(Photo credit: James Lee)

Presently, the main doubt tormenting me is whether we are already in a long-term bear market or not. Everybody seems to hold the view that we are still some time away from it, and this is, precisely, what worries me.

One of the most interesting facts about economic recessions and bear markets is how fast we can go from euphoria to depression. That happens, in part, because economic downturns come from euphorias that infected the credit market. And, as in a euphoric behavior, it has a high and a low.

Throughout history, we can see that bear markets follow euphoric bull markets. However, this time might be different. We are far from having been in a huge euphoria, yet. Yes, some sectors, like tech, have been through bubble phases that have, at least partially, deflated, but we still lack one of those “the sky is the limit” moments.

We can put the cycle into perspective by looking at the high yield credit market. I have written an article exploring that theme in detail. However, keep in mind that it is not clear that the HY market has already peaked. It is true that the issue of HY debt is at high levels, while spreads and bankruptcies are at decade lows, but a recession in the HY market is not clear, yet.

I’ve made the case that HY debt refinancing needs will be topping around 2021 and that might be the turning point. However, it is deeply scary that the 2-3 years before the bust view is so widely held. Usually, when everyone is expecting the same thing in the market, it doesn’t materialize, or it might materialize earlier than expected.

My investment approach relies on my awareness of euphorias. Only that way can I anticipate the following depression. However, in the present market, I feel like I might be a boiling frog. I fear being cooked without realizing it.

I still hold the view that higher interest rates have led to several repricing/price-discovery movements, increasing volatility. However, we cannot discard the idea that the market tends to offer self-fulling prophecies. And, if market participants become convict that the market rout is a sign of a looming recession, then the recession might very well materialize.

So far, the things that I expected to happen at the beginning of a crisis are materializing: stronger dollar, scared stock market, rising yields, and directionless gold. The stronger dollar is proving to be an element of additional disruption to many countries around the world, self-reinforcing the USD appreciation cycle. Additionally, trade tariffs will decrease global growth and bring inflation. Was this a long slow euphoria? And, no one noticed it?

One hypothesis includes the boom-and-bust of liquidity. For long years, investors have been confident there wouldn’t be a liquidity scare because the QE was there to back it up. However, with the QE’s unwinding, investors are starting to feel the chill of not having it there. That is also contributing to the boom in volatility. After one year of low volatility, we are facing periods of volatility spikes, which are self-feeding and contributing to the unstable nature of financial markets. I lean to the last hypothesis, but I keep having nightmares in which I am a frog in a boiling pan.