Is This US Stock Market Fall to Become a Bear Market?

Dear Reader,


The S&P 500 and Nasdaq dipped into correction territory in the past week. Is this the end of the longest bull market in US stock market history, the beginning of a bear market and an ensuing economic recession?

In my opinion, no. Why? To cause a bear market or an economic recession in the US and globally there has to be a large shock to the economy usually due to internal or external fundamental reasons. The 2008 economic recession and a stock market fall was caused by a fundamental problem with the banking sector - souring real estate mortgages and the connected with them derivatives which were placed around the globe and the financial crises became global.

Now I do not yet see a large fundamental problem with the banks. Yes, many financial bubbles have been blown up, but we are not yet at a tipping point, although we are close. The banks are still relatively sound.

The banking business, though, is inherently leveraged. If people start withdrawing their deposits, the liquid means of the banks are only 10% of their assets. So if 10% of the assets get withdrawn as deposits, the banks are basically bankrupt. So there is the implicit and not so implicit deposit guarantee of the global governments regarding banks.

So are the globally systematic banks stable? Yes, they are. Several smaller financial bubbles have been blown, though. The US stock market, especially technology stocks, leveraged loans, the ETF assets, real estate, China to name most. Real estate is not yet in a huge bubble, but commercial real estate prices have gone up  a lot. Some of the bubbles like China and some technology stocks have partially burst.

Although there is no one huge bubble, a perfect storm could cause many of the bubbles above to pop simultaneously which will threaten the banks.

So is this a buying opportunity for stocks, US especially? I expect when the S&P 500, DJIA and Nasdaq fall around 5% since the beginning of the year the time is rife for buying the dip.

I expect in 2021 or 2022 the financial system will be close to an economic recession and a prolonged bear market, because many of the financial bubbles above will have simply become too large and unsustainable.

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Kind regards,

Petar Posledovich