Anyway, here's the case for a coming Bear Market, as I see it, and why I am increasingly defensive in my portfolio.
Now let's add a few more facts to the mix:
So what is the trigger event and when does it happen?
Now you're asking me to use a crystal ball.
Back in early April I said I thought we had topped in February. I still believe that. By "top" I mean a sustainable, rational market top. What we're doing now is neither sustainable or rational. The Dow is in what amounts to a Parabolic rise the last two months on weak data and even weaker forecasts for the future.
In short, the market is running on pure liquidity today. This is similar to the rush of adrenaline that one might experience when hiking in the woods and being suddenly confronted by a mountain lion. You will run fast and hard but how long can you keep it up? This much is certain - not forever.
I expect that a strong dose of reality is going to come to the markets in the coming weeks - perhaps this week.
If not now, certainly if next month's same-store sales show further weakness, or if there's no evidence of a strong pickup in the housing sector. If the consumer falls out of bed, then its "look out below!" And honestly, I don't see how it can be avoided. As debt shifts to higher-interest-rate instruments, a shift that has been going on now for a few months and is only going to continue.
Worst-case, second quarter earnings are going to be fun to watch, but I suspect we're going to start seeing warnings sometime around the end of May, which is just a few short weeks off. Right now guidance is being maintained by retailers, which looks to me to be a brave face on what is almost certain to be a nasty reality - if same-store sales continue to be weak then how can you maintain guidance for earnings growth? It looks to me like everyone is trying to believe that April's numbers were a "glitch" - I'm not buying it.
I would love to see the the counterpoint to this - how does the consumer continue to spend at an increasing pace when their debt is shifting to higher-interest instruments and total debt load continues to rise?
If that's all there is, we should see a "walking down" of the markets - not a dramatic crash - but losses nonetheless. The Fed might be tempted to cut interest rates, but how can they while real inflation rates are in fact quite high and while other governments are raising rates? If the Fed cuts rates in that environment it results in a flood of capital out of the US and into foreign debt instruments with better yields, which causes bonds to sell off hard - real interest rates go up even though the Fed cut rate and the dollar tanks at the same time!
The only way I can see the Fed getting out of this box is to somehow convince foreign central banks to cut rates in tandem with the Fed. This I rate as highly unlikely, because foreign bankers are increasingly concerned about inflation - as well they should be.
What could provoke an outright crash is fallout from the credit markets. If foreclosures and other mortgage defaults spike further, that could initiate it. A far more ominous development would come in the form of a failed LBO deal or, with continued softness in the economy, a spike of defaults in the commercial credit markets. China may choose to "take its pain now" rather than risk a market blowup just before (or worse, during!) the '08 Olympics, drawing down liquidity there and spreading the damage here.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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