The Big Hope: An Invitation to Dream

By Alex Salomon
This blog entry comes on the heels of a series of tweets from my account @Alex__Salomon. A friend (follower) suggested I should expand on it. The meat of my thesis? Let’s just call it “the Big Bull Rally.”

I think it all started last Thursday with the frustration of reading yet another column by Nouriel Roubini on Mario Draghi and the ECB’s plan… and how it was all going to end badly, very badly. No doubt, in jealousy and frustration with Roubini’s fame, I then ironically tweeted “My new plan to get famous: let me say it now, someday in the future, we will correct and it will feel awful and scary.”

But before I delve on, let me make something very, VERY clear: I understand the bearish trade. Moreover, I understand the ultimate bearish outcome. When I mean I understand, I understand it deeply, like millions of others. It does not get more bearish than being of Jewish European descent named Salomon, in 1939. It does not get more bearish than being a widower at 35. For many years I lived in communities where people “live” on $1-$5 a day. I guess that is where I get both philosophical and sarcastic: it does not get more bearish than torment, pain, suffering and death. A bearish trade is a walk in the park compared to a bearish life: it is just money and I mean it. So let me pound it some more: the real bearish outcome is death — and it will happen, sooner or later.

There are many shades of bearish from death (war, suffering, famine, disease, pain) but think about it: some of these are actually bullish compared to the absolutely certain Bear Trade: Death. So philosophically speaking, all scenarios are pretty much bullish until the only bear trade that actually counts. Thus mentally, philosophically, economically, I understand the Big Short.

But here and there, I really get sick and annoyed of reading about Bears. And this Saturday from Twitter I wanted to write about the almost unspoken Black Swan of a massive rally, of a Bull trade. What if the next Black Swan is a massive overshot of historical P/E valuations? What if doomsayers are wrong and we actually turn the corner? Not tomorrow, but say over the next couple of years? S&P 500 at 600 or 2200?

There is a growing group (still confidential, but growing) of bulls calling for S&P 1500 in 2013, maybe even 1700. But there are still just a few commentators calling for something far “crazier” such as a return to the meridian on the S&P historical valuations, and then, as many times in the past, an overshot — yes, a real, bona fide, exuberant Bull Rally.

As a pointer on where the crowd is, if you look at SPY calls for January 2014, the $125 puts (roughly putting the S&P at 1250 or lower in January 2014) are worth $8.50 each and there are 18,227 such open contracts. In contrast, the equivalent $165 calls (so roughly putting the S&P at 1650 or higher) are only $3.09 with 1,518 open contracts. I understand the rationale (2013 is the Fiscal Cliff year, sound familiar?) but this metric actually begs the following bottom-line: hope for hope (crash for bears; melt up rally for bulls), the real hope trade is still very thinly crowded. The hope trade is, in many ways, is the contrarian trade.

Chew on this: while most contrarians here think that we are due for a massive cliff — they are still the crowd! Not so contrarian after all, is it? Now, I repeat, I insist, I pound on it: I understand why it is so. I understand the risks of fiscal and social entitlements, the risk of European collapse, the risk of US collapse, and China’s hard landing. But then, again, no matter how you twist it: this thinking is crowded, the doom and gloom of European issues and the US Fiscal Cliff are on everyone’s mind, not the hope, the Bull, the next great overshot, or the “what if we make it through?”

I then wanted to take the argument one step further, talk about yet another Bullish “Black Swan.” Fast-forward to 2025! What if indeed France becomes Greece-like, as long as India becomes USA-like? 65 million people versus 1.5 billion! Think about this: maybe indeed Europe slowly declines as an economic group from 1st (depending on some metrics) to 2nd to 5th… if China, India & Brazil replace Europe, and explode into 2020.

If you think I am crazy, just remember, smack in 2000, France’s economy was larger than China’s! 12 years ago, no one invested in Shanghai … nor in Apple (AAPL)! (here’s the typical wiki source)

Fast forward: note that the 2025 version of Shanghai stock exchange or the next Apple are not even popular yet! The Big Short might indeed be the slow decline of the USA or Europe, but what about The REALLY Big Bull: what will be the 2025 versions of China & Apple?

This blog entry is not about finding the answers, it is an invitation to join me in finding them. Moreover, it is really an invitation to dream. It is an invitation to find the equivalent of Apple at $28 on Jan. 3, 2000 or finding the next block of BRICs.