Bull versus bear is dead

As the S&P500 rocketed into the close this morning on yet another European bailout rumour, it occurred to me just how broken the equity market is right now. We are trapped in bear market dynamics of grinding sell-offs punctuated by explosive short-covering rallies with no end in sight.

The obvious conclusion to draw is that we are witnessing a great stuggle between bulls and bears. That the outcome of this struggle will determine the economic cycle and our own job security. And today was a great win for the bulls, snatching victory from the jaws of the bears. That’s the way the media will portray it.

Rather, I would argue, what we are seeing is the death of the entire paradigm that defines “bulls versus bears”. Let me explain.  

For thirty-odd years, Western stock markets have enjoyed one of the greatest booms in history. The reasons why are easy enough to see in retropect:

  • an historic boom in credit and leverage
  • a period of expanding liberalism, trade and globalisation
  • the triumph of the Western consumption model
  • little conflict between Great Powers
  • technological advancement giving common folk direct access to equities
  • governments committed to ownership societies through tax breaks

It’s no wonder that throughout the period, equity markets enjoyed stellar returns. The list is pretty much “the end of history bull market”. That phrase coined by Francis Fukuyama to decribe the period of American triumphalism following the end of the Cold War, when liberal democracy and capitalism seemed destined to end the political economy struggles that has determined human progress for millennia.

But the “end of history” was always an illusion. What was really happening, was that the US liberal empire had reached its apogee and, like all empires before it, lost sight of what got it there when no peer was left to define it.

In its military and political dealings, the US became arrogant. It spurned traditional alliances and the institutions of strategic management that it had itself established to serve its own ends. It abandoned the strategic ideals of realism and liberalism in favour of  a more perfect, and hence flawed, goal of forcing others into its own mould. And it did it alone, through voluntary wars in far flung provinces.

In its economic dealings, the US rightly insisted all other countries follow its lead. But when other countries did so, and began to hollow out America’s own strength,  it turned not to redoubled efforts to compete but to easy answers like credit inflation. This is as true for the markets and businesses that embodied US liberalsim as it is the empire itself. The manufacturing power, caution and surpluses that had defined US economic leadership through much of twentieth century was replaced by post-modern games of financial inflation, never ending deficits and a complete abrogation of risk.

The outcome was, of course, the opposite of that planned. And so, the world is now reaquainting itself with something that it forgot during the 30 year party that was the “end of history”: structural risk. Let’s revisit our list of structures underpinning the bull market of yesteryear:

  • a historic credit boom and leverage has turned to a series of burst bubbles and deleveraging
  • exapanding liberalism, trade and globalisation has tipped into a period of intense currency wars, leading inexorably to trade wars
  • the triumph of the Western consumption model  is over. In its place we now have a mad scramble for economic surpluses
  • little conflict between Great Powers is, sadly, passing, though, if we are fortunate, hostilities will be confined to economies
  • technological advancement giving common folk direct access to equities is still intact but is now fighting a tide of skepticism powered by volatility
  • governments remain committed to ownership societies, but how committed can they be when they themselves are so close to bankruptcies and must raise taxes? 

So what does this have to do with today’s short covering rally? Everything. Days like today are not some romantic struggle between bulls and bears, they are a reminder that in periods of structural risk that volatility reigns. Anyone that tells you otherwise is a fool or trying to sell you something.

To me, the nomenclature of bull versus bear now makes no sense whatsoever. In a world chock full of structural risk, the only sensible approach to your money is to look for modest returns that incorporate risk. You must be bull and bear.

The alternative is that you’re a gambler and, sooner or later, broke.

Houses and Holes


  1. Bull/Bear or Busted Arse……..

    What a choice eh?

    Lat nights “rumour rally’ would have been hilarious if not for the fact that it was so insane.

  2. I think it’s essentially a problem of the financial economy getting too big relative to the real economy. But I am not sure what the solution is.

  3. So 2012 will be the end. Not the end of the world but then end of the monetary system as we know it.

    • Nar..We just got school levers and Xmas bills ,more twists ,staged fights ,election lollies ,more twists and
      try not count the worthless papers…
      Just ,keep a bright-eye on left field action…you never never know,,
      Should be a Breeze,really
      said the Storm
      Cheers Johnno..JR

  4. Just scanning the macro business articles, i read this title as ‘Bull Versus Beer is Dead’ and the picture of the hands looked like the froth on a glass of beer.

  5. I couldn’t agree more H&H, and this rally if we could see the trades is likely the institutional guys using other people’s money. All based on a FT bank bail out rumour which could possibly fail. Nothing fundamentally has changed. If you read Charlie Aitken’s piece today he’s telling all his clients to buy so not his money I’ll bet.

    • I have access to his musings and he has turned very BULLISH in the last week, as he is convinced we will see a violent bear market rally in Q4. Prior to this he was despondent and very bearish for longer than is natural for him.

      He’s not too bad old Charlie, though sometimes i find he can be overly BULLISH by nature (he is a broker after all), but he did turn quite bearish and recommended profit taking when market was at 4900, so he made a pretty good call there.

      His reasoning of late is that he thinks sentiment across the globe is about as low as it gets, so he’s turned contrarian.

      • Agree JC, but a bit of a moral hazard if he’s lining up retail uninformed investors to jump in IMO. Who knows there might be a sustained rally until next year, but I’d not be making any recommendations knowing the background to this crisis.

  6. Well the bear certainly has the bull by the horns ‘ tho the bull might push the bear a few steps back the bear will react and throw the bull out of the stockyard

  7. Great article H&Hs with some clear observations that those with some power should listen to. However, could I add that western governments including our own must recognise the end of middle class welfare ie course unless they dont destroy the middle class first

  8. Volatility reigns in the short term, but take a step back to a longer term view and it disappears.
    Bull versus Bear is an eternal struggle. No way is it over.

  9. Certainly the predictability of the last decade’s bull/bear interaction has disappeared. Trust in financial institutions, governments and the credibility of corporate management is in very short supply. (eg Deutsche’s wtf exposure to Greek debt)

    Real risk (not that risk on/risk off money flow rubbish) has returned. Investing at the moment feels more like hedging, as there is such massive uncertainty on how loose liquidity and the money/credit supply is effecting values. Even not investing feels like a dangerous position because of the currency volatility.

    Your comments are fair hnh – the underlying structure that formed the basis of the predictable bull/bear market is broken.

  10. Diogenes the Cynic

    After 20 years of investing and working in equity markets I think the conclusion is that the current “model” is broken or close to it. That 40 minute rally last night seems either machine driven (algos) or worse some central planning inspired nonsense.

    The financial sector is like a blood sucking vampire bat on the throat of a large cow but it has become so engorged and huge that it threatens to kill the cow. I doubt governments will do anything significant until there is a profound collapse in the current model.

  11. Diogenes, spot on with respect to the death of the current model.

    But what’s coming next? Let my imagination run wild for a moment – Morgan Stanley is about to trip, or be tripped (now WHO would even think of tripping them??? – who holds the CDS’s that pay off when MS trips?)

    The crystal ball shows JP Morgan as the default underground government of the World, manipulating all the markets to provide JPM with a nice tax on everything, in league with the Chinese, enforcing the semi-serfdom model of labor across the world.

  12. Swing trading has become increasingly popular since the GFC. What would happen if all the buy-and-hold traders realised they were being taken for a ride by swing traders (including hedge funds), and decided to also become swing-traders? I believe we are starting to experience this very scenario with the massive drops and short cover rallys.

    I was thinking we must reach a point of equilibrium where the markets become so inundated with mathematicians that it becomes unprofitable for all but the elite mathematicians, and the swing-trading fad would die out. However, then I remembered there is an even bigger scam that is leeching money from an even bunch of suckers… superannuation. You only have to see the trade volumes on options expiry days to realise how corrupt brokers and fund managers really are. These leeches will very gladly profit out of their clients losses.

  13. I don’t know. Something in my argumentative brain wants to make me play devil’s advocate here and say that we’re merely in the eye of the storm and that soon enough we’ll know if the EZ will implode or whether every bank will nationalised and debts restructured/ written off. Sure, yes, opinion is split and so the market is driven by trading and rumour. But we’ll know the answer in weeks, and then the bull or bear will stamp its authority again. Also, epic QE3 if the S&P nears 1000?

  14. Frankly i’m getting annoyed with the market rallying on the slightest hint or rumour of bailouts and “plans.” I was looking forward to another 70-80 points being shaved off our bourse today when i went to sleep last night so i could get some “stink” bids to go through.

  15. Great theme setting article, thanks to H & H.
    Equities have becoming gambling chips. Of all claimants to the underlying business, shareholders rank last. The only compensation is the ability to vote and control the management. The institutionalization of the equities market has unfortunately seen real shareholder control of the business slip away to instittutions who play with other people’s money. But help is on the way. DIY funds should see the direct shareholder involvement rise again.

  16. Bear cycles on average last 26 years, and yet after the biggest most debt fuelled bull market in history you want to call an end to the struggle after a few weeks of volatility and a 20 per cent decline?

    I agree with Avid Chartist, and in my opinion even one year is way to short a time frame. This is a once in a century event.

    Like most “realists” out there, you get so much right but seem incapable of taking it all to the logical conclusion, like 75 percent retracement. 1929 retcared 90 per cent, Japan 75 per cent, why should it be differnet this time?

    The reason this is all so choppy and still offers the bulls a glimmer of hope is because unlike the 1930’s, US officials in particular have tried to front load stimulus in the hope of averting a market crash.

    More debt cannot ever solve a debt problem.

    Clearly a lot of people still have faith in the Fed put, but the war of attrition is being won by the bears/realists.

    • That’s weird because that is pretty much what I meant. But bear markets are never straight down, are they? There are big rallies too. That’s the point to the article. If you stick to one school or the other you’ll miss out.

      • No bear markets generally don’t go straight down, but they generally do decline at a much faster rate- the up the stairs down in the lift analogy

        You wrote: “the nomenclature of bull versus bear now makes no sense whatsoever. In a world chock full of structural risk, the only sensible approach to your money is to look for modest returns that incorporate risk”

        As Avid Chartist points out, that is only true if you have a short term view.

        Now trading is fine for some, and I’m not averse to short term punts myself, but the the message of this post is that its not worth doing anything in these markets.

        Maybe from a pure domestic point of view it is fine and safe to sit in cash, but that has its own valuation risks on a global basis. There is a much bigger picture out there if you have the right mindset.

        If you accept that things are bad and the logical conclusion is a bear market of some order, then you need to put your mind into reverse and “invest” in it as such.

        All the Buffet’s of the world recommend the long term view for a bull market, so why not hunker down with a long-term shorts for the bear market, ignoring the market “noise”?

      • I imagine we’d be in clear agreement if we were all talking about the same time frames.
        If I look at the weekly candlestick chart covering the past five years, I don’t see volatility, I see clear patterns and trends.
        If I look at the hourly candlestick chart then I see plenty of volatility.
        Investors should be looking at the longer term chart. Me, I’m happy to play in either sandpit.

  17. After a 300 year struggle between nations, all of Europe and beyond was absorbed in an epic war to end all wars… After this war a new all conquering empire was established. The empire declared that no such bloody wars would occur again and it set itself to police the empire, to maintain peace and prosperity for all. For 70 years trade flourished, the empire grew in stature and it declared that the world had entered a new and glorious phase of prosperity. Tolerance and the rule of law became the guiding themes but the dominant desire was for economic growth.

    Unfortunately, the market is a competition and for every winner there are many losers. The discontent of the poor and disenfranchised grew and there was unrest and rebellion in the streets.

    So began the decline of the Roman Empire.

  18. Great article.
    If there is some form of trade war, or some form of trading bloc mentality sets in, then I think Australia is in real trouble.
    As you have mentioned previously H&H, Australia’s economic and strategic interests are pulling in opposite directions.

    • “If there is some form of trade war, or some form of trading bloc mentality sets in, then I think Australia is in real trouble.”

      Intersting, please extrapolate if you are inclined.

      ‘An interesting quote recently was that rarely do a nations economic interests and strategic interests stay divergent’

      ….and we know (economic) tends to be the direction they unify in.

      Australia’s ecnomic interests clearly lay with China.

      It’s strategic interests are with the U.S.A.

      Now this can be a multi-generation occurence. i personally subscribe that in the absence of revolution or yet another xenophobic refusal of the outside world, China will become a Singapore on steroids.

      So while aligning to China in its current state may be viewed as distasteful enough to recoil from, a big Singapore ruling the neighbourhood I don’t think would be unpalatable.

  19. For what it’s worth, I think that market prices,or to be more
    specific official support of high market prices, have become
    the last bastion of government policy, at least in USA. Unfortunately,
    as Goodhart’s Law makes clear, “When an indicator of the level
    or degree of any activity becomes a matter of policy, it loses
    its’value as an indicator.” The markets will remain broken for
    so long as government continues to support non market
    prices as the last means of preventing a collapse of the debt values which underpin them.