Some deep thoughts from David Rosenberg on the likelihood of a secular bear market and potential new lows:
Well, well, so much for consensus views. Like the one we woke up to on Monday morning recommending that bonds be sold and equities be bought on the news of China’s “peg” decision. As we said on Monday, did the 20%-plus yuan appreciation from 2005 to 2008 really alter the investment landscape all that much? It looks like Mr. Market is coming around to the view that all China managed to really accomplish was to shift the focus away from its rigid FX policy to Germany’s rigid approach towards fiscal stimulus.
What is becoming clearer, especially after the latest reports on housing starts, permits, resales and builder sentiment surveys, is that housing is already double dipping in the U.S. The MBA statistics just came out for the week of June 18 and the new purchase index fell 1.2% – down 36.5% from year-ago levels and that year-ago level itself was down 22% from its year-ago level. Capish, paisan? So far, June is averaging 14.5% below May’s level and May was crushed 18% sequentially, so do not expect what is likely to be an ugly new home sales report for May today to be just a one-month wonder. Meanwhile, the widespread view out of the economics community is that we will see at least 3% growth in the second half of the year: fat chance of that. What is fascinating is how the ECRI, which was celebrated by Wall Street research houses a year ago, is being maligned today for acting as an impostor — not the indicator it is advertised to be because it gets re-jigged to fit the cycle.
From our lens, there is nothing wrong in trying to improve the predictive abilities of these leading indicators. Still — it is a comment on how Wall Street researchers are incentivized to be bullish because nobody we know criticized the ECRI as it bounced off the lows (not least of which our debating pal, James Grant). For a truly wonderful critique of the ballyhooed report that was released yesterday basically accusing the ECRI index as fitting the data points to the cycle – not the case, by the way – have a look at ECRI Weekly Indicators Widely Misunderstood that made it to our friend Barry Ritholtz’s blog (“The Big Picture”).
As for the equity market, we are at a critical juncture and it could break any day. After successfully testing support at the key Fibonacci retracement level of 1,040, the S&P 500 has since bounced up to the 200-day moving average of 1,115 – and this failed to hold. Resistance prevailed. My sense is that the market will break to the downside, and for three reasons:
1. Even if a double dip is avoided, the market is not priced for a growth relapse.
2. The intense volatility in the major averages over the past three months is consistent with the onset of a bear phase.
3. Bob Farrell believes a test of the March 2009 lows is likely. I don’t think anyone is in a position to debate five decades of experience, not to mention his track record. Louise Yamada, a legend in her own right, not to mention the likes of Bob Prechter and Richard Russell, are on this same page. Notice how none of them work at a Wall Street bank.
The chart below shows over 100 years of the Dow in real terms. There are a few conclusions from this:
- Secular bull and bear markets typically last 16 years
- During the secular bear market, most if not all of the prior gains made (again,in inflation-adjusted terms) in the prior secular bull condition, are wiped out. Look closely at the chart and there is a very subtle upward drift – the secular low points rise over time, albeit fractionally.
This is the information contained in the chart; do what you like with it. Assuming inflation averages 2% annually and that 2016 marks the end of this secular bear episode (seeing as it began in 2000) then the historical pattern would suggest a test of 5,000 on the Dow as the ultimate trough (at that point, gold will likely be 5,000 too). This does not preclude cyclical rallies along the way, but these will be “bear market rallies” such as we saw from March 2009 to April 2010 and investors should not be tempted into any other strategy than to rent these rallies and not own them.
Source: Gluskin Sheff