1300 Years Is Nothing

Charts: The 2002-2007 bull market sure lasted a long time and yet it was only a cyclical bull market within a secular (long lasting) bear market and it was quite anemic in terms of gains. If the secular bear market that started in 1999 actually ended in March 2009, then it will have been the shortest secular bear market ever. Secular bear markets average about 14 years and they always include several cyclical bulls that average about 5 months. No matter how you slice it the current uptrend is more than a mere rally. By definition it is a bull market, we just don’t know if it is a cyclical bull or a secular bull. The 1975 cyclical bull lasted one year and today’s economic conditions roughly resemble the mid 70s. So maybe the uptrend will last another 6 months (or maybe not). When and if the secular bear resumes it should announce itself with virtually all technical indicators swinging sharply negative and credit spreads widening at a breakneck pace. The yield on the 10-year note will be the single biggest indicator of the bull market turning back into a secular bear. The economy is now run by the government and yields on government debt are everything.

Fundamentals: The current bull market is primarily based on the ongoing recovery in US housing. Existing home sales rocketed up 7.2% last month, a record increase. Multi-family housing (apartments) has weakened recently and so has high end single-family. Only cheap single-family is doing well and only because it is heavily subsidized. The government through FHA and Ginnie Mae is backing this segment with loans that feature absurdly low down payments and weak credit scores. By year’s end the government will have facilitated $1 trillion worth of brand new subprime mortgages, much of which will wind up in foreclosure and will require another round of subprime mortgages, etc... The $8000 tax credit is also subsidizing low end housing. It looks as though the tax credit will be expanded to $15,000 and applied to all single-family housing (bullish for now). There is no serious call to stop the government’s subprime lending spree. The stock market is taking all this as a positive for the moment since interest rates on the 10-year are still well under the 4% danger zone. Furthermore, not only are Japan and China still buying treasuries, Americans themselves are buying in larger numbers. The weakness in US consumer spending means higher savings, which means US citizens are buying more government debt. If the US economy could grow at 6% per year or so and no new spending programs were passed, it might not end in tears. America can only deal with a huge government debt hangover by rapidly growing GDP while gridlock simultaneously prevents new spending, never with spending cuts. This could happen.

Geopolitics: If we were to ask Osama Bin Laden when the Long War started he would say 711 AD, when Muslim armies successfully invaded Spain, helping establish the Great Umayyad Caliphate that straddled three continents and was one of the largest and most powerful nations ever. Resurrecting the Great Caliphate is Al Qaeda’s cherished dream. Osama and other bad guy intellectuals would say that the Long War continued after 711 as the Great Caliphate was battered back and crusaders eventually invaded Muslim lands, only to be expelled. More centuries rolled by and Christian colonialists invaded the same lands again but with greater success. The colonialists were kicked out, now they’re back and are getting kicked out again; ebb and flow, the great cycle of the Long War repeats itself. Probably the bad guys would say the Long War is about half over, only another 1300 years to go and the Great Caliphate will be reestablished. Heck, that’s just around the corner, patience my little jihadist, here strap on this suicide vest. I agree with Osama, the Long War is indeed centuries old.
Most Americans would say the Long War started in 2001 and they are losing patience with this lengthy debacle according to polling data. My God, this thing is dragging on for years! Most Americans still support the Afghan War, but support slips with every new poll. General McChrystal says that if he can’t show major progress in Afghanistan in one year, the American public will start clamoring for withdrawal. America can only lose a war if it chooses to lose. The US spends more on defense than ever other nation on Earth combined so we are our only serious enemies. Here then are two other metrics to see if we are winning besides bad guy body counts: 1) Opinion polls showing American support for the war. 2) Whether McChrystal gets the new troops that he is about to request from the White House and Congress. If opinion polls turn south and/or McChrystal doesn’t get new troops it will be bearish.