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Why the Next Bear Market Will Be Different


You don’t have to be a chartist to discern the weight of supply sitting on the stock market right now.  The steep pitch of early February’s plunge tells us that many investors were caught completely by surprise. Although some undoubtedly expect shares to binge anew to untold highs, it’s possible that even more are waiting for a strong upswing that would allow an exit with less-than-stellar gains. That is the nature of the supply overhang mentioned above, and it will tend to limit the rallies. It will also exacerbate the downdrafts, with each new wave of selling persuading more and more investors to exit on the very next show of strength. Those bear rallies will come, but usually not with sufficient vigor to allow a satisfying exit by most or even many. The herd will not be quite as greedy when yet other opportunity to escape comes, but Mr. Market will anticipate this with an even more disappointing rally. This dynamic explains why bear markets most commonly turn ugly not when stocks are falling from record highs, but when rallies to lesser peaks sputter out after having failed to reach hoped-for levels.

FAANG Stocks Falter

To this sobering picture we must add a weighty accretion of negative stories that recently have turned some previous high-flying stocks leaden.  The shares of Google and Facebook, to name two, have gone flaccid due to the intense scrutiny the companies are getting in the U.S. and Europe over the way they gather information about their customers and exploit it. Tesla’s abysmal failure to hit production targets for the highly vaunted Model 3 has called the company’s very survival into question. Apple’s overrated smartphones, with their notorious battery problems, are finally meeting serious price resistance from consumers; and even the shares of Netflix, whose stock has soared as though everyone on the planet will eventually become a paying subscriber, have failed most recently to hit technical levels that should have been easy to attain. Moreover, all of these companies and many others will be challenged to beat earnings that at last glance reflected a perfectly-tuned economy that was hitting on all cylinders.

Despite the dark clouds on the middle horizon, there are signs the broad economy could continue humming along, keeping the stock market buoyant while ameliorating the odds of a crash. A tight job market has yet to produce any significant inflation. And the Fed, with the help of their clueless stooges in the news media, has been able to sustain the illusion that prosperity can go on for as long as the central bank desires.  No one even questions why, even as the Fed purports to tighten, the supply of credit — for housing, automobile purchases and leases, college tuition, stock buybacks and what-have-you — has never been easier to access. (This situation will change precipitously when the yield curve finally inverts, but we’ll save that discussion for another day.)

Why the Next Bear Market Will Be Different

A mixed bag for sure — one that would not preclude a stock market rally to new highs — nor, for that matter, the halving of share prices in a a relative trice. If it is the latter that occurs, or even just a pale version of it, it will unsettle America’s future like no bear market before it. That’s because Millennials and Gen-xers who continue to struggle to get on solid financial footing are about to take on nearly the entire financial burden of Baby Boomer Medicare, Social Security and public pension systems headed inexorably toward bankruptcy.  That this is occurring in the very best of times is scary. It would seem less so if the stock market were to double again from current levels. However, as a practical matter, that would not mitigate the predictable outcome, only make it even more catastrophic and precipitous ultimately.

Bottom line, we owe too much collectively to pay off our debts through any mechanism other than deflation. This is a very likely outcome in my opinion, if not to say inevitable, and it is BORROWERS, not lenders, who will pay the price.  Some have argued that our debts could conceivably be discharged via hyperinflation. However, this seems extremely unlikely to me, in part because debtors, including anyone with a mortgage, would skip free. There are dozens of other good reasons why we should expect the global financial disaster that lies ahead to start with an implosion — i.e., a deleveraging of financial assets — rather than with a hyperinflation. I have been writing on this topic for nearly 30 years and am willing to debate it any time, any place, with anyone.

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Dan April 2, 2018, 5:05 am

“Bottom line, we owe too much collectively to pay off our debts through any mechanism other than deflation.”

QUESTION: Does “DEFLATION” = “DEFAULT” (as in default of DEBTORS ?)

“… it is BORROWERS, not lenders, who will pay the price”

QUESTION: How can it be that ONLY “BORROWERS” (debtors) will pay the price ? If I am in debt to you for $100, and I don’t pay, you the LENDER lose. If the debtor has pledged collateral, then the lender recovers some portion of his loan, but typically far less in the amount which he loaned. And if there is a massive “deleveraging”, with a lot of lenders trying to liquidate recovered collateral all at the same time ?

The only way a “LENDER” does NOT lose in that situation is if it is one of the “too big to fail” banks/financial institutions….maybe the last man standing will not be the US government, or Gold, etc., but Goldman Sachs.


The initial burden and legal responsibility for paying debt will fall on the borrower. In that way, deflation will hit debtors in proportion to their sins. But yes, as you say, if the debtor simply can’t pay, it will be the lender who does.

In practice, it is entirely predictable what will happen in residential real estate: Instead of a wave of defaults that would crush the banking industry, most mortgages will be rewritten as, effectively, leases. We are halfway there already, since few who buy a shitbox for $700,000 in, for one, Southern California imagine they will someday own those homes free and clear. More and more buyers are thinking this way — i.e., they will make mortgage payments they can barely afford for as long as they live in their homes; then they will sell those homes for a tidy profit and move to ‘something nicer’ that they can even less afford. This dynamic can only end badly — will end when the bull market in stocks ends. RA

PRS April 1, 2018, 9:51 pm

The old saying, ‘when interest is low, stocks will grow. When interest is high, stocks will die.’ Now interest rates are by no means high but they are higher than they have been in a while and are probably only headed higher. This will be a serious headwind on markets.

Harry Hv April 1, 2018, 6:58 pm

Rick, why should it be different this time? Think of any of the thousands of governments and emperors who have resorted to printing money to pay the bills. Then printed more money like confetti and handed it to their cronies, to outbid one another for artwork and mansions. The result, in thousands of historic cases, was always the same – the confetti became worthless

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