When does a bull market end? It’s an important question, and not just a philosophical one.
Most investors will tell you that it ends when prices stop going up – and start going down.
But that price action can be a misleading, and usually uninformative data point.
Because a bull market ends when it runs out of buyers.
This phenomenon has some interesting implications for the current global marketplace.
Think about the different asset classes out there. They’re certainly all interrelated, either inversely or directly.
Which asset classes are running into a situation where they’re running out of buyers?
Which asset classes are in a bull market, and yet still have very little relative buying?
I’d argue that government debt (bonds and currencies) are currently running out of buyers. Lots of people want to sell sovereign debt. Italy. Greece. Spain. Portugal. The United States. Japan. And so on.
These countries need to sell this debt because it’s the only way they can pay for their deficit spending – to keep the gravy train rolling on.
So there are lots of sellers. But who is buying this stuff?
We know that even the biggest bond funds in the world have eased off of Western sovereign debt. Bill Gross famously sold off all of his U.S. Treasury holdings earlier this year. He bought some a few months later – but the point is, these sovereign debt issuances are running short on buyers.
We saw that lack of demand recently when German bank Danske Bank called last week’s Bund auction demand "the worst on record."
Someone is. And increasingly, we know the buyers aren’t pension funds or mutual funds. They’re not mom and pop scrimpers and savers.
They’re other debt-ridden western governments.
They’re all buying each other’s junk, because no one else will, and they can’t ever let an auction fail, because that would be an admission that something is quite terribly wrong with the world’s financial systems.
So, look for that trend to play out. Eventually all of the liabilities will be piled up nice and neat onto the backs of the dollar and the euro. That’s the bet that the world’s central bankers are making. On one side is the Keynesian dream that you can manage an economy, socialize everything, have your cake and eat it too.
On the other side is the idea that modern, developed world currencies can’t ever go bust.
One of these things is going to give. Possibly both.
And that brings me to the asset class that’s in a bull market, and still has relatively few buyers.
Thanks to all of the nonsense I’ve described so far in this letter, this asset class will have plenty of buyers in the coming years. I’m talking about commodities – and specifically, silver and gold.
When these currencies continue to collapse, fail and otherwise lose credibility, the buyers for gold, silver and other "real" assets will come out in droves. They’ll have no choice. Holding government debt is a suicidal position that they will do anything to exit.
The flood of governments buying other government debt will come rushing back into commodities, making the bull market so far look like a tiny blip on the radar.
Get ready. Be smart. Invest now – before the crowds.