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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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The biggest problem is that this new debt has been used primarily to consume and speculate (in real estate, stocks, etc.) and to service existing debt; it has not been used to create new economic growth. In the first decade of the 2000s, each dollar of new credit produced a mere $.18 of new GDP (contrast this with $.59 per dollar in the 1960s). This makes the world debt trend unsustainable, for the same reason that it would be unsustainable in your personal finances. The math is pretty simple: If you're borrowing $100,000 each and every year, but your income is only increasing by $18,000 per year, it won't be long until you're buried up to your eyeballs in debt you cannot ever hope to repay. Under these conditions, it's not a question of "if" you'll eventually go bankrupt; it's only a question of when. The same is true for the world.

Most bears already know this -- the problem is, going back to our time machine analogy, how long can the world's governments keep kicking the can? We don't know because this particular debt experiment has no precedent. But I do know one thing with certainty: They can kick the can a lot farther than most of us imagine is possible. I know this is true because they already have.

As a result, when it comes to projecting and trading the market, bullish and bearish are relative terms to me. Despite my fundamental bearish bias, I've always tried to be a "neutral trader," at least as much as possible. When the charts suggest higher prices, I try to position accordingly; and vice-versa when they suggest lower prices. I let the charts lead, because there is no way I can accurately predict the incredibly-complex fundamentals of "if and when the wheels will come off the Debt Machine." There are entirely too many moving parts to know at what point things will break, which parts will break first, and exactly what happens when they do (the governments are not going to sit idly by as things break down; we've seen that in action already).

Because this is the reality, I always do my best to look at the charts fresh, and trade in a neutral manner -- thus I am bullish or bearish on the market based solely on what I think is correct directionally. As one of my readers recently said so eloquently: "I'm for whichever side is paying the most."

Which brings me to another point for bears to consider: In late 2011, I think the wheels were on the verge of coming off, not only from the market, but from the world. I do believe that's a prelude of what will eventually happen one day, but I think the Fed (and the rest of the world's central banks) stick-saved everything exactly where they needed to, and that inflection point was huge in retrospect. How long they can keep the show going is anyone's guess, but many bears have been playing emotional catch-up ever since.

It's human nature to get a bit shell-shocked and overwhelmed by big events, whether those events happen to us personally, or on a global level. Our nervous systems are wired in such a way that we sometimes continue to react to these past events as if they were still going on. Have you ever nearly been in a car wreck, then noticed your hands were still shaking some time after the danger had passed? The wreck was a near miss and the disaster never happened -- yet your nervous system is still on fire, and the adrenaline continues.

From that near miss, some of us will even decide to live out the stressful event in our imaginations, and consider "what if?" Still others will relive whatever did happen in memory (a form of imagination) -- and thus stretch out the reaction from their nervous systems even longer. Our imaginations can be incredibly powerful tools because our subconscious simply does not know the difference between fantasy and reality. We can actually create chemical reactions inside our bodies, purely based on imagination. I don't want to get too far off track, but this is why things like "positive thinking" have proven medical benefits.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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