Look closer: Why Hasn’t the Bear Market Attacked Yet?

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Rarely does a grizzly bear attack someone while it’s gorging on salmon upstream. That same analogy describes exactly why the bear hasn’t attacked the financial markets yet.  It’s way too busy trying to gorge on cheap currency provided by the Federal Reserve and the other national banks that continue creating cheap currency.

It’s all done in an attempt to keep the financial markets stimulated. But that doesn’t mean the bear is going to simply go away and hibernate once governments and banks stop printing cheap currency. With rock bottom interest rates, there’s not a lot of calories behind these currencies.  Which means the bear market could  still be very hungry since its major food source is this cheap currency.

So how did we get to this situation?  Look at this.

SP500 - 2010

It all comes back to the heart of the financial crisis of 2008.

Featured in the article Dead Cat Done Bounced, this chart clearly shows that once the S&P 500 hit $666 in 2009 it bounced off this low point like a diving board and was ready continue its splash into the water.  Since the currency flow had dried up in the United States and the rest of the world, there was no way for the financial markets to stay at the high levels it was accustomed to.  This was all mostly thanks to the horribly bundled sub-prime mortgages in the United States.  These sub-prime mortgages carried an unprecedented level of bad debt and left major financial markets without enough usable currency to sustain itself.  Thus a 2nd crash was inevitable.

I view the 2009 rally as nothing more than a dead cat bounce that has been fueled by government stimulus, quantitative easing, accounting trickery and unprecedented investor optimism. But faith in the markets seems to be running a little thin lately, as the rally begins to lose steam and reality begins to set in.

But years later, the 2nd crash still hasn’t happened.   Here’s why.

Remember Danger #1 and Danger #10 from the Ten Dangers of Investing?

  • DANGER #1 – The Mainstream Media Will Not Tell You There is a Financial Crash Coming Until It’s Too Late.
  • DANGER #10 – The Investment World is Getting More Dangerous While the Political Environment is Getting Worse – The 30 Day Test

Every single time the markets get ready to dip again into a recession,  another round of government stimulus and quantitative easing comes in to artificially save it.  When QE1 was finished, the market was ready to head back down again.  Then came QE2 to prop up the market but that didn’t completely do the trick either.  So now we simply have continuing rounds of quantitative easing each month with the occasional discussion of tapering it off .  Thus the bear market eats some more un-fullfilling currency calories and the financial world is “saved” once again.

But all this artificial stimulus comes with 2 hefty price tags;  DEBT and INFLATION

In the end it comes down to simple math. You simply cannot keep printing currency out of thin air without the DEBT and INFLATION monsters rearing their ugly heads. Currency is created from DEBT.  All bonds, especially treasury bonds, is debt which needs to be repaid exactly like those horribly bundled sub-prime mortgages.   So when all that debt, including the national debt, gets too high and people try living within their means and stop borrowing more money to create more debt, the financial markets will have no choice but to deflate.

That could possibly leave the bear market very angry.

Enter the second monster: INFLATION. Inflation is simply the purchasing power of your currency getting less valuable.  The cost of goods is getting higher because the purchasing power of your currency is getting lower.  With all these calorie reduced currencies being printed each month through quantitative easing, prices eventually have to go higher. They must go higher.

In the end you need to protect yourself from both Deflation and Inflation

 

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About Author

Leslie Michael Jr. was born and raised on the Westcoast of British Columbia, Canada. He is a lecturer of Money Uncensored, a series of presentations designed for North Americans and people from around the globe to better understand the financial direction this world is headed and what they can do to protect themselves financially.

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