The other day I was asked whether we are headed into “bear” market. I said absolutely. The next question was the telling one. When? “Beats the hell out of me,” I responded. But as night follows day, a “bear” market follows a “bull” market and, thereafter, a “bull” market follows a “bear.” In its simplest form, these represent the expansion and contractions of markets based on supply and demand. When the speculative price of stock exceeds the trailing actual value (based on current performance) by a sufficient ratio, stockholders retreat, stock prices go down and if they go down sufficiently (20 percent or more) you are deemed to be in a “bear” market. The 2018 so-called “Christmas retreat” found most major sectors had entered bear territory in December and that all three major indexes had finished the year in the red – they were lower at the end of 2018 than at the beginning.
The space between a market downturn and a bear market is deemed a “market correction.” They occur periodically during every bull market, and while they are unsettling, they usually are over as quickly as they begin.
And how about a recession? Are we heading into a recession? Absolutely! And again the answer to “when” is “beats the hell out of me.” A recession is a contraction of the economy. It too follows an expansion just like night follows day. Technically, a recession is determined when the United States economy, as measured by the Gross Domestic Product (GDP), is negative for two fiscal quarters in a row. A recession is deemed to be over when the GDP begins to grow again – usually for two quarters in a row. In essence, when the supply of products exceeds the demand for those products, the number of units and prices drop (GDP).
The last recession began in 2008 under President George W. Bush and ended in early 2009 under President Barack Obama. It is most often referred to as the Bush/Obama recession because while Mr. Bush was president when it occurred, Mr. Obama was a United States Senator who voted for the primary underlying cause of the recession – a housing crises. The housing crises occurred because Congress authorized and then refused to fix the so-called sub-prime lending for mortgages resulting in a whole swath of people who could not or would not pay for those mortgages. The housing market fueled by sub-prime loans expanded in excess of “real” demand. When real demand retreated contractors, suppliers, and financial institutions (mortgage lenders) were left holding empty housing units and unfinished construction projects when the sub-prime loans began to fail. And Mr. Obama was among the most vocal on demanding the continuation of loans that every person who knew anything about the economy would never be repaid. (History is now showing the Mr. Obama knew less about the American economy than any previous sitting president -– probably even less than he knew about constitutional law.) Worse yet, because of Mr. Obama’s really poor economic choices, recovery from the recession was anemic at best and those that suffered the most were the poor.
So the questions loom. Are we headed into a bear market? Are we headed into a recession?
There are countless stock market analysts (even more precious metals speculators) who claim to know the answer and they are all wrong – if they were right we wouldn’t see so many fund managers ride a market to the bottom of a downturn, exit the market and then fail to re-enter it until substantial growth has returned – bad advice in the beginning begets bad advice at the end. But there are market analysts who fastidiously examine the vast indices of business data superimposed against previous market reactions and make intelligent and data supported recommendations – the best ones warn you that they cannot prevent losses but that they are likely to minimize losses compared to the general market (Dow, S&P and NASDAQ) – it usually involves reallocating assets between stocks and cash/bonds.
It is even more difficult to predict the occurrence of a recession because economies have become much more global and thus the excesses of diverse governments have greater influence on growth and regression. Governments by their very nature are inefficient arbiters of the economy because they allow uneconomic policies to crowd into their decision making.
For instance, the European Union has “managed” the European economy into stagnation by allocating manufacturing of various products among its member nations. The allocations are done for political purposes rather than based on which country can manufacture most efficiently. The introduction of the “green mandate” has forced closure of much of Europe’s coal production in favor of the more expensive and less efficient “renewable” resources. And the mass migration from the repressive Islamic nations into Europe has overwhelmed the European welfare state with little if any economic benefit to any of its countries. When governments impose those kinds of restrictions and burdens, it is impossible for the economy to grow robustly and thus Europe has teetered on the brink of a recession for years.
China, America’s major competitor in the world economy, is a government-dominated economy. The growth of China has occurred because the Communist government has refrained from exercising its authority to manage all segments of the economy and allowed a semi-free market place to flourish somewhat. Worldwide demand for cheaply produced historical goods (shoes, plastics, clothing, etc.) coupled with cheating by the Chinese government on reciprocal trade has allowed spectacular growth at the expense of other countries. It has also left China behind in terms of innovation and has resulted in China using its domestic companies to steal technology innovations that they cannot accomplish themselves. However, when confronted by other nations – principally the United States – China, in the face of demands to play fair – is watching its growth slow, its innovation decline and its unfair economic advantages diminish. It too is now at risk of slipping into a recession and China has neither the knowledge nor the resources to battle a recession. In fact, when it comes to a totalitarian government, such as China’s, it will react to tighten its control, which will ensure that the recession is longer and deeper than might otherwise occur.
Even the United States prolonged the effects of its latest recession by imposing more expense and greater controls on the economy under President Obama. History now shows that Mr. Obama presided over the slowest economic recovery in history. More regulations, more taxes, more market manipulations, more imposition of mandates and quotas drove uneconomic choices and repressed demand. Thus we heard from Mr. Obama that growth in GDP would never again rise above two percent, the high unemployment was the new normal, that manufacturing jobs would never return to the United States and that the status quo on international trade practices (massive deficits) could not be interrupted with catastrophic consequences to the United States. Each and every one of those statements has proven to be dead wrong.
So where does this leave us in understanding whether we are heading into a recession or a bear market? The most repressive governments will most likely promote a recession and when it begins, those same governments will make it even worse – like Cuba and Venezuela. The United States can mitigate the effect of such recessions on its citizens by avoiding the effects of non-economic policies (higher taxes, more regulations, growth of the welfare state, forced immigration, and identity politics). How many times do we have to observe the failures of socialism and the welfare state before we conclude it doesn’t work – regardless of when twits like Alexandria Ocasio Cortez and Beto O’Rourke embrace the lure of socialism. They are as stupid as Speaker Nancy Pelosi telling us how the Catholic Church really doesn’t really oppose abortions.