PDSnet About us -Backgound Approach

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Our Background Approach - updated on 13th July 2022.
In our opinion, Wall Street, represented by the S&P500 index (S&P), has been in a bull trend for the past fifteen-and-a-half years. This understanding is important for private investors because all the markets of the world, including the JSE, tend to follow Wall Street. As a private investor, you should be close to fully invested during a bull market and stay mainly in cash during a bear market. To determine whether the markets of the world are in a bull or a bear trend you have to begin by looking at what is happening to the S&P500 index.
So our view is that the bull trend began on 9th March 2009 when the S&P index closed at a low point of 676,53. Prior to the impact COVID19 in 2020, the index was making a new series of record highs and was clearly in a massive bull trend. Once the pandemic was under control, that bull market resumed - which is what we predicted would happen in our <a href="/index.php/bear-trend">article</a> "Bear Trend?" published on 14th March 2020. The virus caused a clear "V-bottom" which we regard as a "technical aberration" and not a true bear trend. It was followed by a series of new all-time record highs on the S&P culminating in the record high of 3rd January 2022, when the index reached 4796,56. 
After that, it began a new downward trend which took the S&P down to 3577,03 on 12th October 2022. This was a 25,4% fall and, in keeping with the tradition among techincal analysts that any fall of more than 20% is a bear trend, most commentators took the position that a it was a bear trend and not just a correction. Our view is different. We believe that it was a exaggerated correction and that the bull trend, which began in March 2009, was still in progress. For a more detailed justification of this position refer to our article "The Great Bull Market" published on 28th October 2024.
So you will see some analysts saying that the current bull market began from the low of 3577.03 on 12th October 2022 and so is still relatively young. Our position is that it has been in place since March 2009 and is by far the longest bull trend since the S&P began shortly after World War II.
 
To get a good understanding of what this great bull market means and how it came about, you need to first understand the long-term context of exactly where the world economy is right now and more particularly, the US economy, in relation to its history. Without this deeper understanding, you will be as confused as most economists and analysts have been in the face of the relentless and apparently unstoppable upward trend on Wall Street.
A Bit of History
Firstly, we need to go back to the crash of 1929 and the Great Depression. What few people know is that that crash was actually anticipated and predicted by a Russian economist, Nikolai Kondratiev, in his book "The Major Economic Cycles" which was published in 1925, 4 years before the 1929 crash. What Kondratiev said was that roughly every 54 years there would be a collapse of commodity prices in the world economy. He traced this cycle back 300 years, but it had already been recorded thousands of years earlier on the Hammurabi stele (a stone onto which the leader Hammurabi etched his laws) which dates from 1770 BCE. This 3700-year-old stele talks about periodic economic booms and busts known as "Jubilees" which come roughly every 50 years. This idea is echoed in the Old Testament in the book of Leviticus (Chapter 25, 8-13).
We believe that this historical 54-year cycle corresponds roughly to the economically active lifespan of the average man. In other words, you become economically active in your early twenties, and you cease to be economically active in your middle to late seventies. So, there is roughly 54 years during which your economic decisions will influence the economy and the markets.
Everyone who was an adult and experienced the 1929 Great Depression first-hand took away from it a deep and immovable fear of debt. They avoided credit cards, trade accounts and overdrafts - in both their personal and business lives. The impact of this over the next 50 or more years was enormous.
But by 1987 the influence of that generation was waning rapidly. Those that were still alive were in their middle to late seventies and as their influence faded, so debt levels began to creep up again - personal debt, business debt, international trade debt and government debt.
So, in our view, Kondratiev's commodity price cycle is really a cycle of periodic debt clean-outs. It is just most visible in the prices of commodities. It seems that every generation has to learn for itself that debt levels cannot keep accumulating and going up forever:
At some point the piper always has to be paid
 
Another Bit of History
After the 1929 crash and during the Great Depression, John Maynard Keynes published his book "The General Theory of Employment Interest and Money". In this book he argued that the Federal Reserve Bank (“the Fed”) had adopted exactly the wrong approach after the collapse of Wall Street in October 1929. He argued that instead of adopting a "tight" monetary policy, what they should have done was to inject additional funds into the economy to compensate for the wipe-out of wealth on the stock market. The tight monetary policy they adopted, said Keynes, caused the cycle of bank collapses and unemployment that came to be known as the Great Depression of the 1930's.
Fast forward to 1987, Ronald Reagan is a second-term Republican President and in October of that year the S&P500 index falls 23% in a single day. This is more than double the first day fall on "Black Monday" (that was 9% on 28th October 1929). The Republicans very much wanted to win the election in 1988 and so they called in their recently appointed Governor of the Federal Reserve Bank, Alan Greenspan.
Greenspan was an avid student of John Maynard Keynes and he told Reagan that he knew exactly what to do to avert another Great Depression. What he did was to gather the leaders of the G7 (the seven largest economies in the world at the time) and persuade them that they had to pump money into their economies to compensate for the collapse of their stock markets. They did exactly that - and the results were nothing short of spectacular. The stock market stopped falling in March of 1988 and, 23 months after the 1987 crash, it reached a new all-time record high.
So successful was this cash-injection policy that Greenspan repeated it at every stock market bear trend for the next 19 years that he was Governor, and his successors (Ben Bernanke, then Janet Yellen, and now Jerome Powell) continued in a similar manner. The problem is that in the 1980's it took an injection of tens of billions of dollars to turn the US economy around. In the 1990's it was hundreds of billions and in the "noughties" (i.e., 2000 to 2010), following the sub-prime crisis, it has been trillions. In other words, each successive cycle required an exponentially more powerful monetary stimulation to avoid the inevitable, periodic debt clean-out and collapse of commodity prices that Kondratiev observed and wrote about.
And debt levels have gone higher and higher. The US government debt was $3,5 trillion in October 1987. Today, at the start of 2022, it is just over $35,8 trillion. If you really want to scare yourself witless go to the web site: <a href="https://www.usdebtclock.org/">https://www.usdebtclock.org/</a>
The Sub-Prime Crisis and Quantitative Easing
In 2008, following the sub-prime crisis, the Federal Reserve Bank of America, in its efforts to stimulate the economy, just ran out of money. But that was no problem. Taking a leaf out of Robert Mugabe's book (from Zimbabwe), they began to print money. They literally created massive quantities of money out of nothing and injected it into the US economy. Other first-world economies followed suit. Following the 2008 sub-prime crisis the central banks of the world created and injected well over US$12,5 trillion into the world economy.
This creation of money (known euphemistically as "quantitative easing" or Q/E), combined with holding interest rates at close to zero percent for at least 8 years, finally had the desired effect of pushing the US economy (and other economies) into a boom. At last, scared consumers and businesses began spending again. Up to then they had been sitting on cash, hoarding it in case things got bad again. It has been estimated that the non-financial companies of the world alone were at the time sitting on about US$7 trillion. In South Africa alone non-financial companies were hoarding about R750 billion.
After ten years of the most powerful monetary stimulation in history, the US economy slowly entered a sustained economic boom. Until February 2020, it was creating between 200 000 and 250 000 new jobs every month and unemployment was at all-time record lows. This boom was anticipated by investors and drove Wall Street and other world markets to a series of new record highs. By the middle of February 2020, the S&P500 index was trading at record levels and was probably due for some sort of major correction.
The Corona Pandemic
The impact of the coronavirus was completely unexpected. Investors world-wide were caught flat-footed and off-guard. None of the usual economic signs of the top of a great bull market were apparent. The world economy was gathering steam and looked to continue upward for some time. COVID-19 was a true "black-swan event" (refer to The Black Swan: The Impact of the Highly Improbable., N. N. Taleb).
In our view, this means that the effect of the pandemic was always going to be materially different from other previous downward trends. We believed and said that its impact on the markets will directly reflect the perceived progress of the pandemic itself. We predicted a short V-bottom in our article of 14th March 2020 [link] at a time when perceptions were universally negative.
By July 2022, most countries had the virus well under control with infection and death rates falling. Our prediction that by the end of 2021 the coronavirus would largely be a spent force had materialised. Some countries fared better than others because of their state of preparedness and the strictness with which they implemented counter measures to prevent the virus from spreading. The rapid roll-out of vaccinations worldwide has helped mitigate the pandemic.
Investors world-wide were also aware of these facts and they began to buy bargains in the share market as early as March and April 2020, especially because of the massive additional stimulation agreed by the US Congress. Indeed, in the almost 2 years that the pandemic impacted on markets, the Fed injected a further $11 trillion into the US economy through Q/E. The S&P500 rapidly reversed its downward trend and completed the V-bottom as we predicted. Since then, and until the beginning of 2022, it made a series of new record highs as investors try to discount the massive monetary stimulation since February 2020.
The great bull market had resumed - and gained considerable momentum from the additional stimulus and some notable efficiencies which came out the lockdowns. COVID-19 was seen a "bump in the road" (albeit a major bump) of this great bull market. By the beginning of 2022 the US economy was creating almost 500 000 new jobs every month and unemployment was at a very low 3,6%. 
Many analysts, both inside America and outside, had become confused and bewildered by the relentless progress of Wall Street (and all stock markets world-wide). The COVID19 downtrend was a brief respite and they remain very concerned about a bull market which had by that time gone on for a record 13 years. They found it more and more difficult to justify the prices at which shares were trading based on the profits of the companies which they represent. 
Inflation in America remained at above 5% for most of the second half of 2021 and then began to rise, reaching 8,6% by June 2022. This forced the Federal Reserve Bank to begin raising rates aggressively culminating in a 75-basis point hike in May 2022. Even then the repo rate was between 1,5% and 1,75% - well below the going inflation rate. The futures market was pricing in rates of 3,4% by early 2023. Into this mix came the sudden and relatively unexpected Russian invasion of Ukraine. Oil prices initially went up sharply. Stock markets the world over fell. And they kept falling. By 8th June 2022 the S&P500 had fallen more than 20% and financial journalists declared it to be a new "Bear Trend".  
The Federal Reserve Bank began raising interest rates to control inflation. And they also began a program of quantitative tightening (Q/T) by removing $47,5bn a month from the US economy and talked increasing that rate to $95bn a month in September. 
Commodity prices from oil and copper to gold and coal, which were all rising began slowing down and looking toppish. The relatively low oil prices over the previous five years kept a lid on inflation so central banks were much more interested in pushing growth than in defending the purchasing power of their currencies. Suddenly, central banks the world over were desperately trying to put the "inflation genie back into the bottle" by raising interest rates. 
By October 2022, however, it was becoming apparent to the "smart money" that the downward trend had been hugely over-blown. Shares were very cheap and the importance of artifical intelligence (AI) was beginning to be recognised. This massive jump in computer technology held the prospect of raising almost every company's productivity and hence profits. The 10-month old so-called "bear trend" suddenly disappeared as investors piled back into their faourite high-tech shares. 
In our view, the 25,4% drop in the S&P was never a bear trend, but rather an unusually large correction. We outline our arguments in this regard in our article "The Great Bull Market" published on 28th October 2024 [link]. We believe that the great bull market is not over - and in fact we believe it has some distance to run as the full impact of AI and other technologies such as humanoid robotics take hold. At the same time the world is moving rapidly towards cheaper energy in the form of various renewables, especailly solar power. We expect a sustained drop in the price of energy over the next 10 years which will make everyone wealthier than they are now. 
The American democratic system tends to encourage politicians to have a relatively short "time preference". They are motivated by the next election and their immediate popularity. Trump was a clear example of this. He was horrified by the corona pandemic because it came at the worst possible time for him in an election year. He did everything in his power to obscure the impact of the pandemic and reverse the downward spike in March 2020. Politicians inevitably fail to implement or support policies which will involve bringing them pain in the short term, but which have long term benefits. This explains why debt levels in America just keep on rising. It has become politically unacceptable and thus impossible and unacceptable for the Americans to have a significant economic recession. So the authorities keep borrowing from the future to ensure short-term prosperity.
No market goes up in a straight line. There are always rallies and corrections. Ultimately every bull trend must come to an end. We just think that this bull trend still has some distance to go.