Long Bear Market is coming - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 24 February 2014
Long Bear Market is coming A  A  A

Baltimore, Maryland

The Dow was down 26 points on Friday. Gold rose a few bucks. Nothing important.

After a good fright two weeks ago, investors are comfortable again. They've learned their lesson: whenever the stock market goes down, just stay calm; it will always come back.

So here is our prediction: the next time it won't. The next bear market will last at least 10 years...and probably 20. Why? Debt and demography.

Our old friend, now deceased, Dr. Kurt Richebacher spelled it out for us years ago:

    You can't build lasting stock market gains or solid GDP growth on debt. Because debt cannot expand forever. Sooner or later it must stabilize and then it must contract. When that happens, all the positive features of debt become negative features. Instead of borrowing and spending more, people must spend less and pay off past debt. Instead of adding to corporate sales and profits, they subtract from them. Instead of driving up asset prices, they push them down.
Borrowed money has an almost magical effect on the way up. It comes out of nowhere...so there is no labor cost to offset against it. It goes almost directly into corporate profits.

But on the way down Dr. Jekyll becomes Mr. Hyde. Debt has a maniacal effect when it goes into contraction mode. Jobs and wages go down as spending slows...making it harder than ever to pay debt...forcing households to make cuts far beyond what they would have had to do in the good times before.

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The effect is Biblical. And symmetrical. As ye sow so shall ye reap. Borrow a lot of money and you will have to repay a lot. Enjoy a big debt-financed boom...and you will suffer a big debt-driven bust. The bigger the boom, the bigger the bust.

Where are we now? Not far from an all-time high in debt...and stock prices. Investors are confident. If prices should go down, don't worry; Janet Yellen has their backs.

We bring this up because an end to the de-leveraging cycle has been widely reported. Households must borrow to spend more. Because their wages and salaries are still crawling along the floor. And if they do get in a borrowing mood, it would have a powerful and magical effect. Consumer incomes and spending are roughly 6 times as much as corporate earnings. So, a rise in the consumer's willingness to borrow and spend could be important...at least for a while. Corporate earnings - already at record highs - could go even higher!

But wait. It would take some pretty strong magic to get corporate earnings and stock prices to go higher. How many more rabbits does Ms. Yellen have in that hat?

By our count, not many. The Fed has tried QE. They've tried ZIRP. And now what? Nominal rates can't go below zero. And QE doesn't seem to do more than to get them down on the floor.

That leaves jawboning...or 'forward guidance,' as the Fed calls it. But everyone knows 'forward guidance' is no guidance at all. The Fed tells us it can change its mind at any time.

So, unless the consumers really are ready to bugaloo....we are still in a de-leveraging episode...still with a long way to go down. Debt is still in its Mr. Hyde phase. And there's not much the Fed can do about it.

How about demographics?

Oh la la. There are a number of studies linking demography to stock market P/Es. The results are what you would expect. When people prepare for retirement, they buy stocks. When they retire, they sell stocks.

As more and more people retire more and more stocks are sold. P/Es go down in - at least according to the studies - is a predictable pattern.

And here's where the grim news comes. According to the latest study we saw, the expected effect on stock prices of demographics will be about MINUS 15% per year...over the next 10 years.

Debt and demographics cannot be QE-ed or ZIRPed away. They are both long-term trends. And they'll pull down stock prices for at least a decade.

Prepare for it.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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3 Responses to "Long Bear Market is coming"


Mar 4, 2014

Nobody will like this heading without proof and any more logic.



Feb 24, 2014

As we all know the whole universe is expanding. ON this planet earth not only the population is increasing but needs of all human beings are also exploding. This inturn will ensure that the troughs and crests of curve of progress will
continue to move upward albeit after a lingering a bit.


H K Prakash

Feb 24, 2014

1 For years, the Chinese have produced cheap stuff, sold it cheaply in the US and GIVEN THE $$$ BACK TO THE FED by buying T Bills. Now their own economy is in trouble (because of siphoning off of large amounts by Party, Army and other leeches) Where does that leave the US?
2 The Beatle Bailey cartoon strip has supply sgt Cosmo telling Beatle: "Nothing much is produced in the US anymore, there's just an awful lot of money SLOSHING around trying to find an outlet!" Does this explain the various scams, boom/ bust share cycles, the insane valuation of Facebook/Twitter/Apple IPOs leading to the insane valuation of Whatsapp?

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