http://contraryinvestor.com/mo.htmThe above link will change once the September article is current, you can always scroll down to the bottom of the link for this article.
"Set against the magnitude of credit cycle issues of the moment that indeed have very meaningful implications for what will be the reality of domestic economic outcomes ahead, questions have arisen as to whether we are now facing a relatively run of the mill bear market for equities or perhaps a bear of generational proportion. The thought has clearly made the rounds that the US equity bear market started in early 2000 was simply interrupted to the downside in 2002/2003 by incredible domestic monetary and credit cycle stimulus, as was truly exemplified by the literal generational bubble that was blown in US residential real estate prices, acting to lift both the financial markets and economy itself for a time. Of course no one knows in advance what financial market behavior and price trajectory will be ahead, but we do hope there are some signposts that may be helpful in guiding us as to potential ultimate downside severity. The bottom line is that big time bear markets really do indeed come along maybe once in a generation. They are infrequent by nature. By this, we're really referring to the devastating bears. You know, the ones that can change lives, destroy fortunes, and generally have investors swearing off equities forever. As investors in the current generation, we've clearly been conditioned over the last three and one half decades to view equity market corrections as opportunities. For the bulk of American equity market history, this has indeed been the case. But every once in a while, it's different. Every once in a while, we hit a generational event.
Before going any further, we have absolutely no way of knowing if we've embarked on a big time bear. A big multi-standard deviation event. We just thought it topical to at least address the unthinkable as simply one possibility in a number of outcomes. As we've preached far too many times over the years, the key to successful investment management is risk management. And that quite simply means we need to have a game plan for all potential market outcomes. Although this is far from a pleasant thought, we're simply contemplating how we might identify "the big one", if you will, if indeed that is to occur at all. Sincerely, the reason we are addressing this rather unpleasant thought is that these types of devastating episodes often coincide with once in a generation financial market or real world events. In the 1930's, the devastating equity bear was accompanied by the peak of a generational credit cycle, ultimately leading to the reality of economic depression as reconciliation played out. In Japan during the late 1980's, the equity peak was accompanied by not only by the obvious equity bubble, but also a generational bubble in real estate valuations driven by their own credit cycle mania of sorts, likewise leading to Japan's own version of a "contained depression" in economic activity in the aftermath of the bubble peak. Without attempting to sound melodramatic, at the moment and although intertwined in nature, the US is facing both potentialities - a possible generational credit cycle peak, and a generational bubble in real estate that is now deflating. We told you this was not going to be pleasant, didn't we? The following chart chronicles the credit cycle dating back to the early 1950's. Just as an FYI, the peak in the 1920's was estimated to have been 270%. We're just a touch beyond that at the current time, no?
...........So as we move ahead in our present circumstance, we suggest using the 10 year moving average of S&P price in conjunction with the relationship between the S&P and its 200 month moving average to perhaps signal us as to levels of true generational risk in both the financial markets and real economy. Remember, what we have presented in this discussion is interpretive art. We're simply trying to identify the appropriate rhythm of historical experience against which to view the current cycle. We know US credit cycle issues of the moment are incredibly important. We have called them generational in character in our discussions for literally years now. The advent of economic and financial market globalization is incredibly meaningful change. From a demographic standpoint, we have the baby boomers on the cusp of theoretical retirement at the exact time the ten year moving average of equity price only returns is as low as anything we have experienced in close to a generation. And we know the boomers are going to need to at least partially liquidate the financial assets they have accumulated along the way (inclusive of pension assets) to fund retirement lifestyles they believe they deserve. From our standpoint, we believe the multiplicity of issues converging at the moment are far from routine. They are far from cyclical. This is secular in terms of convergence. Again, we warned you this perhaps venture into the dark side would not be fun at all. We simply believe that in cycles such as we now find ourselves, having a sense of the very big picture is quite important. We have no way of truly knowing what lies ahead. Plenty of guesses? You bet. No matter what the probability, we just want to make sure we've at least thought through and are prepared to act relative to any potential outcome. After all, the last time we checked, luck favors the prepared."