I’ve argued now, for longer than I wish, that we are in a secular bear market driven by global imbalances.  While rallies are sure to ensue during the secular bear it’s important to understand that a secular bear generally doesn’t end with a few bailouts and a return to the good old days (think 2003-2007).  Secular bears end when the excesses that caused the prior bull are extinguished.  In our predicament, it’s impossible to make the case that this is currently true.  The flawed Euro currency continues to wreak havoc throughout the region.  The flawed Chinese currency peg continues to impose imbalances on the global economy.  And the financalization of the global economy continues to infect the entire system – primarily the United States.

Although we’ve kicked the can I think it’s fairly safe to say that nothing has really changed since March 2009.  We’ve merely papered over the bigger problems.  This doesn’t mean things haven’t gotten better.  They have.  And I fully recognize that we could be experiencing a repeat of the 2003-2007 period when equity markets were generally positive, but global excesses largely remained.   At some point, however, these problems must be dealt with head on.  The debt must be removed, the Euro must be fixed, the Chinese must work to fix their imbalances and the United States needs to stop with policies that promote imbalances within its own economy.

When will this all occur?  It’s impossible to say.  It’s clear that Ben Bernanke and the US government have no desire to give up on the Milton Friedman/Alan Greenspan playbook that got us into this mess.  The Europeans are making solid progress towards resolving the Euro crisis, however, the flaws largely remain.  And the Chinese are beginning to discover through inflation that they have created their own imbalances.  My guess is that one of these problems will cause a more pronounced problem in the global economy in the coming years and force real change.  When will that occur?  Probably not until government’s recognize the gravity of the situation and work towards actually fixing the problems as opposed to papering them over.  That might involve some pain and we all know governments are now convinced that you can have capitalism without pain.  But as Kyle Bass says, capitalism without losers is like Catholicism without hell.

Pring Turner Capital Group recently published the following commentary and excellent chart showing the average secular bear.  It succinctly puts the average secular bear into perspective:

“If the current bear does follow the average path in a broad sense, our historical study suggests 2011 could be a challenging year.  We are in no way predicting that a new down leg to the secular bear is about to get underway because that would require evidence of a new emerging cyclical bear and that is not yet on the table. What we are saying, is that confidence is still excessively high by traditional standards, valuations are still too expensive and therefore, investors need to be on alert for a resumption of the secular bear trend.”

While there is ample evidence of economic improvement in recent months I still believe there is zero evidence that the secular bear market has ended.  This doesn’t mean there isn’t a great deal of money to be made during the bear market (on both the long and short side), but at some point we must recognize that our global imbalances all remain.  Admission is the first step.  We’re clearly not there yet.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • LVG

    Good stuff Cullen. How are you positioned currently? What’s your ER saying?

  • pjf

    As long as Cramer is on the air it is a certainty that the bear market has not finished its work.

  • Zac

    Quite a contradiction to CNN Money’s perspective this morning:

    Everything is fixed, and worst case scenario we steadily climb towards 1300 S&P. Overlaying their picture on your graph above would be nice for some comic relief. I realize the projections in the CNN article are survey-based, and thusly a reflection of the over-inflated optimism currently out there. And I realize too, that their predictions very well could come true, but that is hardly a responsible or even helpful commentary. But such is analysis fit for mass consumption. Yours, on the other hand… gives us something to think about at this juncture.

  • Cullen Roche

    They could be right. I don’t ever pretend to be able to forecast out more than a quarter, but I know one thing – the problems that caused this crisis are all still in existence. They may have been partially cleaned up to some extent, but I don’t see that much has really changed. Are we that much different than we were in 2007? Or are we promoting and encouraging the exact same behavior that caused 2008? We could rally to new all-time highs for all I know, but the imbalances will reappear and when they do we’ll experience another great big collapse.

  • rg

    you bears are funny. Been calling for this top for over a year and half. As the market goes up you say no way as we experience pullbacks you say more more more. As we recover you say no way. It is great to watch and easy to trade off of you. Thanks

  • Cullen Roche

    You might be wise to actually familiarize yourself with my work before you run around labeling me as a permabear or other inapplicable labels. I’ve actually been long on many more occasions in the last few years than I’ve been short. And yes, while a buy and hold strategy since 2009 would have been superior to my tactical approach let’s not forget that I also sat out the entirety of the 50% crash.

    My outlook over the last 4 years has been that we are in a secular bear market caused by global imbalances resulting in excessive debt levels. So, I’ve been implementing a short-term approach that focuses on managing risks rather than just blindly buying and holding an index. That approach has served me well over the course of this cycle as stocks tanked in 2008 and I was fully hedged from such an event. It has not served me quite as well in the last 18 months since the market bottomed. I am not a permabear. In fact, believe America will be a much better place to live in 10 years than it is today. I am not long-term pessimistic. I merely believe we are in a period of difficult economic growth in the short-term which increases market risks. So, I continue to manage the short-term risks, but am far from being pessimistic on America in the long-run. I have never claimed to be infallible, but on the whole I have stubstantially outperformed a buy and hold approach over the last 5 years. And despite being bearish many of my calls over the last 18 months, have been the absolute most opportune moments to be long and short (and I have in fact only been net short at 3 points during the last 2 years – June 2009 briefly, April 2010 and November 2010 briefly):

    2009 investment predictions:

    Updating my early 2009 calls:

    Updating my calls from 08 & 09:

    Multiple calls to buy stocks before earnings season in addition to multiple calls that buy and hold investors should stay long for the long-term:

    Flash crash short call:

  • js

    bulls like ‘rg’ are funny bc they like to forget their massive losses during corrections.

  • FDO15

    RG – how much did you lose in 2008? Are you just getting back to even? Of are you still 20% off your peak portfolio highs like most investors?

  • Zebra

    TPC do you think the new congress will make any difference in terms of dealing with the debt issue? Thanks!

  • Cullen Roche

    Will they reduce the deficit? It looks to me like they’re all talk for now, but we’ll have to wait and see.

  • rg

    I have followed you for a while and I do understand you try to put both spins on but the majority of your analysis has been trying to support calling a top.

    FDO15 –

    By the way QQQQ put in a high above the 07 high and small caps are almost at all time highs. So if you held through you are even or above.

  • Cullen Roche

    I’ve explained my approach before. I focus almost exclusively on risk management. It’s not the positives that trip up a portfolio. So yes, the vast majority of my analysis is focused on what can trip up a portfolio. If you want to label me a permabear because of that then that’s your opinion, but it’s misleading. As I’ve said before:

    I’m not pessimistic by nature. In fact, I am quite the optimist (I was very optimistic about the U.S. stock market even at the beginning of 2009). But I view the trek up to the top of the investment mountain as being full of risks. Seeing butterflies and rainbows sure make the trek more enjoyable, but won’t guarantee that you ever get there (just ask the millions of baby boomers who have been fooled by the myths of buy, hold & hope!). Anyone can get caught up in the beauty and wonder of a butterfly or a rainbow (or a bull market!), but it’s the cautious observant who steers you clear of the loose rocks and the avalanche attached. If you don’t watch out for potential pitfalls I guarantee that you’ll never get to the top of the mountain.

    This website is a reflection of that approach. Of course, I’d be lying to you if I said that I spend most of my time reading articles about butterflies, rainbows and v-shaped recoveries. As a risk manager I spend most of my time finding risks and fending them off before they blow me up. I still consider my move to cash in August 2008 and my October crash call as the single greatest investing achievement of my career even though it was followed by underperformance in 2009….I hope readers understand this risk management focused approach and find my (sometimes) negative bias helpful in avoiding their own potential portfolio debacles….

  • eludog

    Cullen, I think your die hard readers understand where you come from very clearly. Thanks for the great site. It really is the best bang for your buck out there:)

  • Dan Dell

    “But as Kyle Bass says, capitalism without losers is like Catholicism without hell.”

    I believe that it was Allan Meltzer who first coined the phrase: “Capitalism without failure is like religion without sin. It doesn’t work.”

  • Whiskey Tango Foxtrot

    So if excessive debt is still the long term problem – why can’t Banana Ben just keep buying up bad debt – even if it gets into the multi-tens of trillions?

    Its worked so far. Works for the ECB too.

    None of it will ever be paid off of course, but the only thing that matters is the next election cycle – right?

  • Goldfinger


    Here is a nice article about Albert Edwards’ macro analysis and predictions. The guy has been right many times before. Enjoy:

  • http://none rhp


    This article by William Black reinforces your idea that a lot of the things that brought on this economic downturn remain to be dealt with:

    Not that the housing crisis was the only thing that brought down the system, but if you think Bernie Madoff was big, this dwarfs him by a factor of 20-40x or so…….

    I don’t exactly know how this kind of money “looting” and misallocation of financial resources bears out on an economic cycle, but it does nothing to restore confidence in the free market system. Ultimately, it would seem to bring ruin on a system if not corrected. The more I read, the more it seems that much of the leverage that the average consumer is deleveraging from has a large component of white collar crime attached to it. As long as the crime is allowed to continue, it will be a huge weight on any type of constructive economic policy. rhp

  • Cullen Roche

    Thanks Goldfinger. Edwards is good. A bit too permabearish for my taste, but his work is generally very good.

  • Matthew Claassen


    You will find a similar, but more detailed analysis of the Secular Bear pattern in something published on PragCap a few months ago:

    The market is due for a top in the the first half of 2011, but the Fed has the ability to draw out the bull market, at least for a while.

  • Daniel

    I like the charts from Doug Short

    and a similar chart to the one above

  • http://buzz nottpc

    What progress have the europeans made? They have just papered over the same debts. Did I miss the part where they all went Icelandish the past few weeks?

  • Cullen Roche

    I think they might be closer to unifying than many think. A permanent EFSF is essentially a first step towards a unified treasury.

  • boatman

    this chart illustrates the reality we are in…….but the answer to the title is still no.

    ultimately QE2,3,4 will not keep us from 1937.

    just my take is all.

    thanks for everything Cullen.

    i’m thinking your next step is a paid subscription newsletter…. of course i’ll have to use irrational gold profits to pay for it…..but i know you will accept it!

  • http://none rhp

    Well, considering the BoA settlement excuses BoA from any further liability from the $123Billion in countrywide mortgages and BoA surges, I would say the market may run higher and the taxpayers may run lower. Private sector jobs were nice to see this morning

  • Roger Ingalls

    It’s good to see you clearly enunciate your guiding principles. You manage to present clear risks, without fearmongering.

    A suggestion: Place your philosophy on a more accessible menu.

  • boatman

    i read it when you first put it out……this time i’m bookmarking it.

    might even copy it n put it under my pillow.

  • NR

    After the real estate market plummeted and Americans have taken tremendous losses 9 tn USD worth since 2006, the FED will do anything they can to support the stock market. They know if the stock market declines as well as the real estate market did before, the country will fall into a great depression. The US private sector holds 25% of their entire assets in stocks. If the stock market goes into a secular bear market, the FED may be disempowered for all time. I don`t bet that this will happen.

  • OntheMoney

    Interested to hear your reasons for believing Europeans would voluntarily unify their fiscal policy. I think you’d see blood in the streets first.

    From this (Brit) side of the pond, the only way I can see it happening is as a result of a truly monumental crisis; to accept a central Treasury (implying the end of traditional sovereign government in Europe) citizens across the zone would have to conclude that the alternative is certain catastrophe. Unless that occurs, expect to see the exact opposite when sh*t finally meets fan: countries frantically bailing out.