Most Popular ArticlesNovember 17, 2009
Foundations of a secular market low
Secular trends, or super-cycles, encompass multiple cyclical market cycles, and Davis said they can last as long as 20 years. On a secular basis, Davis is neutral, based on his analysis of seven “foundations” of secular market lows.
The first of those seven is that money should be cheap and readily available, as it is today. Davis showed that secular bear markets consistently correspond to periods of negative growth in the real money supply; currently, the real money supply is growing by nearly 8% annually – a bullish signal.
Monetary growth has not translated to increased bank or consumer lending, which Davis said is necessary for this foundation to be solidly in place, and he concluded that this foundation “is not consistent with a secular low.”
Neither is Davis’ second foundation bullish. He requires that the debt structure should be deflated, but his data show that total public and private sector debt is at its highest level ever, and has been rising consistently since 1990, as shown below:
“This is the most negative chart that we have,” he said.
The ratio of the increase in debt to increase in GDP has risen in each decade since the 1950s, nearly doubling to 6.03 in the current decade from 3.12 in the 1990s. “We are just not getting the job done,” he said, referring to the ability to grow GDP without incurring additional debt.
He also noted that, for the first time in history, combined federal, state and local government debt now exceeds GDP. “I am not certain we will solve the problem of too much debt with more debt,” he said.
“There’s not much pent-up demand for goods and service,” he said, and that demand is Davis’ third foundation for a secular low. Davis’ data showed that demand had risen steadily since 1985 but fell off over the last year. It rose slightly during the last quarter, which he attributed incentive-based programs, such as “cash for clunkers” and the government’s first-time home buyer program. “There’s enough demand to keep the economy going for a while,” he said, “but I don’t see a sustained source of demand.”
Over the short term, decreased savings correlate with rising equity prices, Davis said. Longer term, though, increased savings are necessary for a secular bull market. Savings are increasing now and are 3.3% of income, which he characterized as a neutral reading. “I don’t think we have the savings we need for a long-term up-trend,” Davis said.Display article as PDF for printing.
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