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Secular Bullpucky
by Mark M. Rostenko
Editor, The Sovereign Strategist
February 7, 2005

With the stock market poised to extend its cyclical bull trend, we have to wonder: “Shall we buy the hype? Is the Big Bear over and a new secular bull market emerging?” As usual, the so-called experts are not much divided on this issue: Stocks have always been a “buy,” are a “buy” now and will always be a “buy.” Few, among them your editor, have the courage and remarkable foresight to stand above & beyond and issue a resounding and definitive “Ummmm, I don’t think so.”

Secular bull markets result from the happy marriage of sound economic conditions and mounting optimism that give birth to a self-reinforcing cycle of increasing growth and genuine value-appreciation in the asset markets. Often that happy marriage is the outcome of years of “belt-tightening,” sweeping away of excesses, consumers, business and government getting their financial houses in order.

I’m not sure exactly who has tightened their belts over the past four years. Consumers are more indebted than ever, but own bigger and more costly homes and driveways full of SUVs, ATVs, and DVDs. Not exactly a case of “doing without to save for a more secure future.” Is it the government that tightened its belt? A raging budget deficit would seem to indicate the contrary. So does a national debt of $7.7 trillion, a figure which has been steadily increasing during these “lean years” and doesn’t even account for pension and Social Security obligations.

One of the hallmarks of a secular trend is the tremendous expanse that investor psychology travels, from low to high and then back again, hand-in-hand with market prices. Exceptional pessimism has historically characterized bear market bottoms and the emergence of new secular bulls. We’ve all heard the classic examples of Business Week’s “Death of Equities” article appearing towards the end of the last secular bull and pronouncements of the “permanently high plateau” shortly before the 1921-1929 secular bull peak.

At secular bull peaks, stocks are heralded as the gateway to eternal prosperity. At secular bear troughs, stocks are scorned, ridiculed, and ignored. The mood of the late 1990s and the extremes of bullish enthusiasm made a very strong case for a secular bull’s peak. Did we witness a similar, albeit inverse extreme of sentiment at the 2002 bottom? Hardly. Sure, we had a lot of disgruntled losers. But the speculators were back in full force shortly thereafter and it didn’t take long for volume to pick up at the major “little-guy” online brokerages.

Today’s situation is far more reminiscent of the 1970s secular bear than it is of the early stages of the 1980s secular bull. Then as now the dollar was in trouble. Then as now the government embarked on train-wreck fiscal policies, like defaulting on its obligations by shutting the “gold window.” Today, they give the same old unbacked money a pretty facelift every few years and then go about devaluating it still further.

Then as now commodities were in long-term bull markets. The 70s saw a major oil shock and a costly effort to liberate foreigners from the demonic clutch of communism. Today, to call record high oil prices is too shocking so our fearless Fed chief calls them “transient.” Communists are like, “so yesterday,” but liberating folks from nasty dictators is still fashionable, and a lot more costly.

I’m not arguing for a replay of the 70s, but it’s pretty tough to make a case for similarities to the early 80s when the last great secular bull began. Sure, interest rates were slashed but it was a whole different game in those days and for very different reasons. Rates came down from “crazy highs” to reasonable lows. This time around they’ve come down from reasonable highs to “insane lows.” And let’s not forget this most salient point: In the early 80s we were still the world’s largest creditor, not the entire universe’s and all of history’s biggest debt junky.

The details are not nearly so important as this general point: secular bull markets tend to emerge following periods of BALANCING. Balancing the books, shoring up the bottom line, sloughing off the fat and getting it all back on an even keel. Today’s cyclical bull market is the polar opposite: the direct result of massive IMBALANCE.

Perhaps the greatest imbalance driving this cyclical bull is that of absurdly low interest rate. It is a liquidity-driven rally. It is a speculative rally that began from overpriced levels, fed by an abundance of cheap easy money and a lack of places for it to go. China pumps out cheap goods and keeps the Walmart shelves stacked at reasonable prices, so the inflationary effects of printing far too much money far too fast has to go somewhere: stocks and houses, baby.

A lot of crazy stuff, a lot of imbalance can keep from slipping over the edge in the short-term. A cyclical bull can overlook a lot of problems. But imbalance doesn’t fuel ten & twenty year bulls. For that you need the real deal: investment, savings, new technology or business/political paradigms that fuel optimism and enthusiasm for the future.

Do we have that today? Do we have investors or do we have gamblers and speculators? Do we have an abundance of savings or an excess of borrowings? What’s the new technology? Google - a search engine? (The Internet already fueled the bubble stage of the last secular bull. It won’t fuel the next one.) What’s the new business/political paradigm? Imperialism and a perpetual war on terrorism?

In time these factors will resolve themselves. In time we will find balance. Even war and terrorism will find equilibrium, if not long-term solutions and peace. It always does. Debts will be reconciled, as they always must. But to suggest that any of those balances have already been found is patently absurd. We’re still ramping up the imbalances and barely acknowledging their dangers. Stocks may climb and stocks may fall, but this is no secular bull. And like all cyclical bulls, this one will fade into the backdrop of the current secular bear in time.

© 2005 Mark M. Rostenko
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