balance sheet repair and economic reform. As a result, the growth/trade dividend that the surplus nations enjoyed from funding the deficit nations now seems far less certain and therefore, the desire to keep providing cheap funding is, we think, weakening. The net result is that the cost of capital to the deficit nations is likely to rise. And it means that the surplus nations may have to address domestic overheating/inflation/asset bubble problems even at a time when growth in the deficit nations is still very weak.

2 – Asia/EM slowdown: We expect a voluntary slowdown/soft landing in Asia/EM, as this block – which has driven global growth for some time now – deals with domestic inflation and asset bubble concerns. The QE2 move by the Fed has not gone down well in the Asia/EM complex as it has turned a long-term imbalance problem into an immediate and acute short-term concern for Asia/EM. We saw no signs of any sort of meaningful currency adjustment in Asia – rather, domestic tools like higher rates, low lending volumes and higher reserve requirements have and will likely continue to be used to achieve a slowdown.

3 – European concerns: We see two key themes around Europe. On the one hand is Germany's impressive growth this year. And on the other are the extreme problems of the periphery. The common link is of course Germany and its  willingness and ability to keep funding its deficit nation brothers. As we have said before, we see two possible outcomes for the eurozone: (1) it ends up as a “hard” bloc dominated by prudent German policy, a clean ECB, and where burden sharing/bondholder losses (sovereigns and banks) and a centralisation (federalisation) of sovereignty are a harsh reality; (2) it ends up as a “soft” bloc where Germany underpins all credit risk and funding needs for the entire bloc – sovereigns and banks – and where the ECB is significantly compromised. For us the right long-term choice is clearly the former, but the Irish bailout suggests the opposite is more likely – for now. If this were indeed the long-term outcome then Bunds and the euro would certainly not be safe havens nor good stores of value. We use the term “for now” because we struggle to see how Germany will accept higher bund yields (as it increasingly has to reflect eurozone credit risk, not just German prudence) and higher domestic inflation (to help the peripheral nations, relatively, deflate) for any material period of time. The real issues for us now are (1) how generous will Germany be as the Asia/EM growth slowdown hits the German growth story? and (2) how generous will Germany be if Spain and even nations like Italy and Belgium are dragged into the mire. We think burden sharing/debt restructuring in the eurozone – and in other weak balance sheet nations – particularly  (on a case-by-case basis) for bank bondholders, even at the senior level, are going to be both necessary and likely. And we think 2011, not 2013, is going to be the year that this hits home. It is worth repeating that burden sharing is likely not just to be a eurozone issue.

4 – US policy limits: There seems to be a general perception among clients that “if QE2 does not work, the Fed will do more.” We are uncomfortable with this. Bernanke is already struggling to justify his current policies and this struggle is not just with the surplus nations. Within the US concerns seem to be growing, including within the FOMC and Washington, that current policy settings are not appropriate and that something different (more Austrian) needs to happen. One of the biggest risks we see for 2011 is that we might be faced with a double whammy of a global growth slowdown, driven by Asia/EM, at precisely the same time that the limits to “more policy” in the US are hit, both fiscally and on the monetary side. We have no doubt that if things get bad enough, with say unemployment heading back well over 10% and/or the S&P 500 at 30-40%, then there would be some sort of Fed/FOMC/Washington consensus around more monetary (QE3) and fiscal (new “New Deal”) policy, but we now see this as the main issue. Namely, the risk now is that in order to get meaningful additional policy stimuli, things are going to have to get a lot worse. In the interim, we think the biggest risk is to the credibility of Bernanke and his current policy setting, in an environment where the political will to allow him to do more is clearly under the microscope.

5 – Investor sentiment and positioning: Our view on the global investor base is that there exists a lot of concern, uncertainty and confusion. We do not think investors are ready or prepared for burden sharing, for a global growth  slowdown, or for the realisation that we are close to the limits for more policy in the deficit nations, including the US. The eurozone is a real concern because more investors seem to be reaching the conclusion that the whole project and bailout policies are neither credible nor sustainable. There seems to be a tug-of-war going on between the unwillingness to accept bond holder losses/burden sharing, and the desire for credible, sustainable and clear solutions to the solvency problems in Europe/the deficit nations, as opposed to more debt/liquidity fixes. We think 2011 will resolve a lot of these issues,  although they may drag on to 2012. If this is the case, we will probably just be storing up even bigger problems for later, because strong global growth seems elusive and unlikely to provide us with an escape route. Investors are increasingly seeing this, but do not yet seem ready to accept the solution.

As ever, we appreciate any feedback. And if you are wondering why the title "Bulls in a China shop", I hope that after reading the above, it makes sense: financial markets are very fragile right now, and any bullish risk-on phase seems to be based on very hopeful assumptions (“don't fight the Fed”; “beware animal spirits in the US”; “don't position against the US consumer”; “Germany owes us”; and lastly, “China will always grow at 10%”). We prefer to rely less on hope and more on hard reality and sensible and credible policies – even if they may mean more pain in the short term.

www.zerohedge.com

READ MORE - Bob Janjuah On The Market: "Like Bulls In A China Shop"