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September 20, 2004

Get Religion With Secular Bears
by Chuck DiFalco

Most of us Americans don't know or even care if we are in a "bull market" or not. The origin of the terms "bull market" and "bear market" to denote rising and falling price trends, respectively, remains murky. Perhaps you should use the simple mnemonic: you eat a bull, and a bear eats you. My only prediction in this article is that sooner or later you will care more than you do now about market and economic issues impacting your lifestyle.

While a few of you readers already knew this market jargon before reading the above, even you should know how loosely those terms are used in the popular media. Bull and bear markets are usually associated with stocks. These words, however, can refer to any other investment category, such as bonds, gold, real estate, economic sector equities, currency, and collectibles such as art. The problem with using "bull market" and "bear market" derives from the vagueness of the timescale. As usual with the short attention span of the talking heads on the financial TV news, the unspoken assumption is that the time scale refers to the smallest cycle used in the technical financial literature. The briefest price trends, also known as "cyclical" bull and bear markets, to which investors (as opposed to traders) pay attention, last several months to a few years. For example, the US stock market experienced a cyclical bear market from early 2000 to late 2002, and a cyclical bull market from late 2002 to 2004(5?). Generally, up markets are longer than down markets. Why? The human experience shows us that destruction is easier than construction, and this truth applies no differently to macroeconomic institutions.

So if a cyclical market is the shortest price trend important to investors, what lasts longer? The terminology is "secular bull" market and its counterpart "secular bear" market. A secular bear? Is that a grizzly without religious conviction? Actually, the adjective "secular" comes from the Latin word seculum, meaning a generation, or an age. Thus, a secular bear market endures on a timescale of decades. For example, the US stock market boomed in a secular bull market from 1982 to 2000, while global gold mining stocks declined in a secular bear market from 1981 to 2000. As seasons strung together make a year, multiple cyclical bull and bear markets can and do constitute a secular market. Clearly, in a secular bull the ups are bigger than the downs. The proof rests in the graphs of market indexes (a more accurate word than "averages") going back in time. While analyzing historical price graphs (a.k.a. "charts") can be interesting, all that is really old news, and I will not pontificate here. However, if you enjoy reading words more than charts, one popular book on the last secular bull market in US stocks is appropriately titled Bull! by Maggie Mahar. In addition, the more esoteric financial literature reveals even longer cycles, such as the nearly century sized "Kondratieff Cycle." I leave such study to the interested disciple.

Let us, though, fast forward and hit the stop button at the present. Where are we in the marketplace, here in the United States, in 2004? Whether or not the current cyclical bull market in stocks is over or not is a question that distracts from the big picture. What is important is the context of this cyclical bull (no, not an Olympic bovine), namely, its containment within the secular bear market in US stocks that began in 2000. While I have independently, although belatedly (2002), identified this transition to what I call "The Great Recession," many folks far away from Wall Street, including Ned Davis, Bill Fleckenstein, Jim Puplava, and Houston's own Lance Roberts, have come to the same conclusion. No person, policy, institution, circumstance, and/or country can reverse the secular bear until it runs its course.

What does a secular bear market mean to you? The self-serving Wall Street mantra "Invest for the Long-Term" will not make you any money for 10 more years, even if you can hold on to the investments. In fact, zero return in the major market averages was true for the previous two secular bears (1929-42 and 1966-82). If you are nearing retirement, and you are still heavily invested in stocks, you might be forced to work 5, 10, or 15 years longer than you planned. If you can keep a decent job. Those of you well into your careers might find yourselves squeezed from both the income and the cost ends, thus forcing liquidation of your 401k, 403b, and/or IRA assets to pay for current assets, and to prevent your cars and houses from being repossessed (so much for "Buy and Hold"). You might think of yourself as a savvy investor, and you can buy low and sell high through the turbulent years. Also, you might recognize that alternative investments, such as gold mining stocks or foreign currencies, are in secular bull markets. However, if you are middle class, you probably do not have enough capital to make up for any investment mistakes. All it takes is one big drop at the wrong moment to sink you. If you are much closer to your school years than your retirement years, you should learn about all the real world macroeconomics they never taught you at the U, and you should be skeptical of everything coming out of Wall Street and Washington, D.C. And everyone should pay off their debts! The bottom line is that you should focus on capital preservation, not capital appreciation, for many years until everybody sells out. But that's another article.

Why do I focus on trying to make middle class folks see the light? The rich can take care of themselves. The poor, besides having little or no portfolio to lose, are attended to by government, church, and charity. While they pay lip service, politicians ignore the middle class.

Many people do not want to face the truth. I have heard a radio program in which a caller complains that the host, who had gotten religion about the current secular bear market in US stocks, is "too pessimistic." That caller is a personal finance accident waiting to happen. The caller's subjective comment surprised me, a born again realist. I don't care about optimism based on wishful thinking, or on the other hand, pessimism based on conspiracy theories; I just want to objectively figure out the real story underneath the hype and spin. I can make some preparations if I have a general idea what's coming. Before you start drinking too heavily, I want to tell you about the good news so far into this secular bear. The downtrend has been relatively slow in unfolding. By this time into the secular bear market we now call the Great Depression, millions of Americans were jobless, lying in the streets, and living in trash heap boxes (1933). If we're lucky, it will not get that bad this time around. You still have time to convert, if you start now. That is the truth. Yes, Col. Jessup, I CAN handle the truth! Believe it or not!

Chuck DiFalco

Living in League City, Texas, Chuck DiFalco is a software engineer by day, and an unconventional thinker and writer by night. He can be reached at cdifalco@houston.rr.com.

Copyright © 2004-2007 by Charles Joseph DiFalco. All rights reserved.

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