"No warning can save people determined to grow suddently rich" - Lord Overstone

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The Cyclical Bull Market of 2009

Year 2008 eight has passed end it sure was full of surprises with collapsing banks all over the world, declining real estate prices, hedge fund blowups, bursting of the commodity bubble, Fannie Mae and Freddie Mac blowup, record high volatility in almost all markets, most automotive companies bankrupt or very close to bankruptcy, severe credit crunch, government bailouts of bank and automotive sector and of course crashing stock markets and record breaking pessimism.

In 2004 and 2005 I predicted that most of these events would come to pass and we would have a world economic depression. I must admit that I was a little too early as I couldn´t imagine the financial madness to go on for another 2-3 years before finally collapsing.

I was however wrong in my prediction that we would enter a world economic depression. (although this is what the mainstream media is now starting to call this economic downturn) If the free markets would have had their way and governments would have stayed out of the markets there are no doubts that we would have entered a new economic depression.

I believe in the free market as an outstanding regulator of economic activity, however short sighted governments all around the world panicked and threw money over the markets to save essentially bankrupt banks, insurance companies and car manufacturers and in the US the FED lowered the rate to practically zero.

The 2008 economic downturn was extremely swift and bad but the worldwide government fiscal and monetary stimulus action is also unprecedented. When this money comes into play in early 2009 together with record low interest rates there is no doubt in my mind that stock markets and economic activity will go up, most likely in a big way. This is of course contrary to what most people and the media have to say about 2009, but then again how often is the majority and media right about stock markets and economic activity?

Does this mean I believe there will be no depression and the bear market is over?

My answer is both yes and no. Yes I no longer believe that we will have an economic downturn as severe as 1929-1932, governments all over the world can´t take the political heat a downturn like that would trigger so they do whatever they can to stimulate the markets. Will it work? Yes it is very likely that the markets and economic activity will go up. In the short run. Instead of letting the free market get rid of companies with bad fundamentals and debt in a swift and painful manner but highly effective for economic growth in the long run, they have opted to bailout these companies and let them slowly try to repair their balance sheets, this option is less painful in the short term but will instead stall world economic growth for another 8-10 years before the bad debts are cleansed from the system and a new bull market can begin.

So we will not likely have a depression but the bear market is not over either, what I believe we will see in 2009 is a powerful cyclical bull market in a larger sideways bear market. This bear market looks more and more like the one Japan has been experiencing for 18 years and counting.

So let us take a look at the fundamentals for a cyclical bull market.

  • Interest rates are at zero or very low in most countries.

  • Governments across the world are competing who can launch the largest stimulus packages to help their respective countries resume economic growth.

  • Commodities prices have collapsed in unprecedented fashion which will help companies gain back their pricing power.

  • After the stock market panic in 2008 stock market valuations look very attractive and there is a lot of money in cash and bonds that gives a very poor return on investment when interest rates are approaching zero. This money will give the cyclical bull stamina once it gets moving.

  • Many countries have been in recession for well over a year and the pent up consumer and business demand will propel markets higher when people realize the worst of this economic downturn is over.

  • Subprime loan problems will reside and with zero interest rates the housing market will likely pick up in 2009 and the credit markets will return to normal. See chart.

  • Deflation is likely peaking at the moment and with the entire stimulus in 2009 inflation and pricing power will likely return. Massive layoffs and plant closings will result in impressive earnings as soon as market demand turns back to normal. See chart.

Conclusion: The stock market outlook for 2009 looks very promising contrary to what most people think about the economy in the new year. If 2008 was a very bad year 2009 will likely surprise most people to the upside. I hope you all prosper in this new cyclical bull market!

 

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