The Three Bears

I think 2012 will go down in history as a time when the global debt bubble came to an end. We surely will witness the first of many sovereign debt defaults this year. We also could witness the end of the euro. But most importantly, we will watch the end of easy money. My friend John Mauldin calls the expected conclusion of the debt super cycle the “endgame.” It is that point in time when governments no longer are able to finance their promises through deficit spending.

We also will be selecting a new U.S. president or reelecting Barack Obama this year. In either case, the person who gets the job will have to deal with our fiscal dysfunction of $15 trillion in debt, annual deficits of a trillion-plus dollars per year and unfunded liabilities of many trillions more.

This year also will spotlight Europe’s grand experiment of economic union. The growing conflict between euro-zone nations seems likely to come to a head. The wild social promises made by politicians and the strict union rules for employment have ruined the economies of Greece, Portugal, Spain and Italy. A great crash is coming and now is the time to get your personal financial house in order so you and your finances are able to survive the havoc that Europe’s problems will bring to the rest of the world.

The global economy is slowing but Europe, the largest economic bloc in the world, is going into recession. The results are clear to me; this global slowdown is about to get a lot worse. If we also get bad news out of China, we could be in for another 2008-style global recession.

 

Take a look at each of the following three charts. I call them "the three bears."

 

These charts tell quite a story. You see, there are long periods of time when stocks go nowhere. Such instances occur after we have had long periods of outperformance by the indices. The first secular bear in the 20th century followed a period of time called the roaring ’20s. The U.S. economy expanded rapidly and stocks screamed higher during 1920-1929. We all know from our history books what happened next: the Great Depression. Stocks fell more than 80% in value. It took more than 20 years for stocks finally to break out to new highs.

Then there was the secular bear market from 1966-1982. This period of time followed the great Eisenhower, post-World War II boom. Once again, stocks soared in the ’50s and into the ’60s, only to hit a wall in 1966 with the first of two major bear markets in the span of just 10 years. Stocks did not break out until 1982. This secular bear market took 17 years to come to an end.

 

Now, let’s consider the year 1999. This was the end of the ’90s, a decade when stocks outperformed their historical average by 70%. Stocks compounded during the decade of the ’90s at a 17% annual rate. Add to that situation the decade of the ’80s when stocks compounded at 15% and you can see why this current secular bear dragged along for some time. We now are 13 years into a period where stocks have gone nowhere again.

This market sluggishness is no way for us to calculate when this current secular bear will come to an end. But we want to be aware of these long-term trends to make good decisions about managing risk in the years ahead.

 

In my Successful Investing advisory service, the Fabian family has been helping investors manage risk for over three decades. If you’re in a quandary about what to do with your money, then why not check out Successful Investing today.