As the future settings seem to be problematic, another hurricane may appear in the market. The global economy and corporate profits may have peaked, inflation will become tricky, taxes will rise, valuations will inflate, and optimism will dominate.

In August, the market hit 12 intraday record highs. There have been only two 11 intraday highs in one month in history-August 1987 (before the massive market sell-off two months later) and the bull market top in 1929 at the end of the roar of the 1920s.

Admitting a mistake is a difficult act.

In the short term, my bear market view is untenable-largely because of excessive fiscal and monetary stimulus measures aimed at revitalizing the domestic economy and reversing the job market. Similarly, the company adjusted and aggregated the industry profits for 2021 and 2022, which far exceeded the expectations of most people (including me). Finally, the market structure has brought more equity inflows, and FOMO ("fear of missing out") has become the overwhelming sentiment of many traders and investors.

In an honest assessment, Citi’s Tobias Levkovich artfully explained the reasons why shorts have made mistakes in the past 12 months:

Where did we go wrong?

Acknowledging mistakes is difficult, but reviewing mistakes is expected to allow people to learn and avoid the same problems in the future. So far, the two important gains we have made in 2021 are the strong gains that have surprised Wall Street the most, followed by the effectiveness of the Federal Reserve in pushing investors towards risky assets, including equity funds of more than $500 billion. With the upcoming shrinking and the EPS trend preparing to slow down, we suspect that these projects may not be the driving factors in the future, while other factors including euphoria and excessive valuations become more influential. But to a certain extent, it was offset by the revitalized stock repurchase program. In our view, the stock market needs to consolidate its earnings over the past 18 months, and portfolio managers need to know more about profits in 2022, especially when faced with the possibility of an increase in corporate tax rates next year.

As we pointed out in a recent article, the bottom-up consensus for 2021 is estimated to be $167 at the beginning of the year and is now higher than $200. Due to the easy compensation brought about by the pandemic-related shutdowns in 2020, the investment community appropriately expects a strong performance in the second quarter of 2021, but the first quarter results were nearly $10 higher than expected, and the second quarter was about $10 higher than expected. 9 dollars. As a result, the S&P 500 index has risen about 20% year-to-date, which is commensurate with the revised (stronger) bottom-line forecast, as few customers find the price-to-earnings ratio or price/sales indicators look attractive. As our leading margin indicators still need to be cautious in this regard, we expect that many companies will face some challenges, such as their inability to overcome soaring freight rates.

With the advent of FOMO, a higher index will lead to capital flows. In many ways, chasing tape can capture emotions well, because greed is a powerful driving force. Given the impressive predictive power in the past, we found it difficult to abandon our panic/excitement model. Similarly, the low intra-stock correlation of the top 50 (by market capitalization) also provides insight, reflecting that fund managers are currently overconfident in their ability to trade names based solely on specific fundamentals, while ignoring macro stacking. Given the impact of fiscal stimulus, inflation, bond yields, etc., it is difficult to assume that the overall top-down impact can be ignored.

The actions of Congress may be even more daunting. The US$1.2 trillion physical infrastructure package and the US$3.5 trillion human infrastructure legislation did not happen overnight. Since there is no Republican Party to support tax increases, the latter will need to involve every Democrat. There is a rift between the so-called moderates and progressives that cannot be easily concealed. Eventually, we expect the reduced version to pass, but even then there is no guarantee that Wall Street may see some of these differences emerge when the Senate and House of Representatives return in late September. If we get additional spending growth, or if there is no tax increase in the context of reduced GDP growth in 2022, then taxation almost seems to increase.

We are fully aware that the market is more than 10% higher than our year-end goal, and even exceeded our mid-term 2022 outlook at this moment, but surrendering to our discipline seems uncoordinated. If our figures for next year are too low, even if inflation is not rampant, we believe that the 20 times P/E ratio is still unsustainable. In the past, 0%-3% inflation was accompanied by a multiple of 18 times. We are uncomfortably arguing that the new paradigm view can justify the expansion of the valuation.

Of course, these observations will tell us why and where we have been, not where we are going.

"From the rearview mirror, investment wisdom is always 20/20."

I strongly believe that in order to get us to this day, the monetary and fiscal policies adopted will eventually have adverse consequences.

This letter is an expression of the diagram, which runs through the key reasons for my insistence on this point of view.

As shown in the figure below, an unprecedented 43% of GDP (including COVID-19 relief) has been promised to stimulate economic growth, compared with only 6% in the Recovery and Reinvestment Act of 2009 after the financial crisis, and expenditure of GDP 40% in the New Deal:

Despite the strong rebound in the U.S. economy and continued inflation, central bank officials continue to maintain an extremely moderate stance-resulting in the most accommodative financial conditions in decades:

The U.S. money supply has grown by about 40% in the past two years, the fastest two-year growth in history:

COVID-19 and the need for emergency support for the U.S. economy have led to large-scale chaos—most notably the disruption in the supply of goods, services, and labor markets. Importantly, the pandemic has accelerated the shift from globalization to isolationism, which shows that local and global supply chains are unlikely to be repaired in the short term-bringing greater inflationary pressure to consumers and businesses.

The combination of huge fiscal expenditures and aggressive monetary stimulus has encouraged speculation and dangerously increased the value of financial assets. The large amount of central bank liquidity is directly related to the performance of the market-leading large technology stocks (FAANG plus Microsoft):

This week, the market value of "FANGMAN" reached 10.3 trillion US dollars-up from less than 5 trillion US dollars in March 2020.

The five largest market capitalizations represent more than 10% of the S&P index and more than 20% of the Nasdaq index.

Short interest rates are at their lowest point in history—if stocks fall, they provide an insignificant cushion:

The currency background has also led to a widening, record-setting and worrying gap between the S&P index and after-tax corporate profits:

With the outbreak of liquidity, the forward market-sales ratio of the Standard & Poor's index climbed to a record high. The ratio is now at a level that has historically led to meaningful stock market corrections:

In addition, unfavorable policy results have been soaring, and the US inflation rate is unlikely to disappear anytime soon. House prices have risen by nearly 20% (year-on-year). In the past six months, the annualized rate of CPI inflation has increased by 7.8%, while the core inflation rate has risen by 6.8%:

Rising inflation has become a global phenomenon:

Reflecting my expectation that inflationary pressures will persist stubbornly, I expect the Fed to shift in the next few months.

History shows that stocks tend to struggle during the Fed’s balance sheet contraction:

History also shows that bad policies can bring unfavorable results.

I believe that the most undisciplined fiscal and monetary policies in history will have more adverse economic (and market) effects. Most notably, there is already more and more evidence that the US economy is heading towards stagflation.

As Peter Boockvar recently pointed out, the release of the Dallas Manufacturing Index in August supports some of our concerns about stagflation. The index fell from 27.3 to 9, and the six-month outlook fell from 37.1 to 15.1, the lowest level since July 2020. Please consider some selected company and industry comments included in the report:

Machinery Manufacturing: "This is the worst market I have seen since 1975... We see that the monthly changes in sales are difficult to explain. Sales rise and then fall within a month. We prefer stable ones. Traffic business so that we can plan accordingly. We are living in strange times!"

Transportation equipment manufacturing: "Labor costs continue to rise, and the supply chain interruption of main material components continues to cause production delays, increased costs, and uncertainty... Today, business needs are encouraging, but there are too many uncertainties in the future, that is, currency Swelling, available staff and economic prospects, including ongoing supply chain issues and the fact that Covid will not disappear. Coupled with a dysfunctional government and out-of-control fiscal spending, it is difficult to be optimistic. We are proceeding cautiously."

Furniture and related product manufacturing: "We continue to have vacant employee positions, and the labor force is growing faster than the pricing of our products."

Paper industry: "It is impossible to find employees. We have to work hard."

Printing and related support activities: "We are worried about how high the inflation rate of our materials and services are, and feel that the economy will soon be hit in this regard. Therefore, although we are very busy, we are worried about now in 6 months It seems to be busy for a while."

Citigroup’s economic surprise index has turned negative.

Persistent high inflation, persistent supply bottlenecks, the unwillingness of companies to increase inventories under delta variables, China’s economic weakness, peak consumption, fiscal cliffs, and geopolitical risks indicate that the global economy and profit growth rate is before peaking within a few months, and It may start to decline sharply for the rest of the year:

The Global Purchasing Managers Index stabilized and started to fall:

With sufficient time, I think all these factors discussed may have a negative impact on market valuations. To make matters worse, these policies are being extended at a time when our country’s debt burden is at an all-time high and valuations are extremely high.

Having said that, as mentioned earlier, the market currently totally disagrees with my point of view.

As mentioned earlier, a large amount of liquidity is still the main reason for the rise in stock prices.

Another direct reason is the change in market structure in the past decade, from active management to passive investment. Quant Strategies and ETFs-so entangled and dominated by machines and algorithms that pursue price momentum rather than value investment-have contributed to rising stock prices in recent months. Although these strategies know nothing about price, they know very little about value. They strengthen the virtuous market cycle characterized by limited market adjustments.

As I mentioned in my diary, with the exception of stock prices relative to interest rates, most historical valuation indicators have risen sharply-for us, this shows that the market is seriously underestimating risk.

Low interest rates are the source of historically high valuations, but as Adam Slater of Oxford Economics points out, a core issue of TINA’s argument is that “there is a fundamental problem with the low interest rate argument—we may be comparing an overvalued asset. Category and another one."

Warren Buffett’s favorite valuation barometer—the ratio of total market value to gross domestic product—is a clear example of the overvaluation of the stock market:

The global stock market is now worth 118.6 trillion U.S. dollars, a record high, equivalent to 140% of a record world GDP:

"Did he doubt or tried? There are many answers in Goodbye and Goodbye, talking about your abundance, talking about your illness, one person collecting the overflowing things of the other."

-Grateful dead, Saint Stephen

My bear market views are described in the charts and comments in this (Thursday) opening letter.

Few stocks meet my buying criteria.

There is currently a negligible "margin of safety".

The market’s overall upside returns pales in comparison with downside risks.

PS-Watch the performance of The Grateful Dead's Ripple-inspiring.

(This review originally appeared on Real Money Pro on September 2. Click here to learn about the dynamic market information service for active traders, and receive Doug Kass's daily diary and columns by Paul Price, Bret Jensen and others. )

At the time of publication, Doug Kass did not hold a position in the aforementioned securities.

These recently downgraded Nasdaq stocks have shown deterioration in both quantity and technology.

Stocks will never do exactly what we hope they will do.

This is a frequently repeated phrase, but it may be repeated often because it contains some wisdom: "Be greedy when others are afraid."

But it is difficult to move in the other direction—especially when the mainstream business media turns a blind eye to all underperforming stocks and focuses only on the index.

If you think that the downward momentum will continue next week, ESTC is an interesting consideration.

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