In my view, we are in the early stages of a secular bear market that began in 2007. By that, I mean that it will take between eight and 20 years before the major market indices including the Dow Industrials and the S&P 500 will get back to their all-time 2007 highs. If this current secular bear market is like its seven predecessors, which date back to 1802, the major market indices and most mutual funds won't breach their all-time highs -- reached on October 9, 2007 -- until sometime between 2015 and 2027.
There are many dynamics that are powering this secular bear market. They include:
- the contraction of credit after decades of expansion
- the retrenchment of consumer spending, which at its peak accounted for 70 percent of U.S. GDP
- the concentrated holdings of stocks by mutual funds that will be forced to be liquidated by fund shareholder redemptions
- the changing demographics of the 76 million Baby Boomers who were responsible for powering the 1966-1982 secular bear market and the 1982-2007 super bull markets.
Bruce argues that the massive government interventions seem to be working. I disagree. The Federal Reserve's tactics to maintain and foster low interest rates to spur lending and growth are not working. Most recently, the yield curve (the spread between short term and long term interest rates) was the highest on record. Despite the Fed's massive March 18 intervention to buy $1.25 billion of long-term government bonds, mortgage interest rates are the highest they've been since August 2008. The widening yield spread is a problem because the resultant increase in long-term rates increases the borrowing costs for both businesses and home buyers.
Bruce says that expectations are being exceeded and that this will lead to market advances. In my view, the only expectations that are being exceeded in this economy are the lower earnings forecasts that many companies are providing to analysts before they issue their reports. Dell is a good example. See, for example, this recent story about Dell's profit plunging, but still beating estimates. What the Wall Street analysts and Bruce are missing is the significance of Dell's revenue falling by 23 percent in its most recent quarter. The only time Dell had annualized revenue declines was following the burst of the dot-com bubble in 2002, and the peak declining quarterly sales rate of 4.4 percent during that trough pales in comparison to Dells' just-reported 23 percent decline. "Over the cliff" revenue declines by Dell and others will be cataclysmic to the U.S. economy because they force the companies to permanently reduce employment in order to make a profit off of lower revenue bases.
Little money on the sidelines
Bruce also says that broad skepticism about this rally suggests there is still quite a bit of money on the sidelines that can drive stock prices higher. I respectfully disagree. The latest figures indicate that there is approximately $4 trillion of cash on the sidelines. But that number is minuscule when compared to total U.S. debt of $56 trillion, which includes $15 trillion of U.S. government debt. To put this into perspective, $4 trillion would barely cover a one-year payment of interest on the debt. In a contracting economy, available cash is likely to be kept in reserve so that it can be used to pay down debt or to make interest payments; this is especially true for the millions of people who are losing their jobs. Little of this money will therefore be used to buy stock.
Creative inventory management
My opponent argues that "just-in-time inventory management has allowed companies to respond quickly to falling sales" and that inventory rebuilding could fuel a recovery. What appears to be happening, though, is that many companies are off loading or stuffing their inventories into their sales channels by giving their customers very favorable terms of payment.
Dupont is a good example. Analysts were happy after its inventory declined by $1 billion in the first quarter. But its receivables increased by 20 percent over the same quarter even though its revenue fell by 19 percent. This tells me that Dupont was offloading its inventory risk to its receivables. As a result, Dupont's net cash decline of $1.2 billion doesn't give it the wherewithal to replenish its inventory.
Bruce says that we are in the early stages of a new bull market, but I couldn't disagree more. To my mind, we are in the early stages of what will prove to be a long and drawn-out secular bear market. The contraction in the price-to-earnings multiples for stocks has only begun.
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