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Intermediate Term Bullish, Still waiting for the Secular Bear to Complete (Long Term Bearish), But Very Long Term Very Very Bullish



January 21, 2011 – Comments (3)

I wrote a post recently (Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?) where I gave a macro outlook and a projection that I think is more realistic than my previous uber-bearish stance. I think that evidence continues to come in that most developed economies are improving, and that the outlook for the next couple of years is not dire.

I still think this is a 'reaction' (i.e. an economic bounce driven by massive liquidity injections by the Fed combined with an inventory rebuild cycle). But the fact of the matter is that it is actual economic activity that is generating actual GDP growth and there is a lot of evidence to support the view that it will continue for some time.

David Tepper has some recent views that discuss this:

In my last post, even though I acknowledge there is still like more left in both the current economic cycle and business cycle (and hence a continuation of this cyclical bull market for likely a couple of years), I am skeptical of the sustainability of the economic activity, and that they actual underpinnings which are driving this cycle are fundmentally sound, or that the problems that the last crisis undercovered were fixed.

I still think they weren't, which is why I don't think this secular bear market is over yet. I just think it is much more complicated than I was originally thinking.

That said, I agree with rofgile and many others that there are extremely positive devlopments that will add fuel to a secular bull market. I said as much last year:

I just don't think there have been either the sustainable fixes to the economy (structural changes) that are required for long term growth, or the massive P/E compression (and no 40 to 15, while compressive, just took massively inflated values to normal values. There was never an undershoot which has happened in every secular bear market) that is typically seen as major changes take place.

This piece from David Rosenberg's morning report are a list of things that I too would like to see to make me fundmentally bullish on the US economy. And yes, I believe that we will see some of these before this secular market is complete:



   1. An energy policy that truly removes U.S. dependence on foreign oil (shale case, coal, nuclear).
   2. A complete rewrite of the tax code that promotes savings, investment, and a revamp of the capital stock. Cut tax rates, eliminate loopholes and costly tax breaks. Tax consumption, promote savings and investment. That is crucial. But it will take political courage (ask Brian Mulroney).
   3. A credible plan that reverses the runup in the debt to GDP ratio. This includes not just on-balance sheet items but new rules governing entitlements too. We need delineation of the future of Fannie and Freddie if there is any … they became wards of the government nearly three years ago and there is still no clarification on this file (slightly more important than these periodic consumer spending gimmicks that have surfaced over the past few years). We need a complete rewrite of social contracts and a reversal in sacred cows that have been created over the years that are completely unaffordable. Plus, people are not going to learn to live within their means if our politicians continue to set a bad example. The act of dipping into Social Security, incentivizing companies who are already cash-rich to spend more on new equipment and extending a Bush tax cut that always had a 10-year expiry date at the expense of the already severely strained public purse was political expediency at its worst.
   4. A massive mortgage write-down by the banks — a Jubilee of biblical proportions — that provide much-needed equity to upside-down homeowners.
   5. A creative strategy to put people to work instead of paying them to be idle — having nearly half of the unemployed ranks out of work for over 15 weeks and a 25% youth jobless rate is unacceptable at any level.
   6. Tort reform. The only way to rationally bring down health care costs to more manageable levels.
   7. And from six — use whatever proceeds they can save to enhance their education skills, especially in the sciences and mathematics where the U.S.A. is sliding down the global scale.
   8. Financial sector regulatory reforms that actually have some teeth.
   9. Change tax policy to free up the hundreds of billions of dollars of corporate cash sitting in reserve in overseas accounts — bring this money home!
  10. Our Republican friends may not like this too much but in Canada, we understand the importance of immigration inflows and the U.S.A. should be doing more on this front to stimulate its long-run growth potential. This is where Japan’s decade of lost growth became two decades but its decision to resist immigration rule changes is more cultural in nature. The U.S.A., like Canada, is already extremely diverse. But as economists, what goes into economic growth is both simple and complicated. The simple part is merely identifying the two ingredients: growth in the population (more specifically, the part of the population that is working) and productivity (what most of the other nine ideas listed above would attempt to generate). But the dependency ratio is working against the U.S.A. and a smart immigration policy would help at least stem the runup.

    I refuse to be labelled a perma-bear even if I have been bearish for a long time. Having been a bull in the 80s and 90s I do know what it feels like to wear rose-coloured glasses. But the reality is that U.S. policy has been adrift for over a decade and it looks like all we have are measures that merely kick the can down the proverbial road. So it looks like 2012 will be the critical inflection point if there is one, not unlike, hopefully, what 1980 ushered in which was a complete about-face from the ruinous policies dating back to the early 1970s. What we have on our hands right now is a recovery built of straw instead of bricks. An economic expansion and bull market built on rampant expansion of the Fed and Federal governments’ balance sheet is neither sustainable nor desirable. I am desperately looking for reasons to turn more optimistic, but to do so, some major policy shifts have to take place, like the ones above.

    I am convinced that we will, before long, be replaying something along the lines of the reversal of the tech mania and the reversal of the housing mania, which were equally unsustainable. Those fully invested in the stock market today thinking they
    have it all figured out are going to be faced with a deep quandary and are putting their clients at huge risk.

    No doubt there are some opportunities and we have identified them and they include large-cap companies with impressive cash flow streams, trade inexpensively, have nice dividend payouts and are non-cyclical in nature. We also like basic materials for the longer term, and hedging out the inherent volatility via long-short strategies makes perfect sense. And since corporate balance sheets are still in reasonably good shape, it also is completely sensible to be deriving income gains from the credit universe.

    But now is the time, with the S&P 500 doing in 22 months what it took 60 months in the last bear market rally to accomplish (which is to double from the recession lows), to start reassessing the beta and risk in the overall portfolio and what your tolerance level is at the highs. Remember, we have witnessed a bear market rally, not the onset of a full-fledged secular bull market where you can close your eyes and go to sleep for 16-18 years as opposed to nimble trading strategies to get you in and out. If and when we see the sort of policy shifts that deliver secular growth, as we did in the 1950s and the first half of the 1960s and again in the 1980s and 1990s, then it will be time to re-evaluate the landscape and, dare I say …. become secular bulls!

    Rest assured nobody is looking forward to that day more than yours truly. Until then, the bond-bullion barbell and S.I.R.P. strategies (safety and income at a reasonable price) are perfectly acceptable investment themes, and can be captured across every asset class, even in equities!

3 Comments – Post Your Own

#1) On January 21, 2011 at 2:39 PM, davejh23 (< 20) wrote:

In your previous post you mentioned a significant near-term correction and then a resumption of the rally that would eventually lead to a greater fall...the real end of the secular bear.  Do you still believe we'll see a 10% decline in the major indexes in the very near-term?  It's starting to look likely for tech, and small caps at least...

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#2) On January 21, 2011 at 2:46 PM, binve (< 20) wrote:

davejh23 ,

Yes, that is my current thinking. Here are my current intermediate term and long term thoughts:

Long Term

Intermediate Term

Also, I did another study last night that you might be interested in:

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#3) On January 21, 2011 at 5:29 PM, rfaramir (29.57) wrote:

#1 is not actually a good idea unless you are preparing for war (or are in one). Remember, if goods do not pass borders, armies will. This does not mean we should not develop these resources--we should. But the drive to autarky is not one conducive to peace. Intercourse with other nations more blessed than ourselves with energy resources is a good thing.

#2 Generally good. All taxation is theft, but if you believe that it may be a necessary evil, the kinds of taxation mentioned are better than the status quo.

#3 Amen!

#4 Yes.

#5 No creativity necessary. Just the guts to try liberty: eliminate the federal minimum wage, take away the special laws allowing labor unions to violate private property and coerce people into unwanted contracts, eliminate government unemployment insurance which is paying people not to work (private insurance for unemployment would of course not be interfered with).

#6 Tort reform is only a small part of what's needed in health care reform. Try liberty: eliminate mandatory licensing on doctors and medical schools (most will voluntarily get them because most patients will desire this), eliminate the unconstitutional limits on purchasing health insurance across state boundaries, eliminate the FDA and Medicare and any other federal subsidy of or limitation on healthcare providing, and disallow any healthcare mandates from either the federal or state level.

#7 No, if you mean federal or state funded education. End all tax-supported education and all mandated education. Private school students do much better than public ones (home-schooled even better), especially in the vaunted math and sciences. And those aren't necessarily the best yardstick: Britain turns out a lot of physicists each year that cannot get work in physics. If they paid for their own education, they'd make fewer such blunders.

#8 Financial regulation is only necessary because the Federal Reserve is out of control. End it. Without the endless money printing and free money available to speculate, the free market will regulate itself just fine. With the Fed, we have endless problems that regulation can only blunt, and only by hurting the most vulnerable among us. Apply common sense private property rules to banks and deposits, ending fractional reserve banking. End legal tender laws which violate our liberty to transact in the currency of our choice and our liberty to use gold clauses in contracts.

#9 Eliminate the tax on corporations.

#10 Yes, once we no longer offer socialism to immigrants that we pay for (and not them), it will be safe enough to open our borders completely to every peaceful person.

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