How the hell can one be bullish when the only exponential chart out there is that of global central bank assets proving beyond any doubt that every risk indicator is fake?
One key lesson from Japan is that an essential ingredient to the end of a long valuation bear market is revulsion. It is when "buyers-on-dips" become "sellers-on-rallies". It is when volume dries up to almost nothing. It is the loss of hope. In Japan we saw huge rallies in the Nikkei on the back of short-lived cyclical recoveries. Each cyclical failure and further new lows in the equity market saw hope being progressively crushed. Previous US valuation bear markets typically take 4 or 5 recessions to fully play out. We have only had two.
Our market is once again in a hope phase - hoping that the US is now in a self-sustaining recovery; hoping that China might be soft-landing; hoping that the Greece bailout and the ECB liquidity polices have settled things down in the eurozone.
These bursts of hope are essential in long bear markets. Essential in the sense that hope must be crushed. It will be crushed. Hope still beats in the breasts of equity investors. The market will rip out that hope and consume it in front of investors' eyes. Only then can a real bull market begin. We are no where near that stage yet, it will get much worse from here.
A flattening of the profits cycle is exactly what you might expect as the easy, early cycle productivity gains come to an end. It is worth noting that the last time this occurred was just ahead of the start of the recession which the NBER date as having started in December 2007.
Back then too, both markets and policymakers all felt the economy was still quite healthy.
Indeed neither non-farm payrolls nor the headline ISM signaled the economy had already entered recession at the end of 2007 - indeed like now, payrolls actually accelerated in the second half of 2007, just as profits began to slip!