Bull Market Interrupted Is a Bearish Script for Stocks -- John Authers

Discussion in 'Economics' started by piezoe, Mar 29, 2021.

  1. piezoe


    This is on of the more insightful Bloomberg articles I've read in a long time. I condensed it where ellipses appear and deleted the photographs. The entire article can be read at

    Bull Market Interrupted Is a Bearish Script for Stocks

    The slump following the pandemic shock was a historically anomalous spasm rather than the end of a cycle.

    John Authers
    March 28, 2021, 11:00 PM CDT

    John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of “The Fearful Rise of Markets” and other books.

    Scrambled Perceptions
    My colleague Barry Ritholtz has a popular Bloomberg Opinion piece, in which he warns that the current bull market is being misconceived. I’m not sure I agree with all of it, but it does make an essential point. That is that the bull market started in 2009 as we hit rock bottom after the global financial crisis, not last year following the pandemic shock. I think it is wise to look at it this way, even though the dive that stocks took last spring amply qualifies for standard definitions of a “bear market.”

    This is a chart of the S&P 500, on a log scale, starting 12 years ago. I’ve marked in the trend lines that join the peaks and troughs, but arguably that isn’t necessary. The upward trend is very clear. A year ago, in response to an exogenous and scary risk, the market dived below the lower trend line for a matter of a days. Since then, the rally has been remarkable; but perhaps it makes more sense to regard this as a recovery from the shock, followed by a climb from the bottom to the top of the market’s upward trend. You could call this a long bull market, followed by the briefest bear market on record, followed by the beginning of another bull market. It makes more sense to call it a briefly interrupted bull market.

    Before anyone says I am being Pollyanna-ish, bear in mind that this is, if anything, a bearish point. I’ve received plenty of excited sell-side research in the last few months explaining how it is reasonable to expect much more growth now that a secular uptrend has started. But we aren't in the early stages of a bull market, we’re in the very late stages. That has altogether less pleasant implications.

    There are many other examples where the extreme shock of last spring, and the remarkable measures that followed it, have messed up the normal cyclical rhythms of markets and the economy, and could wreak havoc with our perceptions. That could be particularly true in the next few months, when year-on-year comparisons will show a sharp rise in inflation, which may prove transitory. What we have seen in the last 12 months or so is a historically anomalous spasm that is still working its way through the economy. That spasm may yet cause some huge changes, which I will discuss lower down. But it would be unwise to regard what happened last spring as the end of one cycle (in markets or the economy) and the beginning of another.

    The Inflation Debate
    Arguably, no issue matters more than whether inflation is really getting started, and the likely increase over the next few months will only intensify the debate. There is plenty of disagreement. Here are some important points on both sides:

    It’s About Antitrust
    Lack of U.S. antitrust enforcement in recent decades is well documented. It is widely blamed for loss of economic dynamism, higher unemployment and higher inequality. This is the tale, as charted by Vincent Deluard of StoneX Group Inc.:

    Even though large anti-competitive firms have more pricing power, Deluard suggests that monopolistic companies have become a deflationary force. He points to a little discussed 1979 Supreme Court decision:

    I would single out the Supreme Court’s 1979 Reiter v. Sonotone Corp, which set the Consumer Welfare Standard as the litmus test for in antitrust enforcement. Rather than establishing that a company had monopoly power, antitrust regulators now had to prove that monopolies raised prices for consumers. Big tech companies, whose products are “free” (or rather, which found other ways to monetize their customers’ data and attention) rushed through this loophole. “Consumer-friendly” monopolies (if it sounds like an oxymoron, it is because it is one) mushroomed as antitrust enforcement collapsed after the 1980s.

    This approach to antitrust made it easy for tech companies to evade enforcement. The economics of the tech industry, with capital available for companies to build up an impregnable position over many years without ever turning a profit, have added to this. The questions now are whether antitrust enforcement will stay so muted (there is good political reason to believe that it won’t), and whether companies will continue to refrain from using their pricing power.

    If wages and other costs start to go up, it is easy to see how tech monopolies could decide to start extracting more from customers. Deluard suggests that if Netflix Inc. doubled its price, “no one under the age of 40 would return to old TV” (probably true, though they might move to a rival streaming service). If Google started charging for Google Maps or email, nobody would revert to paper maps or postage stamps, he argues.

    In short, the quirks of antitrust enforcement have allowed anti-competitive markets to build up without creating inflation. There is reason to believe this will change.

    It’s ESG’s Fault
    Will the new emphasis on ESG investing lead to secular inflation? I’ve seen two arguments to this effect, although one holds that it will result in stagflation, and the other that it could produce a virtuous boom.

    Arguing for stagflation is Deluard of StoneX once more. The nub of his argument is as follows:

    ESG’s raison d’être is that the free market, when it is driven only by the profit motive, will create costs for other stakeholders – society, workers, and the environment. ESG investors’ efforts to internalize these external costs may be morally just and socially optimal, but they are a cost which did not show up in the consumer prices. By definition, the rise of green standards and the demand for more responsible goods and services from governments, investors, and consumers will raise prices.

    There’s plenty of research to suggest that ESG investing pays for itself and leads to better returns; though if this were clear, there would be no need for the label because everyone would do it anyway. ESG sets out to change the economy; it’s logical to expect that it could also change the dynamics of pricing.

    Deluard points out that big oil companies are cutting back capital expenditures significantly, a trend that should lead to lower production and supply. All else equal, less supply means more inflation:

    Also, the oil industry no longer reacts in the way that might be expected when there is a major change in crude prices. Higher levels should encourage frackers and drillers to open more capacity, while lower prices will force them to shutter facilities. Last year’s oil crash had exactly the effect predicted. The subsequent rebound has so far had minimal impact:

    From the point of view of an ESG investor, this is a consummation devoutly to be wished. If fossil fuels are more expensive, they will be used more prudently and there will be more incentive to invest in alternatives. High oil prices in the 1970s led to much greater fuel-efficiency. The problem is that the 1970s also saw stagflation, with higher fuel costs helping to make everything more expensive. There is a separate debate to be had over whether this is a price worth paying; the point is that ESG is having a significant effect on behavior, one that appears to be inflationary in the long run.

    There is also an argument that the ESG movement will spur not only inflation, but growth too. Liberum Capital Ltd. in London points out that new technologies tend to be copper-intensive. Electric vehicles use far more copper than conventional internal combustion engines:

    Meanwhile, solar and particularly offshore wind power need far more copper than conventional sources of electricity:

    Copper continues to be a vital commodity for conventional manufacturing and construction, so this implies long-term structural pressures on producer price inflation. Liberum’s analysts point to a range of CEOs from capital goods companies complaining about rising input prices on earnings calls, and also to clear evidence from ISM surveys that supply shortages and delays are being turned into higher prices:

    Even without the big increases in demand which many expect later this year when pandemic restrictions are finally eased, it makes sense to brace for higher inflation:

    This argues for a paradigm of secular inflation in the longer run, which might be healthy. Liberum’s analysts discuss their case in this podcast.

    There Are Debt Constraints
    All of this is very well, but in the real world governments, companies and people are all staggering under an immense weight of debt. This is the ultimate deflationary force.

    Rui Soares of FAM Frankfurt Asset Management AG asks the following pithy question:

    We live in highly leveraged, high duration economies (see charts). And highly leveraged financial markets. Why wouldn’t small increases in long-term interest rates (1% - 2%) be more than enough to cause a massive economic slowdown and ease any potentially building inflation tensions?

    That’s a very good question. Here are the latest numbers on debt to GDP for a range of economies:

    The argument here is that capital markets will act as a balancing mechanism. We’ve already seen one frightened selloff, in 2018, at the notion that rates would rise to a level that was still unremarkable by historical standards. Are we in a Catch-22 world, where any confidence that we are at last out of the deflationary trap will merely lead to a market reaction that sends us straight back there? Answers on the back of a postcard please...

    Demographics Aren’t Really Destiny
    My former colleague Matthew Klein, now of Barron’s, wrote this magnum opus on demographics and inflation for the FT Alphaville blog back in 2016. It remains relevant. He was taking aim at the view that an ageing population would lead to great bargaining power for labor, and therefore higher prices and wages.

    Klein’s most important argument, I think, is that there is no clear link between the working-age population and the number of people who are actually employed. Changes in the pattern of work, with people staying active later in life, shifts in female participation, and changes in immigration, have all over time made it impossible to predict the size of the workforce.

    Book Club: Demographic Reversal
    The argument for a secular rise in inflation stemming from demographic change was stated forcefully last year in The Great Demographic Reversal, by Charles Goodhart and Manoj Pradhan, which we subsequently discussed in the Bloomberg book club. The authors continue to defend and develop their views.

    You can watch this presentation from Tabula Investment Management Ltd. in which Pradhan, one of the co-authors, undergoes an interrogation from the CEO. There is some marketing at the beginning, but the following discussion is excellent. Also, if anyone thinks I am overdoing the degree of disagreement over inflation, take a look at this chart produced by Tabula on forecasts for U.K. inflation:


    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    John Authers at jauthers@bloomberg.net
    Laissez Faire and zghorner like this.
  2. Long article. Seems bullish no?

    murray t turtle likes this.
  3. piezoe


    Yes. I would say the general tenor is bullish for now at least accompanied by an up tick in inflation.

    But isn't Auther's primary point that this is now a ~ 12-year-old bull market that might be getting a bit long in the tooth. It is very hard for me to see a sustained bear market getting started without a disaster of some kind as the trigger, simply because of outsized demand-side stimulus headed down the pike.

    I am not concerned about federal debt, but i'm somewhat concerned about private sector debt, which can provide the trigger.

    Last edited: Mar 30, 2021
    murray t turtle likes this.
  4. %%
    Most would use a 200 dma to measure a bull market;
    not near 12 years old@ all. That has been the major media line for some time which makes
    '' 12 years'' even more suspect.
    PLENTY of closes below\ in SPY + QQQ past several years.
    OF course if one is going to define a bull market by subjective fundamentals, anything could be called a bull or bear market.
    [IF SPY dips below 200dma in may\ he could declare victory/LOL] :caution::caution::caution::caution::caution::caution::caution:
  5. piezoe


    I thought Auther's point was that the brief dip in March 2020 was not an indication of a bear market; that there remains the same bull market briefly interrupted.. But he is calling our attention to the reality that if this is still the same bull market than it is getting rather long in the tooth, as bull markets go. I made the point that it is difficult for me to see the end of a bull market with such monumental demand-side stimulus likely ahead.

    I think I'll go out on a limb here and add more. It has occurred to me that there is suddenly a broader awareness of what MMT economists have been trying to call our attention to since at least the mid-Twentieth Century. This can have an impact, finally!!!
    Last edited: Mar 31, 2021
  6. Overnight


    Well, then here is the first sign of trouble...

    consumer credit.JPG

    Released today. Middle number is projection, left number is actual. Greatest increase since May 2016. Highest increase over projection in decades.
  7. piezoe


    Oh oh. Much of that I guess would be covid related, but still!
    Last edited: Apr 7, 2021 at 9:58 PM