People often write to my company asking customer service to forward emails to me asking how I can remain bearish when stocks continue to rally.
For one thing, I want to note that one can be bearish, but still profit from the "current game," or short-term trends that are in place. For example, while I am ultimately very bearish on the economy and on the markets, I positioned my Private Wealth Advisory clients to profit from the various trends of 2011 so that we saw a 9% return for the year vs. a 0% return for the S&P 500.
Having said that, the big picture reason why I'm bearish can be expressed as follows: the current situation that is allowing the market to rally is based on relationships and policies that are crumbling.
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The relationships that most matter for stocks are those between the Federal Reserve, Wall Street, and the White House (the topic of today's research).
The policy that matters most is the Fed's ability to convince the market that it can and will keep the markets up without letting inflation get out of control (we'll address this tomorrow).
Regarding the relationships that matter, I've stated for months now that we are going to see them crumble. This process has already begun in the sense that we've seen:
1) Key Wall Street players hiring famed defense attorneys (Lloyd Blankfein of Goldman Sachs) in preparation for future litigation.
2) The Fed distancing itself from its responsibility for the Crisis by:
- Suing Goldman Sachs
- Opening itself to Q&A sessions and townhall meetings
- Having "pro Fed" editorials written in the Wall Street Journal
- Putting the blame for the Crisis and the US's financial weakness on Congress's shoulders
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3) Various members of Congress (especially Ron Paul) and GOP Presidential candidates taking aim at the Federal Reserve.
Do not, for one minute, believe that the folks involved in the Crisis will get away with it. The only reason why we haven't yet seen major players get slammed is because no one wants the system to crumble again. And the only way for the system to remain propped up is for the Powers That Be to appear to have things under control and be on good terms with one another.
However, eventually things will come unhinged again. Whether it's Europe collapsing, or the US facing runaway inflation, or another stock market crash, etc, something will break and the Financial Crisis of 2008 will begin anew.
When this happens, the relationships between Wall Street, the Fed, and the White House will crumble to the point that some key figures are sacrificed.
Indeed, this process is already starting.