A rare secular bear (market)
Bull or bear market? On a long-term, secular basis, we are of the opinion that the U.S. has been e experiencing a primary, secular "bear" stock market environment since the year 2000. Primary bear markets are vicious animals which consume wealth over a long period of time.
Wealth is destroyed in various forms (real estate, financial assets, business values) both on an absolute and "real," after inflation basis. It has long been our view that the current bear market started in the year 2000. While we have seen temporary respites in the financial destruction of this secular downturn in asset values, the underlying, grinding trend of lower real asset values driven by a strong world-wide fundamental is still in existence.
We have been emphasizing the increased volatility of the markets - and attaching that increase to the real reason behind the current bear market - an unsustainable debt level in many western countries. Until this debt problem is forcefully and successfully addressed, we have been forecasting that high levels of market volatility will continue - creating financial "Black Swans" which are far out of the norm of expectation.
We sense we may be entering the final phase of the "Long Hard Slog" environment - one of final capitulation - where the excesses which are the culprit of our problems will be dealt with.
Stages of the Bear
Secular Bear markets are rare. We have only experienced three other secular Bear markets since the year 1900. They are long, drawn-out affairs during which wealth destruction takes place on a massive scale. They occur due to secular, seemingly unsolvable problems, or worries.
Bear markets occur over many stages, but the final stage is highlighted as a period of capitulation - where everyone agrees on the main problem (this time it is debt structure) and finally the market or officials show investors a way out of the maze. We do not believe the world has been shown a way out of this maze, but given historical standard, we believe that is the next stage of this bear experience - one of capitulation and finalization.
Is this going to happen during 2011? Perhaps. We have already experienced the first two stages of this Bear market:
Onslaught. We have a problem. Not everyone is in agreement of what the problem is - it is not apparent. Perhaps the symptoms of the systemic problem change, but the problem remains the same. People come to the conclusion that we have a problem that is probably systemic.
Agreement. Agreement is eventually reached, due to events which unfold over a long period of time that highlights the real problem. The solution seems completely out of reach and unsustainable. However, agreement of the problems rather than simply the symptoms of the problem, are reached.
Capitulation, Solution and Finalization. This stage can be chilling, but for many investors, it is a period of determination and solution. We believe this is where we as a people stand, and where the world's investors currently are positioned. A proposed solution will occur - the solution to the problem may be a process in itself - but we have passed the phase of shock and the phase of agreement of the nature of the issue. The capitulation and finalization period may take some time - perhaps a period of a few years, perhaps not. At any rate, this based on historical precedent, marks the end of the bear market and the beginning of the bull.