February 6th, 2013

The Secular Bear Market and the QE’s

imageBarry Ritholtz recently asked in his blog, “Is the Secular Bear Market Coming to an End?“. He goes on to say “Here we are, a few weeks away from the start of the 14th year of the secular Bear market that began March 2000. The question on more than a few peoples’ minds has been whether or not it is reaching its end.”  Ritholtz goes on to give his definition of the term “secular bear market” and offers prerequisites required before the bear market can end.  In short, he concludes

“Regardless of your answer to our broad question, there is one thing that I believe to be clear: We are much closer to the end of this secular cycle than to the beginning. Many optimists — most notably, famed technician Ralph Acampora — believe the secular bear market has ended. Even skeptics have to agree that we are more likely in the 7th or 8th inning than earlier stages of the game.”

and offers the following chart:

Secular Bull and Bear MktsSource: Haver, Factset, Robert Shiller, FMRCo. Monthly Data, since 1871.

[Some of Ritholtz’s comments and image match those of found in Fidelity Investments Viewpoints of a few days earlier.]

Helping to prevent losing objectivity to my fundamentally optimistic nature has been a long-running discussion about how the exit from the Secular Bear Market that has hampered the market’s advance for the past 14 years might ultimately look like.  The discussion began with a study of market behavior over the past 50-year that serve as the basis for the Market Momentum Meter, one of the principal topics of my book, “Run with the Herd“.

The data reveals that the market has fluctuated around a line that’s risen at a fairly consistent 7.5%/year rate since 1939.  The upper and lower boundaries of fluctuations around that line are +/- 44% on either side of that upwardly sloping mean distribution line.  The upper boundary was touched at the beginnings of the 1970 and 2000 decades, both of which were also the start of what turned out to be Secular Bear Markets.  The lows of both those Secular Bear Markets were at the lower boundary of the range.

S&P 500 1939-Present

Having touched the lower boundary in 2009, I wondered whether the exit from the 1970’s secular bear market might serve as an analog to the exit from today’s secular bear market.  “What the market trend be if it followed exactly the 1979-82 exit?”    I’ve written about the exit here several times over the years, the most recent being last year on June 4 in “Revisiting 1970’s Secular Bear Market Exit … Again” [that post includes links to previous references to the Secular Bear exit going back to October, 2008.

It turns out that the current Bear Market and the one in the 1970s is that inflation and economic stagnation (then known as “stagflation”) had one major difference.  Inflation had hit an annual rate of 13.5% when Jimmy Carter appointed Paul Volcker to head the Fed in August 1979.  He immediately began attacking inflation by raising interest rates to unprecedented levels of 20% by June 1981; inflation soon began easing and interest rates began to fall.

The current Bear Market was diametrically opposed, especially since the Financial Crisis and bursting of the housing bubble, with the fear of deflation with the crash in housing and real estate values.  To fight the “Great Recession” and ineffective or insufficient fiscal policies, Bernanke launched Quantitative Easing monetary policies which brought interest rates to low levels not seen since World War II.  The following chart shows the different impact of the two monetary policy courses:

1980's Analog and QE's

The 1970s Secular Bear Market exit analog may have been a good benchmark against which to measure the prospective current Bear Market exit.  At this late date, I would have to conclude that not only have low interest rates helped the economy avoid a depression, they may have also helped the stock market exit more quickly from the Secular Bear Market.  Rather than reversing and, thereby, extending the secular bear market’s life, so long as Bernanke keeps rates low, one can be confident that the market will soon exit the Secular Bear Market, cross into all-time new highs and, with luck, begin the first bull market advance since the 1990s.

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August 21st, 2012

Stock Market Recover Sidetracked by European Sovereign Debt Crisis

I think one of my most prescient posts was entitled Housing and Finance: Two Superimposed Crises and Bear Markets of September 17, 2010, almost exactly two years ago and just before the last mid-term elections.  The market had already bottomed the previous March and were breaking above what I saw as an inverted head-and-shoulder interim bottom.  As noted in the post,  there appeared to be the beginnings of a bottom in the housing market due to once-in-a-lifetime affordability.

Specifically, I envisioned the market being victimized for the first time in history by two economic crises: financial crisis hitting banks and other financial enterprises plus the housing crisis hitting consumers.  I suggested that before the market can advance to new highs, both these industry groups would have to bottom and begin moving higher.  The keystone of that post was the following chart on which I attempted to visually superimpose the impact of those two crises on the stock market:

Here we are, two years later, with the market having ground 24.6% higher from 1126 to 1420 today.  I wrote then:

The reason the market appears to be bottoming again (the inverted head and shoulders) may perhaps be that housing is beginning to bottom and turn also. The number of foreclosures continues to rise (although at a lesser rate than last year) and the improved affordability index (historic low mortgage interest rates and closeout prices of houses) has not yet stimulated a pickup in the housing sales turnover. But a pickup may be around the corner [triggered by an up-tick in interest rates?]. Without a turnaround in housing, the stock market recovery will be short-lived.

Unfortunately, I didn’t have sufficient courage to invest in homebuilders and missed out on the Industry Group with one of the biggest moves over the past twelve months, Homebuilders, at 75%:

We thought our Financial Crisis had been contained by the Fed’s first round of Quantitative Easing and that banks would begin their recovery however the effort was sidetracked because of the European Sovereign Debt Crisis beginning towards the end of 2009.  The recovery in the stocks of the country’s larger banks began to falter towards the beginning of 2010 and only now has begun to show signs of renewed life:

The “herd’s” big money flow again beginning to be directed into financial stocks gives hope that, absent a new major crisis (although our own Federal debt and budget debate is still looming on the horizon), the market will be able finally to continue to the previous all-time highs and ultimately break the grips of the 12- going on 13-year secular bear market.  A cross of the XLF above 16 will trigger for me the another clear indication that financials will begin leading the market higher.

It’s been a long, frustrating two years.  We’re facing another national election, this one even more important than the last.  Continuing to look at all the negative news continues to make our investment lives feel dismal.  Seeing the possibilities of some positive news for a change opens the mind to a totally different stock market future than the one we have become accustomed to.  I may be nothing more than an incurable optimist but that’s the best way to remain committed to the stock market and, ultimately, long-term financial well-being.

May 11th, 2010

Gold: The Next, Last Bubble

  1. Bubbles
  2. Were you a Beanie Baby collector? People would search near and wide for their next Beanie Baby, they’d pay ridiculously high prices on Ebay for the most recently issued doll or the one they were missing in their collection. Websites sprung up listing “market prices” of different dolls; exchanges were even created. Was that fad much different than a kids’ versions of Tulipmania in 1635 or the South Seas Bubble of 1720 in England or the DotCom Bubble of the 1990’s and the Real Estate Bubble of the last decade?

    Bubbles usually involve assets whose value is subjective and difficult to evaluate or measure. Often these are collectibles or other forms of assets don’t serve a productive societal purpose or generate any form of income. Buyers who, for reason known only to them, rationalize a value that’s exuberantly higher than the asset’s current market price. Since the asset generates no income on its own, these buyers bid up the price and acquire it in the hopes of selling it sometime in the future at a higher price, hence the term “greater fool theory”.

    “These individuals will continue to purchase regardless of market levels, considering only the willingness of other individuals in the market to pay higher prices. At this point the bubble inflates itself, because a growing portion of the market is self-referencing, making decisions while looking inward…..euphoric levels of valuation are validated by the market, and intelligence is measured only by profits, not reasoning and judgment.” Financial Genius Before the Fall by Jacob Freifeld 1996

  3. Bretton Woods (see Wikipedia)
  4. With World War II was still raging in 1944, all 44 of the Allied nations gathered in Bretton Woods, N.H. to establish a system of rules, institutions, and procedures to regulate the international monetary system (and create the IMF). The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold; the IMF was to bridge temporary imbalances of payments.

    As the costs of the Vietnam War and increased domestic spending accelerated inflation, the U.S. ran balance of payments deficit and trade deficits for the first time in the 20th century. In 1970, because of foreign governments’ redeeming their dollar holdings into gold, our gold coverages paper dollars declined 33 percentage points, from 55% to 22%. Fearing a devaluation, Germany left the Bretton Woods standard forcing the $US to a 7.5% devaluation relative to the Deutsche mark.

    In an attempt to prevent further devaluations, President Nixon unilaterally ended the direct convertibility of the United States dollar to gold and thereby essentially ending the Bretton Woods system and resulting inflation and wage price controls here.

    Since 1971, gold’s value in $US has increased from a low of $63 to today’s high of 1219.90 (from GoldPrice.org)

  5. Gold: The Next, Last Bubble

    Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value, and occasionally, a standard of deferred payment. Fiat money is without intrinsic use and derives its value by being declared by its issuer (country, group of countries like the EU) to be legal tender. In other words, it must be accepted as a form of payment within the boundaries of the country, for all debts, public and private.

    The financial crises in the EU and our own staggering and still escalating national debt underscores that the world’s spending and obligations has outgrown it’s ability to pay. Inflation is coming and there isn’t any way around it. The policies that pulled us out of the recent economic crash put trillions of new dollars into circulation. That makes all of our existing dollars worth less… but it increases the value gold and silver. In other words, currency is being devalued around the world-even in China.

    The rise in the price of gold didn’t start last month or last year. It really started to run (see chart above) about the same time as the US deficit started to balloon due to the recession following the DotCom Bubble Crash and 9/11. Rather than slowing down, the worldwide financial crises and recessions could accelerate the rise. Consequently, gold now has characteristics similar to the objects of earlier bubbles with two exceptions: its demand is worldwide and governments could stop it by agreeing to fix currency exchange rates fixed to gold.

    Until that happens (it may come at any time), the price of gold will probably act the same as did for beanie babies, tulips, tech stocks or stocks in companies that promise to develop mines on Mars and the moon (ala, South Seas Company stock).

Note: Subscribers to Instant Alerts saw me starting to add precious metals stocks and ETFs to my portfolio back in April.