Juggling Dynamite

For the past several years, I have been writing about the likelihood that world stock markets entered a long secular bear cycle in 2000. In history these secular bear cycles have always followed long secular bull cycles and have averaged about 17 years from start to finish. The last secular bull cycle was 1982 to 1999. I thought it likely that this secular bear started in 2000.
When stock markets moved up from 2002 to 2007, I received many comments from people who took issue with the secular bear thesis: “stocks have been moving up for 5 years, so how could we be in a secular bear?”
The fact is that the cyclical bull in stocks during the expansion phase of the business cycle from 2002 to 2007, did absolutely nothing to negate the probability that we were and are still within a secular bear climate that could last another 7 to 10 years.
This big picture secular thesis is so far reinforced by the following three charts:
The Dow Jones Index has been range bound since 2000:

The S&P 500 has fared even worse, now down more than 30% from its last cycle peak over 8 years ago:

Both of these broad market indices have been harder still on Canadian investors who suffered further declines exasperated by the falling US dollar for 7 years to 2007.
The TSX Composite after much thunder and flash, and in its typically lagging pattern, is now falling back to retest its 2000 peak:

Why do we care about this?
We care because this means passive equity investors have suffered incredible volatility for the past 8 years and have had negative real returns for their reward.
We care because during secular bear climates, cyclical bears like the one that began in 2007 tend to last several months longer and drop considerably further than bear markets during a secular bull phase.
We care because buy and hold investors have been hurt over the past 8 years and their pain is likely to continue for several more years. We care because the long-always investment industry doesn’t seem to give a damn.
Its not that investors cannot make gains during a secular bear climate, its just that someone has to be focused on keeping those gains each business cycle. Sucessful strategies must be tactical about protecting capital from the end of cycle declines.

Ms. Park will be interviewed on CBC News Today with Suhana Meharchand at about 1:20pm est. They will be discussing this week's market action and the Federal Reserve interest rate decision today.

Many people are angry and upset over the trend of recent events and mounting financial losses around the world. The list of those who bear guilt in this fiasco is long.
In the final months of election campaigns in Canada and the US, it is presently very popular to blame the current mess on failures of the Bush administration, regulators and Alan Greenspan. I agree they are all culprits in the present mess.
It is also popular to blame the executives on Wall Street, and I agree they are extremely culpable in this.
It is not so popular to blame the lazy, somethin’ for nothin’- consumption and risk-addicted behaviour of individuals who have helped to orchestrate their own demise. But individuals are clearly to blame too.
At the end of the day, no one party was to blame for present turmoil. So the reality is that no one party can fix it. Collective action through individual responsibility and behavioural change is the only way forward.
Recessions and bear markets are times when gains that were recklessly made in bull times are taken back. Bear markets are the time when the masses discover that those they deemed genius now profoundly disappoint.
The fact is that no CEO or analyst or big bank or government body is ever in charge of the prices bid on investment markets. I repeat no one person or body no matter how competent or educated or charismatic they may seem are ever in charge of the bid on investment markets. Investment markets (stocks, bonds, commodities, futures, currencies) are all secondary auctions. They are all priced by the collective bid of the masses.
The only valuable risk management that any of us can employ is to control our own behaviour and to control when and how we allow our own savings to participate in capital markets. When and how we participate means that we must control the type of assets, the amount of each asset and especially the TIMING of our own exposure to each asset cycle. If your investment advisor tells you they do not try to control for timing, then get another advisor or get out of secondary markets altogether. Trying to participate blindly will be harmful to you and your capital over time.
Most people spend most of their time following and commenting on absolutely useless factors. People will talk about how smart or experienced management is. People will talk about how great profits have been. People will talk about how “solid’ the balance sheet looks; or how many people live in Asia. These factors are all absolutely irrelevant to what is happening to our investment capital today or next week or next year. All that matters in real life is where we are at with in the cycle of prevailing market sentiment.
The market sentiment now is increasingly negative. And so it should be. We have been through a lengthy period of utter idiocy. People of all walks and areas have been ignorant and wilfully blind to the dangers that were mounting. Now they are suffering for their poor decisions. It is not easy or fun to watch but it is inevitable and cathartic and ultimately necessary to clean out the BS and set up for the next real demand driven expansion.
While everyone is presently distracted with the collapse of Wall Street (sorry but collapse couldn’t happen to a more deserving bunch a ‘fellas. And I say that in the kindest possible way), the next horror is going to be the impacts of credit evaporation on the already teetering economy. Earnings expectations are still way too high.
We will either revert to the mean quickly and sharply over the next several weeks. Or we will do it in slower fits and starts over the next several months. It is happening. Your only decision is whether you let it happen to you and your savings.