By Kirk Spano
A couple of years ago I was in a large wooded backyard near Lake Tahoe hiking up a path behind my host. I knew there were some black bears spending time nearby, but I couldn't see any. Suddenly, I stopped, I didn't hear anything, and I don't remember smelling anything. I looked into the woods and over both shoulders. I didn't see a bear. The only place I hadn't looked was directly behind me. I slowly turned around and saw a mother bear about 30 feet behind me.
I called the owner's name and he called the bear. Mama bear just wanted to get to the seeds that various people had been leaving for her and her cubs. She ignored me and headed up hill where the seeds normally were. We avoided any incident other than my blood pressure rising.
I tell this story because like real bears, bear markets rarely give much warning. I think somewhere in the wilderness of the equity markets, there is a bear lurking much closer to us than most think. Let me give you a few reasons today why I believe that. Please remember as you read this, I have been mostly bullish on markets most of the time since the spring of 2009, so I am no perma-bear.
This weekend on Scutify.com, I gave my weekly view of the markets. The first topic I covered was two of the three big headline risks that are capturing most people's attention right now, Russia and Greece. The third headline, which I didn't cover, but have here in my MarketWatch article list multiple times, is the price of oil.
What we know about Russia's ceasefire in Ukraine is that it is a total unknown whether it is likely to hold. What we don't know is just exactly what Putin's end game is. As I discussed in a December article , about the eventual rebound in oil, one possible cause for rising oil prices could be more war.
What we know so far about Greece is that the negotiations with the Troika are not going well. What we don't know is exactly what is the new Greek government's end game. I suspect they will default on their debt and leave the euro, which seems to make sense on multiple levels, but I don't have much conviction.
As for oil, I have been on that since June when I anticipated a deep decline in oil prices. I do see the second quarter as very dangerous for oil and in particular oil stocks.
If the ceasefire ends quickly or the Greeks do default and leave the Euro, both events would be rough on markets. As significant as those events would be, they are far from certain for any outcome. What is certain is that something else that is dangerous is being ignored by markets so far.
As I have pointed out for years, the world has significant deflationary pressures from demographics and debt. Ray Dalio discussed deflation in Davos when he reminded us that there is excess capacity in many sectors of the global economy. One place we see that now is in oil production.
Despite central banks fighting off deflation with money creation, it hasn't been enough to stimulate growth. The problem that most don't understand is that monetary easing works best when economic problems are cyclical in nature. What we are 15 years into now is not cyclical. It is secular and structural. Monetary policy, particularly via the creation of more debt, cannot by itself jumpstart the global economy. Only the United States among developed nations so far has complemented its monetary policy enough — via increased energy production — to stimulate some real, albeit minor, growth.
It is becoming very apparent that we are going to see a global recession in the next couple of years, quite possibly this year depending on how short-term events act as catalysts. In my weekly view, I pointed out that I think in the U.S. we are lining up for a peculiar type of recession. While it doesn't appear that America would see an outright recession this year or next, I think we could very well see two or three zeroish quarters of GDP growth over the next two years or so. A sort of "skip-straight" recession.
If we do see a "skip-straight" recession, and if the S&P 500 does miss earnings soon — as my analysis forecasts due to the top 50 companies in the S&P 500 getting about half of their earnings from overseas — then is that enough to generate a bear market much sooner than most anticipate? I think it is.
Because forecasting exactly when a bear market might hit is extremely difficult to do with precision, it is important that investors somehow put the calendar on their side. I have been slowly selling into market strength for weeks now and last week started to build hedges, including a George Soros and Carl Icahn favorite, buying puts on the SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY -1.11% . These puts are longer dated since I don't know precisely when a bear market might hit, even though I am confident in the accuracy of my economic outlook.
Disclosure: Kirk and certain clients of Bluemound Asset Management own puts on SPY. Kirk has also recommended SPY puts at his investment letter services for self-directed investors: Fundamental Trends and The American Resource Boom Letter. Neither Kirk nor Bluemound clients plan any transactions in the next three trading days. Opinions subject to change at any time without notice.