Long Term Update

8/6/2019 Long Term Update

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This post is mainly addressed to the large number of perma bears, who have justrecently come out of hibernation! Welcome back guys, but be careful, because

the glory days of 2008 might not last as long this time!

Majority of the time on this blog I tend to do updates from the short to mediumterm perspective (Quick Market Update) as I follow the markets movements andfluctuations. After all, the blog is used as my own investment dairy and writingthoughts to paper helps one try and understand the huge volumes of data andnews all of us are hit with on a day to day basis. With all that noise in thebackground, sometimes it is very easy to lose the long term picture, which in myopinion is far more important.

For those that did not see the last long term update, please click here. Theupdate warned on a potential turn coming up, where a cyclical bull couldpotentially end. Even though admittedly I was not extremely bearish, I wroteback then that:

Since the cyclical bull market began on 09th of March 2009, ithas lasted over 121 weeks and so far has gained 87.5%. As youmay remember, the gain was over 100% at one point beforethe May and June correction started. While an averagecyclical bull market tends to last 155 weeks with an average

gain of 100%, the cyclical bull markets within a secular bearmarket tend to last only 126 weeks with gains of about 100%

plus. So therefore by all definitions, we have achieved thataverage.

Note: The historical data in the bar chart above is complied since 1929 for theS&P 500.

Majority of the global equity sectors and indices fell below 20% during the last

week of trading, indicating that we are pretty much in a new cyclical bearmarket, even if it only ends up being a short lived panic crash like in 1962, 1987and 1998 (yes I do read a lot of history).

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During Tuesday's intra day trade, S&P 500 briefly dropped below the 20% thresholdwhich classifies it as a bear market. Therefore if we take that as a new cue, than

from the chart above, we can see that the cyclical bull market lasted 112 weeksfrom 09th of March 2009 until 02nd of May 2011. The bull market achieved gainsof 106% from the intra day low to intra day high. While the length was a bitshorter than expected, gains were very strong!

Statistics show that during secular bear markets, cyclical bears can last up to 109weeks. However, majority of the time, cyclical bear markets last about 74 weeksor just a little bit more than a year. More important than the time it takes toconsolidate or correct, is the percentage point loss that the bear market takesaway. The chart above shows that historically, bear markets since 1929 take away

36% on average. During secular bear markets this can be as high as 46%, but it isobviously skewed by the volatile 1930s. If the bear market goes down 25% or so,we will be testing a major support at around 1040 area - so keep that in mind.

My own secular bear market model was right on que, as can be seen from thechart above. I personally thought that the cyclical bull market from March 2009could go a bit higher before it sucks in more investors. However, judging by thedeclines in majority of the sectors, the cyclical bear has most likely alreadybegan. Now, I do not think majority of the losses will be from percentage gains. Ibelieve majority of the losses will be from inflation adjustment as the market willnot go below March 2009 lows. Therefore equity markets could trade somewhatsideways over the next 5 to 10 years.

Let me explain...

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The 1901 secular bear market lasted 20 years and topped at the start of thecentury, just like the 2000 secular bear market. It actually made a new nominal

high in 1907, but still lost 67% from peak to trough, adjusted for inflation.However, nominally the market moved sideways for almost two decades and innominal terms, actually bottomed in 1914.

The 1929 secular bear market was a pure force of negativity, pain, suffering andstaggering market losses. However, majority of the market losses occurred in thefirst 3 years, when the market bottomed nominally in 1932. Majority of theeconomic pain lasted for decades, but majority of investors fail to understandthat markets discount news ahead of time, sometimes years and years out (this iswhat the 2008 crash most likely did).

The 1966 secular bear market was a huge inflation problem after Nixon took awaythe Gold standard. The market lost 60% in inflation adjusted terms by 1982 lows.The bear market lasted for 17 years or so. However, nominally the market movedsideways for almost two decades and in nominal terms actually bottomed duringthe famous 1974 bear market - not that anyone knew it back that, because justlike today, they were too busy being perm bearish due to bad economicconditions.

However, as already stated, markets discount bad economic conditions years

before they end. By the time you wait for the unemployment rate to dropfrom 9% to 6% and for de-leveraging to occur, the market will already leaveyou behind.



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The 2000 secular bear market topped as the interest bubble inflated andcollapsed. The market is currently down 43% in inflation adjusted terms. If you do

not believe the CPI figures published by US Bureau of Labor Statistics, you mightnot be alone. Using the old CPI method from 1970s, the market is down muchmuch more. The current secular bear market is in a 11 year progress, if youbelieve, just like me, that it all started back in 2000.

While the market still might go down some more when adjusted for inflation,nominally the market will most likely move sideways for several more years -

even to the end of this decade. Most secular bear markets last around 17 years.The difference between the nominal low and real low is about 8 years, thereforethe actual real low could come by 2017. Keeping that in mind, and focusing onthe nominal low of March 2009, we can see that the 10 Year annualised returnwent as low as 1932, which was the greatest crash ever seen! The market hasbarley made a dollar over the last 10 years and most likely will not make a dollarfor another 5 years.

Summary: There will be more cyclical bulls and more cyclical bears. If history isany guide, chances are the March 2009 low, was THE LOW in nominal terms. Do

not be like every other headless chook out there, saying that this is a repeat of2008 and that we are going to go down much much lower. Even during the worstdepression in history, the market never made a new nominal low after 1932, butthe panic and fear just got bigger and bigger. This is already a much worse bearmarket than in the 1970s and 1910s. This bear market correlates closely to 1840sand 1930s within the history of the last 200 years!

Remember, markets need DISBELIEF to climb the wall of worry. My own personalopinion is that stocks will be in a sideways range between 1,500 on the high sideand say above 700 on the low side. It is just a rough estimate. For those that

want to ride a real bull market - the answer is in commodities, as theybenefit when stocks are in a secular bear market and adjusting for inflation!



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But after all I wrote here, you still remain stubbornly bearish like a true perm-bear deflationist who reads ZeroHedge.com every second hour, then you have totruly believe that politicians and central bankers will just stand by and not inflatethe currency, while the markets and economy around them collapse. Throughouthistory, politicians and central bankers have always debased currencies instead ofdefaulting on debt and cleaning the system out properly. United States did it in1970s and they will do it again in 2010s. Stocks will move sideways, while bondsand cash investors will be totally wiped out. That is why I always say stocks arethe best house in a bad neighborhood, while I invest into commodities.



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Long Term Update

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