Bull or Bear?

Submitted by William Bonner, Chairman – Bonner & Partners

The Bull Market in Stocks May Have Ended Already

GUALFIN, Argentina – As expected, Wall Street’s shills were out in force on Wednesday. And the Dow rebounded from Tuesday’s rout – up 293 points. CNBC assured investors that the “U.S. is a place you should be investing.”


The can and the road …

And Bloomberg explained that, “based on history,” investors could expect to wait no more than four months until the stock market fully recovers:

“The S&P 500 rally that began in March 2009 has been marked by two previous corrections: a 16% sell-off from April to July in 2010, and a 19% slump over seven months a year later. The benchmark recovered within about four months of each. So if history is any guide, the market may not be back at its May peak until late December.”

Nikkei, LTBased on Bloomberg’s “history”, the Nikkei is about 25 years “late”, and it looks like it will be even later before everything is said and done – click to enlarge.

But wait… This assumes we’re still in a bull market. As we’ve seen, two factors have been paramount in driving the bull market of the last six years: the Fed’s zero-interest-rate policy (ZIRP) and its QE programs.

And neither of those things is working for the U.S. Now. The Fed’s QE is on pause. As for ZIRP, it seems to have lost some of its zest.

It’s no wonder… As we’ve pointed out many times, lending money that didn’t exist before to people who are already deeply in debt is not a good business model. It doesn’t stimulate an economy. And it doesn’t make people better off. All it does is keep the can bouncing down the road.

And with the Fed now running out of ammo, we MAY no longer be in a bull market. Instead, we MAY be entering a bear market. If so, you can forget about a recovery in four months. Instead, it may take four years… or 40 years… to reclaim the bull market high set this past May.

Remember, from the bull market high set in 1929, it took until 1954 before the U.S. stock market fully recovered. A quarter of a century, and one world war, later. And in Japan, the Nikkei is still roughly 50% below its bull market high set in 1989.

Corrections in a bull market are one thing. Bear markets are something very different.

Admit itIn China bears have been outlawed in the meantime – literally (a Blaustein cartoon from Grant’s Interest Rate Observer)

Liquidity Dries Up

“Excess liquidity” has floated stocks higher over the last six years, argues our friend and economist Richard Duncan. Not earnings. Not growth. Not productivity. Not savings. Not investments. As he puts it, “When liquidity is plentiful, asset prices tend to rise. When it is scarce, asset prices tend to fall.”

richard-duncanRichard Duncan watches the state of free liquidity. We’re not sure if his view isn’t a little too simplistic – after all, government not only “absorbs” liquid funds when borrowing, it immediately spends them again. Still, he may well be correct that another global synchronized recession is about to start (unfortunately he is also an advocate of big government spending as we have pointed out here)

Screenshot, credit: Financial Times

According to Duncan, a basic “liquidity gauge” for the U.S. is relatively easy to construct. When Washington borrows dollars to fund its budget deficit, it absorbs liquidity. When the Fed creates dollars through QE, it injects liquidity into the financial markets.

In the past, the Fed’s central bankers were practically wearing out the pump handles to get more liquidity into the system. During 2013, for example, Washington absorbed $680 billion to fund its budget deficit. And the Fed injected just over $1 trillion through QE. The difference created $320 billion of excess liquidity.

Monetary BaseBase money, which the Fed controls directly, has begun to drift sideways since the end of “QE” – click to enlarge.

But now Duncan warns that his liquidity gauge for the U.S. is set to turn negative in 2015. Washington will absorb more liquidity than the Fed is set to inject. And he is forecasting a negative reading every year from 2015 to 2020.

As Duncan recently told readers of his Macro Watch advisory, Fed stimulus is “no longer sufficient” to keep the credit bubble inflated. As a result, he warns, the global credit bubble is deflating, and the world is “sliding back into a severe recession.”

The can is no longer rolling along. Instead, it has come to a near halt, with central bankers and government policymakers desperate to give it another boot. Watch out!

Charts by: BigCharts, St. Louis Federal Reserve Research

The above article originally appeared as “The Bull Market in Stocks May Already Have Ended” at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.