Many have asked me if the Bull Run will last another 6 months, or 1 year, or even till the end of 2012. A bear market is defined by the stock market falling by more than 20% according to convention. But to me, only a 30% fall or more qualifies as a bear. In Asia, every bear market since 1997 resulted in a 50% crash; 1997 Asian Financial Crisis, 2000 Tech bubble, 2008 Financial crisis. The next bear market should be no different.
What is the reason for my pessimism that we are at the 80th minute of a soccer game with probably no extra time left? Here’s why:
1. The US Has To Pay It’s Credit Card Bill for the Next 10 Years
From 1990 – 2007, consumer spending has been fuelled by debt. Savings rate of the Americans fell from 15% in around the late 80s to around 2.5% in 2007. American households have been re-mortgaging their homes to get credit. It was greatly helped by a real estate bubble spanning 2 decades that finally burst in 2008. With the property likely in the doldrums for the next 1 – 2 years, and US banks unlikely to be so generous in their lending again (mind you, you could buy a property with 5% down payment in the good ol’ days. If your credit rating is spotless, you can buy even with no down payments). This means that the US consumer is unlikely to spend as much as they did for the next 3 – 5 years, until savings rate reach around 15% again. How are the Asian economies with their export driven model able to grow at double digits if their biggest customer is on a cost cutting mode?
2. Baby Boomers in the US and EU Have Finally Hit Retirement Age
2010 – 2020 is the decade where most baby boomers hit retirement age. Pension funds will have to liquidate billions, if not trillions worth of shares and bonds to fund the retirement. It will create unprecedented pressure on risk assets this decade.
3. Austerity Measures Will Cause Eurozone to Plunge into Deep Recession
The socialist model of Europe is unsustainable. Cuts in spending will eat into the generous welfare benefits and bloated government machine. I have not seen much labour reform in Europe to see growth. The problem is that the core of Europe; Germany and France, are socialistic governments. They will never dismantle the powerful labour unions, nor will they allow free movement of labour from outside the EU so that wages can be kept low and productivity rise. The core of Europe is rotten by socialism. It cannot reform itself into a capitalist model like the US, Singapore or China’s. Higher taxes and lower government spending without fundamental reform will plunge the EU into deep recession again for several years.
Do travel to Europe to see how “hard” they work. Annual leave in France is around 30 – 40 days a year. Their shops close at 6pm, at a time when most people are free to shop. It is very difficult to fire workers so bosses are afraid to hire. If you don’t have a job, your dole is almost 30 – 50% of your last drawn for 2 years. Why work? Taxes are 40 – 50% at the highest tier… no wonder they are in trouble. The Spaniards start work at 10am and take a Siesta from 12 – 3pm. Then they start work from 3 and end at 7. But according to my relative who lives in Europe, they don’t work much after siesta! I can’t see the light in their region. They have a long proud history… but they are living in past glory.
4. China’s Heavy Investment Spending Will End
The rail way mishaps over the last 2 months brought to light the extent of the corruption of Chinese officials. A large part of the investment spending has been “leaked”. One only has to look at how many Chinese citizens are buying properties to know where money has flowed to. The Chinese banks lend to provincial governments which in turn is supposed to be channeled into infrastructure spending. Up to 30% of this loan may turn bad. I won’t be surprised if several Chinese banks are insolvent and become nationalized in the next 3 years.
But this is not what will bring the Chinese economy down. The Chinese economy is driven by 30% investments, 40% consumption, 10 – 20% net exports. Is this sustainable? Their biggest customers, the EU and the US, are spending less. Wages in the wealthy coastal cities are rising so fast that manufacturers are shifting either to the western regions or out of China entirely. Their transition from an export driven to a consumer driven model has come very late, at a time when the US and EU have stalled. Investments have been filling in the gap but it will eventually create a bubble (i.e. bridges and highways to nowhere). If investments were to be slowed, China’s GDP growth could drop below 8% and the proverbial s**t will hit the fan.
Conclusion
A lot of people ask me, “How can the stock market crash when interest rates remain so low?” I can only say that “it’s the economy, stupid” (famous words of former US president Bill Clinton when he explained how he won the re-election by a landslide despite being embroiled in a “cigar smoking” incident with a fat intern). The US, EU and Japan will continue to print money to shock their economies to life. But eventually QE will not stimulate investments. Low interest rates will only stimulate borrowing and investments if there’s demand, and there ain’t no demand now, baby.
As Marc Faber said, the coming rebound in stocks may not be as high or last as long as most people would like. If there’s another QE, we could have a Merry Christmas and a Happy New Year, stretching even to a Happy Chinese New Year. But after that, reality will hit us. The next recession will be longer, deeper, sharper than ever before. And QE may not work this time. 2013 – 2014 may be 2 very bad years.
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