David Rosenberg is founder of independent research firm Rosenberg Research and Associates Inc.
We have the makings of a significant bear market, and it’s just starting. The Dow has made the fastest switch from bull to bear market on record, just 19 sessions, since the 42 days following the September, 1929, peak. On average, it takes 136 days to go from bull market peak to onset of the bear – to show how fast this has happened.
Time now to put things into perspective. As we write the obituary on the March, 2009-March, 2020, bull market, we will say that it was a bull run that was twice as long as what is normal by historical standards, and that the total return was 400 per cent even in the face of the weakest economic expansion in history.
Then again, this tells you just how far this bear market may have to go to unwind all the froth that the prior bull market condition generated – especially since so much of the rally was premised on financial engineering, such as the greatest debt-for-equity swap in history that made the share buyback craze the leading source of demand for the entire cycle.
Not to mention the mountain of leverage and the proliferation of exchange-traded funds and private equity-to-debt involvement that has accentuated market illiquidity. The pundits telling you not to worry because the U.S. banks are in good shape aren’t telling you that the holders of the dubious debt from hedge funds to pension funds to mutual funds to insurance companies are in far less good shape.
We had recessions in 1990-91 and 2001 that didn’t involve the banks – they aren’t always the culprit and it makes no sense for us to fight the last war (although the record US$2.4-trillion of dubious commercial and industrial loans on bank balance sheets will be tested nonetheless).
On Wednesday night, U.S. President Donald Trump listened to his instincts and played the blame game and opted to ban travel to and from Europe for 30 days. This will accomplish little else but drive a further nail into the recession coffin, especially in the airline, travel and energy industries.
Labelling this a “foreign virus” has a certain connotation to it – not to mention the move to suspend the entry of most foreign nationals who have been in any of the 26 European Union countries in the past two weeks. Draconian, indeed, and it is a panic reaction like this that breeds panic among the public.
I’m sensing that what markets (and people) would rather hear is a plan to address the lack of testing kits across the United States. The bizarre remarks and actions, the lack of preparedness and adequate response, the news that the NBA, NHL and Major League Baseball are suspending their seasons, and even Tom Hanks contracting the illness and March Madness closing arenas to fans, have all conspired to send global stock markets into further tailspins. Most are now in bear territory.
Congress also resisted the White House recommendation to scrap the payroll tax – as if that would accomplish very much, in any event (except remove funding for Social Security and Medicare ... but who cares about those, right?). Italy has locked down the entire economy outside of grocery stores and pharmacies. Total lockdown. Italy is seeking US$5-billion of International Monetary Fund assistance.
This is otherwise known as a meltdown and, as I’ve been saying for a while now, this has a 1987 feel to it. There are falling knives everywhere and now recession reality bumps up against a complete lack of earnings visibility and the most leveraged corporate balance sheet ever witnessed.