DAVID ROSENBERG: IS DOW 5,000 REALLY POSSIBLE?
Some deep thoughts from David Rosenberg on the likelihood of a secular bear market and potential new lows:
Well, well, so much for consensus views. Like the one we woke up to on Monday morning recommending that bonds be sold and equities be bought on the news of China’s “peg” decision. As we said on Monday, did the 20%-plus yuan appreciation from 2005 to 2008 really alter the investment landscape all that much? It looks like Mr. Market is coming around to the view that all China managed to really accomplish was to shift the focus away from its rigid FX policy to Germany’s rigid approach towards fiscal stimulus.
What is becoming clearer, especially after the latest reports on housing starts, permits, resales and builder sentiment surveys, is that housing is already double dipping in the U.S. The MBA statistics just came out for the week of June 18 and the new purchase index fell 1.2% – down 36.5% from year-ago levels and that year-ago level itself was down 22% from its year-ago level. Capish, paisan? So far, June is averaging 14.5% below May’s level and May was crushed 18% sequentially, so do not expect what is likely to be an ugly new home sales report for May today to be just a one-month wonder. Meanwhile, the widespread view out of the economics community is that we will see at least 3% growth in the second half of the year: fat chance of that. What is fascinating is how the ECRI, which was celebrated by Wall Street research houses a year ago, is being maligned today for acting as an impostor — not the indicator it is advertised to be because it gets re-jigged to fit the cycle.
From our lens, there is nothing wrong in trying to improve the predictive abilities of these leading indicators. Still — it is a comment on how Wall Street researchers are incentivized to be bullish because nobody we know criticized the ECRI as it bounced off the lows (not least of which our debating pal, James Grant). For a truly wonderful critique of the ballyhooed report that was released yesterday basically accusing the ECRI index as fitting the data points to the cycle – not the case, by the way – have a look at ECRI Weekly Indicators Widely Misunderstood that made it to our friend Barry Ritholtz’s blog (“The Big Picture”).
As for the equity market, we are at a critical juncture and it could break any day. After successfully testing support at the key Fibonacci retracement level of 1,040, the S&P 500 has since bounced up to the 200-day moving average of 1,115 – and this failed to hold. Resistance prevailed. My sense is that the market will break to the downside, and for three reasons:
1. Even if a double dip is avoided, the market is not priced for a growth relapse.
2. The intense volatility in the major averages over the past three months is consistent with the onset of a bear phase.
3. Bob Farrell believes a test of the March 2009 lows is likely. I don’t think anyone is in a position to debate five decades of experience, not to mention his track record. Louise Yamada, a legend in her own right, not to mention the likes of Bob Prechter and Richard Russell, are on this same page. Notice how none of them work at a Wall Street bank.The chart below shows over 100 years of the Dow in real terms. There are a few conclusions from this:
- Secular bull and bear markets typically last 16 years
- During the secular bear market, most if not all of the prior gains made (again,in inflation-adjusted terms) in the prior secular bull condition, are wiped out. Look closely at the chart and there is a very subtle upward drift – the secular low points rise over time, albeit fractionally.
This is the information contained in the chart; do what you like with it. Assuming inflation averages 2% annually and that 2016 marks the end of this secular bear episode (seeing as it began in 2000) then the historical pattern would suggest a test of 5,000 on the Dow as the ultimate trough (at that point, gold will likely be 5,000 too). This does not preclude cyclical rallies along the way, but these will be “bear market rallies” such as we saw from March 2009 to April 2010 and investors should not be tempted into any other strategy than to rent these rallies and not own them.
Source: Gluskin Sheff
The bull phase of this last cycle was a bit longer than the others (18 years), and higher too, and so the duration of the bear phase could be a bit different also. If the bottom is 2020 instead of 2016 it would still fit the pattern.
So TPC, next week teach us to catch a falling knife.
now why would I do that?
Yea buy BP.
Please don’t. BK is a very serious risk there. There is far less risk on the periphery….
Didn’t Mr. Rosenberg get bearish at Dow 7500, Dow 8500, Dow 9500, Dow 10000, and Dow 11000?
Stopped clock, right once a day, etc.
And LOL at gold at 5000.
Well even if one knows the future direction of the market, one cannot time it perfectly.
Ah yes, good old EMH….
Rosenberg is a macro guy. You don’t trade his ideas. Just absorb the macro data from him and figure out how to apply it. If he were a trader he’d have run the Merrill equity desk and not their research group….
If he isn’t a trader, he shouldn’t be making calls based on “technical analysis” in public.
TPC, Since it appears discussion has stopped on the thread concerning bond auctions I wanted to post this here. I understand that China doesn’t fund our spending. However, if China all of a sudden stopped buying Treasuries what impact would that have? Would a bigger problem occur if instead of buying Treasuries they sold the dollar and brought the money back to China, thus putting a lot of downward pressure on the dollar?
I have read many of your great articles but I have not seen you address what would happen if China stopped buying them (not that I think that this will occur but I am just trying to understand where they fit in.
Thanks a lot for your work.
Perhaps we would have stop going at Wal-Mart
«Look closely at the chart and there is a very subtle upward drift – the secular low points rise over time, albeit fractionally.»
Note also that this is a *DIJ* chart, which of course includes significant survivorship bias. The real returns on the stock market by the average investor are nowhere as good as those indicated by the DIJ.
It would be rather more interesting also to deflate stock returns not with the price index, but with nominal GDP (do stock prices return at least the rate of GDP growth?).
Also while low points only gently rise (if at all), peaks have risen quite a bit faster, as the government has financed ever greater credit bubbles to enable the financial sector executives to skim off ever higher tops, especially since Reaganism and Gingrich’s Contract on America.
Thank u for this article.
I think the debt bombs will drive the Nation into the stone age.
costofwar.com