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Bears won’t retreat to their dens in 2013

Let's face it, 2012 was not exactly a banner year for the world's best-known bears and their bleak prognostications. The U.S. economy did not slide into recession. The euro zone stayed intact; China didn't suffer anything resembling a hard landing; U.S. dollar assets remained everyone's favourite safe harbour; and corporate profits held up remarkably well.

The S&P 500 has risen nearly 15 per cent, in line with some bullish forecasts. Heck, the once-battered S&P financial index has shot up 27 per cent, its biggest annual gain in nearly a decade. The resource-laden TSX hasn't done nearly as well, but it has been gaining ground since October. European equity and bond markets are slowly recuperating and key emerging markets appear to be on the mend too.

In a Rumsfeldian world chock full of known unknowns and unknown unknowns, it's getting tougher than ever to figure out whether economies and markets will continue their slow, difficult climb out of the deep hole of 2008-09 or tumble down the other side of the hill in 2013. As the less bearish than usual David Rosenberg, Gluskin Sheff's estimable strategist, puts it: "Only the most arrogant fool would ever rule anything out."

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If you had decided last January that Europe was going to be trapped in an ever-worsening recession that would begin damaging the region's core economies, would you have been bullish on European equities? Mr. Rosenberg asks. Probably not. "But then the ECB intervened and dramatically reduced the financial tail risks of a euro-zone collapse." The result was a lot of disappointed grizzlies.

But the good news for those of us who love a spirited food fight between the perpetual pessimists and the diehard optimists who see a rally around every corner is that the permabears have no intention of retiring to their comfortable lairs just yet.

"We're of the opinion that we're extremely close to a major market peak and that, following that, we're going to go into the real winter bear market," says Ian Gordon, a B.C.-based investment adviser and market historian whose bearish technical forecasts extend over decades, not years. "We're convinced that the March, 2009, low will be taken out once this bear market resumes."

Mr. Gordon has had similar strong convictions for years, only to be thwarted by those activist central bankers and their money-printing machines. A lot of the extra liquidity pumped into financial markets in the wake of the global crisis found its way into stocks. The good news, from a peculiarly bearish perspective, is that the extreme intervention makes an eventual blow-up even more likely. And Ben Bernanke and his friends won't have enough ammunition left to prevent it.

The stock market "ultimately has to reflect the reality of the [deleveraging] economy," argues Mr. Gordon, founder of the Longwave group and a dedicated follower of the Kondratieff wave theory, which holds that capitalist economies endure recurring booms and busts over long cycles running 40 to 60 years. Mr. Gordon has divided the long cycle into appropriate seasons. And right now, he says, the economy is in the midst of winter – otherwise known as a deflationary depression.

"So it's going to be pretty drastic," he says of the eventual market response, while acknowledging that he doesn't know what the trigger will be. "But we're absolutely certain there will be some sort of black swan event that this time the Federal Reserve won't have the ammunition to overcome."

From his den in Sydney, Australia, derivatives expert Satyajit Das, that most genial of permabears, says it's only a matter of time before people realize that economic growth is going to remain extremely low for a long time and that policy-makers are powerless to do anything about it. Europe, he says, "will sleepwalk into an implosion" and Japan "will continue to find new ways to fall over." The U.S., thanks to the Fed and heavy deficit-spending, "will remain the cleanest of the dirty shirts."

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Then there is Dr. Doom, better known to his large global client list as economist Nouriel Roubini, who predicted that U.S. equities would be flat this year and then warned last month that the rally he had not expected was running of gas. "With no significant improvement in growth prospects in either the advanced or major emerging economies, the rally always seemed to lack legs," he wrote in a commentary for Project Syndicate. "If anything, the correction might have come sooner, given disappointing macroeconomic data."

As for 2013, Dr. Roubini told Reuters in a TV interview last July: "Next year is the time when the can becomes too big to kick it down (the road) … then we have a global perfect storm."

Mr. Das offers similar watery imagery. "We will continue to drift rudderless and without engine power, hoping a big wave doesn't swamp us."

Of course, by this time next year, the grim gurus could find themselves scrambling for fresh excuses to explain why their dark forecasts missed the mark. It's worth noting that the Mayans, history's ultimate long-wave bears, turned out to be wrong too.

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