New bull market for stocks?

This blogger is a regular trader of the Australian stock market, and one of his studies has been – why do stock markets start a new bull market?

There are many technical reasons/readings one can make, but the key prerequisite for a new bull market in stocks is economic growth. So this blogger uses macro-economic analysis as part of his toolbox to ascertain the difference between a new bull stock market, or an exuberant bear market rally.

Both are easy to define in hindsight, but there is one crucial factor, in a post-Volcker “modern monetary” economic world, that clinches the difference. Australia is no different in this respect, having similar “animal spirits” to other Western nations who operate in the same economic paradigm.

There are clear signs that this current rally is more bear than bull. I’ll go into the other “indicators” I watch closely in future posts, but my radar went off recently when one of this blogger’s favourite conventional theorists proposed that the economy is a lion dressed up as a lamb. According to Gittins!:

  • Unemployment is a “low” 5% (even though underemployment is chronic)
  • Planned investment is very high (but only for commodity exploitation, not productivity increasing infrastructure or manufacturing)
  • Inflation is just above the “target” band of 3%
  • Household disposable income grew by 6.4% in nominal terms in the last 12 months (but in reality it did not keep up with non-hedonic price inflation)

What the conventional theorists  forget is that a “modern monetary” economy doesn’t rely upon modest inflation, low unemployment or higher incomes – all conveniently measured and modelled by econometric blowhards.

The modern monetary economy’s lifeblood is debt – the flow of credit is what makes a modern monetary fiat-based economy live and breathe.

The fact is, until the Australian economy creates more debt and that credit flows throughout the economy, reflected as higher house prices, increased retail spending and above inflation (measured as the increase in real-world prices, not the basket case that is the CPI basket) income growth, we remain in a stagnant, possible technical recession growth phase.

Credit growth (measured by primary statistics and the Post-Keynesian “Credit Impulse”) is this blogger’s key indicator – because bull stock markets are more or less a Ponzi scheme (at least towards the end) as annual growth becomes a multiple of underlying nominal economic growth.

In my previous post I noted that during the last Australian bull market, from 2003 to 2007, the rate of annual growth for the stock market was 2-3 times nominal GDP growth, all because of increased credit throughout the entire economy and the rate of change of that credit growth, reflected in speculative borrowing (both houses and stocks).

When this blogger sees a large increase in margin lending, more aggressively advertised structured finance products, year-on-year increases in mortgage finance lending and business finance, coupled with upwardly revised earnings figures and higher projected-IRR figures for expansion projects , it will know we are in the middle stages of a stable bull market in stocks, leading ultimately to Minskian instability.

Until then, it is best to ignore the conventional theorists who seem to have no grasp on uncertainty in a modern monetary world, and keep your capital close to your chest.

Latest posts by Chris Becker (see all)


  1. Nice one Prince. Last week’s speech by the RBA’s Phil Lowe highlighted household’s current aversion to borrowing. Of all the charts provided in the speech, I particularly liked this one showing how households have shifted from withdrawing equity from their homes (most likely to support consumption) to repaying mortgage debt. There’s little wonder why retail sales are sluggish at present.

  2. Oh dear Gittin’s its more like the lion is debt dressed up as a lamb, it will get you in the end ! indeed its already devouring quite a few people.

  3. Good post Prince. I must admit that the article title hitting my RSS feed made me cringe as it hinted towards the author expecting that we are in a new bull market.

    I’m also of the opinion we are in a bear market rally.

    US markets have been in a meltup, unable to correct significantly while the Fed continues to pump their QE programs. I suspect our markets are somewhat tied to this and are also riding the commodities rally (also a symptom of QE?).

    Quite a few commentators are pointing toward hyperinflation and further QE programs, but I think we could see a break in these coming up given the problems they are causing (e.g. surging food prices).

    What happens when QE stops? I suspect markets here, in the US and elsewhere see a significant fall and that’s when everyone finally realises that there was no real recovery…

    … at least that’s all in my uneducated opinion 😉

    It’s been in the last 6 months that I’ve noticed quite an increase in speculative stocks making unbelievable short term gains. This speculation seems consistent with the complacency in the markets that we saw in 2007 (prior to the last severe correction).

    Interesting times.


  4. Hi BB!

    I too have noticed (and traded sometimes) the increase in speccy stocks – particularly since August 2010 (funny that).

    All my long term indicators are supporting a bear market cyclical rally only at this stage – but the macro factors are just not there.

    From an investing point of view, the ASX50 appears fully priced and perhaps over-valued given the high P/E multiples for the industrials, which are in fact low ROE companies now (because of major equity/debt issuance in 2009).

    What happens when QE2 stops will be fascinating, from an academic and monetary (i.e making it, not losing it) point of view.

  5. Prudent Bear – Pondering the end of QE2:

    “I think the sophisticated players have believed there were still a couple of years before the U.S. debt problem turned unstable. I think they may have to rethink. I have in the past pointed out that in early November 2009 Greece could borrow for two years at about 2% – and markets could pretend the Greek debt situation was manageable. The fact that markets were content to postpone the disciplining process ensured that when it did finally arrive it was serious.”

  6. QE2 connected…?

    Perhaps you (or a colleague) could pen a piece on the issue of derivatives. Astronomical value (generally estimated between $500trillion to $800trillion) underreported and generally poorly understood.

    Many economic sites consider these the elephant in the room.


  7. Thanks 3D1K – as a prolific user of derivatives (the good ones – yes there are good and bad) I have some opinions and ideas about them that I hope to talk about in the future.

    Their expanded use – particularly on a retail level – is another key indicator of a Minksy style speculative borrowing phase in economic “growth”.

  8. I found Satyajit Das’ interviews (a couple of hours worth) with the financial crisis inquiry commission (FCIC) on the topic of derivatives (including some of the more nasty ones) fascinating – and also rather entertaining.

    Also worth listening to are the interviews with William (Bill) Black, Robert Shiller, Mike Burry, Jim Chanos, etc. :

    • LF, thanks for the links and will listen to Satyajit Das’ interview (listened to Bill Black via New Economic Perspectives. Looking forward to the Prince’s treatise!

    • For more on Das’s take on derivatives a recommended read is “Traders, Guns and Money”.

      His book captures what now seems like medieval times of Asian Crisis. Market does suffer from short term memory!

      It was Koreans, Taiwaneese and likes of others last time with currencies(swaps)……The only difference this time is China and commodities. I bet if one ‘find’ and ‘replaced’ some words in the text, it would make a whole lot more sense than analyst with perma bull horns!