Bull/Bear Debate Part 2

Special Note: Today we continue the Bull/Bear debate by giving the bear point of view.

Charts: The only rallies as strong as the current one were the huge cyclical (short term) bull markets of the 1930s, which lasted from several months to about two years. In 1929 the Dow saw monthly trading volume of 4.3 million shares. But in the bear market bounces of the mid-30s trading volume averaged only 1.2 million shares per month, similar to today’s low volume rally. The ‘30s bulls gained on average about 70% before peaking, similar to today’s gain. Most chartists are bullish right now. Those that are not point fearfully to the charts from the 30s and gnash their teeth in chagrin.

Fundamentals: America’s Q3 GDP has been revised from an initial 3.8% gain to a 2.2% gain. Real Final Sales (GDP without inventory adjustments) showed a puny 1.5% gain. Either way it is one of the weakest recoveries in history, so far. The consensus is for 4% GDP growth in Q4 and then about half that in 2010 as stimulus programs end. Corporate profits have stabilized but aren’t growing except at banks, whose profits are artificially propped up with the steepest yield curve ever, housing subsidies, debt guarantees, TARP, and more. Despite these props bank lending is very weak, profits are engineered by Uncle Sam not private sector loans. The corporate bond market has greatly expanded during the recovery (thank God). This is how big companies are getting funded, directly from retail bond investors, bypassing banks altogether. Small businesses aren’t so lucky. They still depend on banks and generate most of the jobs growth in America. Banks will need government life support for several more years. Treasury just lifted its $400 billion cap on bailout money for Fannie and Freddie. It now has an infinitely open-ended commitment to support the ailing mortgage giants. That being the case the government needs to cut spending and debt elsewhere, not pile trillions onto trillions with Obama-Care. Since that isn’t happening interest rates are moving up and mortgage applications are starting to decline. The government could easily get into the position where it throws more money at housing only to see interest rates jump up and then housing gets worse so more debt is floated to throw at housing which causes interest rates to go up and a vicious cycle ensues resulting in a double-dip recession. The growth period between double-dip recessions has generally been about two years, which is why bear market bounces can last a pretty long time. This one could be shorter. The 2009 stimulus package was twice as big as FDR’s 1930s stimulus as a percentage of GDP and America went into the Great Recession with much more debt than it did going into the Great Depression.

Geopolitics: This is the bright spot. Geopolitics is bullish and there is no point in pretending otherwise. So today I am exploding the liberal myth that Afghanistan is the “Graveyard of Empires.”
Through most of the ‘80s the Soviets fought CIA supported Mujahedin rebels in Afghanistan, the forerunners to Al-Qaeda and the Taliban. The Soviet Army lost 15,000 soldiers and the Mujahedin lost 1.5 million. Like America in Vietnam, the Soviet Army won every major battle. Unlike America, the Soviets withdrew from Afghanistan in good order and left behind a relatively strong communist Afghan national army in 1989 (mission accomplished). The Afghan communist government and army were so strong they held off the Mujahedin quite handily even after the Soviet Union collapsed, taking us into the early ‘90s. But of course communism itself collapsed everywhere except Cuba and North Korea and the USSR’s puppet state in Afghanistan was no exception. After the communists left, the Mujahedin/Taliban was unable to even conquer all of Afghanistan.
The British Empire also included Afghanistan at one point. After being mauled by Germany in two World Wars, the global British Empire collapsed. Afghanistan was no different from the hundreds of other colonial outposts across the globe that no longer flew the Union Jack. Alexander the Great’s empire also included Afghanistan 2300 years ago and he is no longer in charge (big surprise). Liberals always throw in Alexander to round off their “Graveyard” argument.
Let’s consider Egypt. It was a Soviet client state from 1955 to 1970, with the Soviets virtually running the Egyptian military at the peak of their influence. Egypt was also part of Alexander’s empire and Britain’s empire, plus the Roman and Ottoman empires (that makes 5 dead empires and 1 live Egypt). Is Egypt some kind of “Super-Graveyard?” Today Egypt is an American military ally and part of America’s global military empire. Is America doomed because of Egypt’s mystical Super-Graveyard status? Of course not.
Places like Egypt and Afghanistan are on the edge of continents; they stand at the crossroads of big empires, ancient and modern.