Secular Bear Market

First off, in order to set the table for my hypothesis of a secular bear market, let's discuss Wall Street's current S&P price predictions according to their Global Trade War Investment Hypothesis. As we see in the chart below with annotations, not ONE major Wall Street investment bank is predicting a bear market for 2025. Their latest price estimates range from a low end of 5,200 which is only slightly below the current level, to a high of 7,000 which is 30% above the current level. The average price prediction would see the S&P 500 rally back to the all time high. In other words, Wall Street is predicting that this trade war is merely a speed bump in an overall bull market. The question we have to ask is, what could go wrong?

To begin with I will define the term secular bear market. A secular bear market is a multi-year prolonged bear market that can't be "fixed" with the usual application of monetary and fiscal stimulus. This is the type of bear market Japan was in for over 30 years. And the type of bear market that China has been in for 15 years since 2008. My assertion is that the same fate awaits the U.S. stock market.

Let's now understand why I believe that Trump's trade war makes a secular bear market likely to have already started.

The U.S. lost its competitive advantage in manufacturing to Japan over 40 years ago in the 1980s. Subsequently, Japan lost its competitive advantage in manufacturing to China over 20 years ago. Now China is losing its competitive advantage to the Asian Tigers (Korea, Taiwan, Vietnam, Malaysia etc.). When the U.S. began losing its competitive advantage in the 1970s, policy-makers turned to "Free trade" in order to bolster investment and corporate profit. This extremely profitable policy came at the expense of the U.S. working class and to the benefit of Wall Street and its ultra-wealthy investors. Fast forward several decades of economic carnage and now we have a president who believes he can restore America's competitive advantage in manufacturing that was lost decades ago, via executive order:

It's all good. In fairy tale theory.

However, contrary to popular belief, the initial dominant effect of Trump's tariff war is not to send jobs and investment rushing back to the U.S., the initial effect is THE EXACT OPPOSITE - the trade war is making U.S. companies far less profitable and therefore making the U.S. far less desirable for capital investment. This is leading to a mass outflow of capital from the U.S. on a magnitude that has never been seen before:

"People are concerned that maybe we're seeing a capital strike against the US, where large pools of capital are selling US assets and taking their money home"

Worse yet, is that Trump has given himself no way out of his quagmire trade war. This past week he raised tariffs on China to a prohibitive 145% not realizing that China is America's largest supplier of Tech hardware. So then on Saturday he was forced to "exempt" a multitude of Tech items from his massive tariff. However, on Sunday his Commerce Secretary came out and said that these Tech exemptions are only temporary and all new tariffs will be levied on Tech within a couple of months in addition to the 20% tariff effective immediately.

Which all comes back to the theory of competitive advantage. Trump wants to make the U.S. a leader in Tech manufacturing, but right now the U.S. is still totally DEPENDENT upon China for its Tech supply chain. So how can Trump both cut off the U.S. supply chain AND attract investment in the U.S. at the same time? It's impossible.

The supply side is only half the story. Trump's tariffs are now going to implode demand for Tech both in the U.S. and in China, which will further reduce investment.

All of which means that investors must first cross the valley of liquidity collapse in order to get to the perceived higher returns on the other side. However, these higher returns are pure fiction based upon an illusion of the U.S. regaining competitive advantage that it lost decades ago. Unfortunately, the financial fallout which has already begun will increase uncontrollably over the coming weeks and months, and then the investment "benefit" will arrive in the form of massively reduced profit margins for Tech companies.

The bottom line is that the most overvalued sector in the global stock market is now about to implode.

My prediction is that Wall Street will finally figure this all out when the S&P is down -50% and they will then lower their returns forecast for 2025 accordingly.

Don't believe it can happen? It already did, not too long ago.