Revenge of the Permabears

There is a group of money managers and economists that has been bearish for so long that its members have been given the nickname “the permabears.” Some of these guys have been warning about a collapse of the U.S. financial system since the early 1990s, based on unmanageable levels of debt.

Of course, some are technical traders who watch charts and they don’t fight a trend. As a result, from time to time they have advised their clients to buy — during the Tech Boom, for instance. Deep down inside, though, they knew the Day of Reckoning was coming. (This is not my phrase; it’s the title of a book by James Dale Davidson and Lord William Rees-Mogg, published in 1993.)

Who are these permabears? Well, James Grant of Grant’s Interest Rate Observer springs immediately to mind. Heck, Grant has been bearish for as long as I can remember, and I arrived in New York as a fresh-faced financial markets devotee in 1982. Before founding his newsletter in 1983, Grant wrote a column for Barron’s.

Another guy who I would put in the permabear camp is my old friend Michael Belkin. I noted in a recent post on Nikolai Kondratiev how Belkin called the top of the Nikkei in December, 1989, just before it crashed and dragged Japan into a decade-long recession (some would say depression).

I’ve been surfing the Net today looking for insight and inspiration now that the Dow has penetrated the key 10,800 level set back in July 2003, which technical traders call a support level. I have previously warned that if this number was breached, the market could be moving significantly lower, though there might be some big upswings on the way down.

I haven’t found a lot of forward-thinking posts today. Maybe folks are shell-shocked, to use the word coined to describe the post-traumatic stress syndrome of World War I.

However, I did stumble upon what market maven Barry Ritholtz called the “Quote of the Day” on July 29, though it was written by Belkin in his market commentary The Belkin Report on July 6.

“Most global stock indexes have decisively broken below their 200 week moving averages, which is a major trend reversal…. Potential downside targets after a 200 week average breakdown are 1) the 200 month average and 2) The previous 2002-2003 lows. Those levels are 25%-47% below current levels for most stock indexes. U.S. financial indexes are already there (BKX, XLF). So don’t think it can’t happen for the broader market and other currently elevated indexes, stocks and groups.”

Friends, that was written when the Dow was roughly at 13,611!

Belkin, as usual, was ahead of the curve. Using astrological indicators, I issued my run-for-the-exits warning (The August Eclipse: Sell! Sell! Sell!) on Aug. 13, three days before the August eclipse.

If you wait long enough, one day Chicken Little will be right: The sky will be falling! It appears the permabears are finally in the ascendance. It’s amazing to me that these guys were fretting about debt back in the early 1990s. I wish I had the figures at hand to show you how U.S. government, corporate, and individual indebtedness has skyrocketed since then.

According to the Telegraph of London, U.S. “household debt is now 131% of disposable income, compared with 93% at the top the dot-com bubble, 79% in the property boom of the late-1980s, and 62% at the end of the 1970s.” Well, that’s some indication of the explosion in personal indebtedness.

This same article, published Aug. 19, 2008, which talks about debt levels cited a huge drop in M3. That’s a measure of broad money supply that the Fed stopped releasing back in 2005. Its “disappearance” was viewed as a sign that Wall Street was heading toward a crash.

So the information about the Day of Reckoning was out there in July and August, if you knew where to look. I wish I could say it ain’t so, Joe, but this feels like the Real McCoy to me.