The Big Bull Markets has run its course - Bill Bonner

Courtesy : Moneycontrol

In an exclusive interview with CNBC-TV18, Bill Bonner, President & Founder, Agora Inc and the author the famous The Daily Reckoning, speaks about the global markets and gives his outlook going forward.

Here is a verbatim transcript of the exclusive interview with Bill Bonner on CNBC-TV18. Also watch the accompanying video.

Q: What is it looking like globally a big bull market in equities which has started again or the jury is out on that?

A: I think the big bull market has run its course. You really have got to go a along way back to try to understand what is going around in the world markets. The world markets have been dominated by the extreme consumer spending from mainly America, but Britain as well. That trend got started many-many years ago, 50 years ago when the modern economist led by John Maynard Kenyes came to the conclusion that consumer spending was the source, it was the foundation, it was the reason that economies prosper, so they pushed consumer spending. Well that trend lasted for 50 years. And in the 50 years, consumer spending, consumer credit and finally debt rose particularly in Britain and America to levels that couldn’t be sustained. So that crash happened in 2007 and since then we are in a period of deleveraging. It is a period of deleveraging particularly in those Anglo Saxon economies. Following that crash we had a massive response by governments all over the world and mainly by China and America which are the two big players in this drama. What we are seeing in the markets today is a response to all that hot money pushed into the system by the governments. It is not a sustainable bull market, it’s merely a bounce from the bear market that started a long time ago.

You could look at that bear market in couple of ways. In America, the bear market really began in January of 2000 and that is when the dot-com bubble exploded, since then markets generally have been down, the prices on stocks have been down and what we are seeing now is only a continuation. That bull market has never fully expressed itself because it has been hit so hard by efforts by government to reflate. We found after a micro recession that in 2001, the government came in with a massive effort at reflation. It was the biggest fiscal stimulus ever delivered in American history and that boosted our prices, we got another big run up on stocks. Then we are here again in 2007, what we are seeing now is another one of these reflations caused by governments, it’s not the big story.

The big story is after 50 years of credit inflation in America that credit expansion has come to an end. Now, we are living through a period of deflation which like Japan, Japan has been in this for 20 years and it’s not going to end any time soon and pretty soon companies are going to realize it, prices are going to go down. So we are in the middle of a long-term bear market and we are going to see another leg down in this bear market, probably pretty soon.

Q.How grave would you say are the sovereign default risks right now for globally equity markets and otherwise?

A: I would say they are huge. We are seeing this period which for economist is greatest time to be alive ever because we are seeing all these dramas that were set in motion many years ago, we are seeing them come to a dramatic conclusion. And one of those conclusions is that government is still in the grip of this economic theory, which is fundamentally wrong, which is that you got to stimulate consumer spending at all costs. So they have been stimulating the fiscal stimulus, running big budget deficits that is happening almost everywhere in the world. We have seen in Greece what happens when you push that to far, we are going to see in Japan, we are going to see it in Italy, in England, in Spain and finally we are going to see it in America. When that happens, when you see that process begin to unfold, you are going to see the effect in all the asset markets because it’s not possible that you can have a crisis in sovereign debt and not see it reflected in the prices of the assets around the world.

Q: Where does that put your opinion on commodities or your take on the commodity world? Gold and also things like crude, where do you think they are headed in the environment that you just outlined?

A: I think they are headed down. But there are two things going on, on the one hand government is inflating, they are inflating as much as they can, they will inflate as much as they can and governments like America can inflate a lot because they have the power to effectively print money through this process of quantitative easing. So you will see two things going on at once, on the one hand you are going to see, a real deflation in terms of gold because gold is the only real money, you are going to see a fall, a drop in prices for commodities. So that is what you get in a deflation, a deflation period could be described even as a depression. During that period you are going to see real prices for commodities fall and that would include the real price of gasoline, real price of oil, real price of copper.

Why is that? It is because in this period we are going to see, particularly we are going to see a fall off in buying from Japan, from China. China has only buying so much in this so many raw materials because it is stimulating so much. China has a stimulus programme which proportionally to its economy is four times the size of America’s programme. So it has drawn in a lot of resources and it has bid up a lot of prices, but that cannot continue. So we are going to see probably some sort of slowdown or even a blow up in China when that happens you will see the commodity prices collapse.

Now having said that, remember that there is other thing going on too because meanwhile the government particularly the US government, but all governments are stimulating by increasing the supply of paper money. So you are probably going to see a run up, this is going to be first time in history that we have seen this, in nominal prices meaning the price that you will be quoting for oil, gold, copper and everything will be going up while the real price actually goes down, the real price being the price in gold, the price relative to other things in the world.

Q: How are you mapping the dollar from here, is there much more downside here or like it has done for the last few weeks the dollar goes up some more?

A: It is impossible to say. But my guess is that when we get to this next leg down in the economic picture and the next leg down in bear market in stocks, we are going to see another retreat to the dollar. My guess is that people will seek safety, they will be alarmed, they will leave things like the Chinese stock market and they will go to US bonds, they will go to the US dollar because historically traditionally at least for the last 50 years that has been perceived as the world's safest credit. But this happens at a time when ideas, opinion are shifting. So it wouldn't be at all surprising to see that this move into US bonds and US dollar was not very long lived. That people would come to see that the US dollar is actually a risk and the US bonds on the whole are probably the riskiest asset class you can have over the long run because the US retains the right to destroy the value of those bonds.

And it's hard for me to imagine how the US can expect to continue to finance such huge deficits. In February US recorded its largest budget deficit ever of about USD 221 billion, if you extrapolate that over a year, we are talking about USD 2.5 trillion dollars in deficits. Americans don't save that much, even if you took all the savings of Americans you wouldn't get that much money. So it's not possible to finance those kinds of deficits over a long period of time and not see collapse of the bond market. And when you see collapse of the bond market, of course people flee the bond market and that means fleeing dollar, so the dollar then will look very bad. So we could have this kind of process where the dollar goes very up in the short-run with the general collapse of the economy and very down in the long run as people realize that dollar is not really a good store value.