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A Survival Guide for Bears in a Bull's World

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A discussion of the world's debt problems, and the psychology of adjusting to the market when it's bullish anyway.

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Ah, it's open season here, my friend.
It always is; it always has been.
Welcome, welcome to the USA.
We're partying fools in the autumn of our heyday.

And though we're running out of everything,
we can't afford to quit.
Before this binge is over,
we've got to squeeze off one more hit:
We're workin' it.
...

We got the short-term gain, the long-term mess,
we got the suffocating, quarterly consciousness.
(Yes man, run like a thief.)

New York to Hollywood, hype and glory,
special effects, but no story.
(Yes man, run like a thief.)


-- Don Henley, "Working It"

There's been no material change in the market outlook, so today I'm going to focus on discussing the world's fundamental debt problems, and how those problems may impact investor psychology.

Let's imagine you found yourself in an H.G. Wells novel, and used his famous machine to time travel into the future to a random, unknown year. As fate would have it, you just happen to land in the exact year when there's a worldwide financial meltdown -- but before you can find out what year it actually is, your time machine whisks you back to the present, and then ceases functioning. You are now in possession of powerful, and somewhat frightening, information. You know this financial meltdown will happen at some point in the future, but the problem is you don't know when. It could be in two weeks; it could be in two decades.

You are an investor and a trader, so suddenly you look at the market and wonder: "What if this future I experienced happens tomorrow?" You react emotionally, rightfully worried, and you immediately pull all of your investments out of the market. Then the market starts going up, and you wonder again: "Hmm. What if this future happens many, many years from now and I miss out on everything in-between?" You have powerful knowledge of the future -- but how can you profit from knowing something will happen, if you have no actual time frame for knowing when it will happen?

I use this analogy because I think many bears have fallen into a very similar trap for years. Bears tend to be smart, free-thinking individuals, who are a bit contrarian in nature. This feeling of being contrarian isn't really by choice; it comes from the fact that bullishness is packaged as the "American Way," and the mainstream media often mocks bears openly with a variety of semi-demeaning nicknames. These names run a wide gamut, from Nouriel Roubini's media-dubbed nickname of "Doctor Doom" all the way to Peter Schiff's media-dubbed nickname of -- you guessed it -- "Doctor Doom" (nobody ever accused the media of being creative). The mainstream media's propensity to nickname anyone who's bearish "Doctor Doom" (also: "Professor Doom," "Mister Doom," "Cousin Doom," "Big Daddy Doom," etc.) understandably makes bears feel they are ostracized and outcasts.

The funny thing is that many bears started off as bulls, and then felt they had some type of catharsis -- some type of "informational awakening" -- which converted them into bears.

I had this fundamental conversion experience in the late '90s, and yet I have been very bullish on the market at several points since. I'll explain why in a moment. In my heart, I'm bearish on the fundamentals because I believe the massive debt that the world has accumulated is completely unsustainable. We have reached levels of public and private debt that are wholly unprecedented, to the point where the term "record levels" is an understatement.

According to the Bank for International Settlements, the debt of governments, private households, and non-financial companies rose from 160% of GDP in 1980, to 321% of GDP in 2010. After the figures are adjusted for inflation, the world's governments have more than four times the debt levels of 1980, and private households have more than six times the debt.
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No positions in stocks mentioned.
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