Bear Market to Last at Least Five Years


In December 1996, Alan Greenspan gave his warning that Wall Street was showing “irrational exuberance”. Even at the time, it was noted that Wall Street shrugged off the warning, although it came from the Chairman of the Federal Reserve Board. However, I wrote a piece about it in The Times, which was given the prescient heading “Wall Street Will Crash”. That article was published on December 12th, which now seems an age ago.

I quoted an American analyst, Michael Belkin, in support of my argument. He had observed that “by most traditional yardsticks, the U.S. market is exceedingly overvalued. I recently unearthed excellent dividend yield data going back to 1871 in the National Bureau of Economic Research database. The current 2 per cent dividend yield is the lowest in 125 years (the average is 4.5 per cent)”.

When I was writing, the Dow Jones industrial average stood at 6,500, around its all time high. It has had extreme fluctuations in the last few weeks, but on historic yields it has not completed its correction. Since 1996 it has experienced two bear markets, the present one, and the crash of the dotcom bubble early in 2000. The present bear market is by no means over. The average period of bear markets in the 125 years before 1996 was surprisingly long. Even if one excludes the 18 year bear market from 1899 to 1917, on the grounds that it was distorted by the threat of war before 1917, the average length of bear markets, up to 1996, was about five years. In these bear markets the dividend yield could go very high: in 1873, at the beginning of General Grant’s second term, the dividend yield reached 8.5 per cent; in 1917, the year that the United States entered the First World War, the yield peaked at 9.3 per cent; in 1932, the slump year in which Franklin Roosevelt was elected President, it reached 9.6 per cent; Pearl Harbour took it to 9.5 per cent. The recession of 1982 – a nasty one – only saw the dividend yield got to 6.2 per cent.

These figures cannot be made the basis for any remotely reliable forecast, but they do suggest two conclusions. The first is that the bear market on Wall Street is entirely likely to last for as long as five years. Of course, the recession in the economy could be shorter, though there is no guarantee of that. The second is that we may have to expect a relatively long period of high dividend yields and high price-earnings ratios.

House prices, which have played so large a part in this recession, have not completed their correction. The problem of American (and indeed British) debt has not been resolved. The first steps have been taken to reorganise the banks, but that process is far from complete. Consumer debt and mortgage debt are still excessive and unstable. The one favourable factor is that Governments are trying to reflate in a depression, whereas President Hoover deflated in a recession. At least that vital part of the Keynesian Revolution has become a normal element of official thinking.

William Rees-Mogg
Leading political editor William Rees-Mogg is former editor-in-chief for The Times and a member of the House of Lords. He has been credited with accurately forecasting glasnost and the fall of the Berlin Wall – as well as the 1987 crash. His political commentary appears in The Times every Monday. His financial insights can only be found in the Fleet Street Letter, the UK's longest-running investment newsletter.


  1. It is disappointing that William Rees-Moggs writes:

    “The one favourable factor is that Governments are trying to reflate in a depression, whereas President Hoover deflated in a recession. At least that vital part of the Keynesian Revolution has become a normal element of official thinking.”

    Paul Johnson in his “A History of the American People” came to this conclusion:

    [Hoover’s] “policy of public investments prevented necessary liquidations. The businesses he hoped thus to save either went bankrupt in the end, after fearful agonies, or were burdened throughout the 1930s by a crushing load of debt. Hoover undermined property rights by weakening the bankruptcy laws and encouraging states to halt auction-sales for debt, ban foreclosures, or impose debt moratoria. This in itself impeded the ability of banks to save themselves and maintain confidence. Hoover pushed federal credit into banks and bullied them into inflating, thus increasing the precariousness of their position” (p.619).

    It is in fact an unfavourable factor, government intervention to prevent the eventual outcome, that is going to make the coming depression deeper than it needs to be.

    “By this time [early 1933] Hoover’s frenzied intervention had prolonged the Depression into its fourth year…” (Johnson, p.620).

    At least Doug Noland understands the reality, writing just before the present Dow Jones nominal peak:

    “… the flawed view of the Fed’s role in the Great Depression: If only the Fed had created $5bn and recapitalized the banking system. More money, so they believe, would have provided a (“mopping up”) remedy for disastrous boom-time excesses. It wouldn’t have worked.

    “The issue then, as it is today, is not some finite amount of liquidity to keep the banks solvent and markets liquid, but instead the enormous ongoing Credit Creation and Intermediation necessary to sustain levitated asset prices, incomes, corporate earnings and government receipts” (Doug Noland, Money Market Issues,, August 24, 2007).

    The answer to today’s problem was the same in 1929. Andrew Mellon, Hoover’s Treasury Secretary, advise, quoted a number of times on this site, is still relevant:

    “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”…

    Proverbs 12:10 “…the tender mercies of the wicked are cruel”

    It is going to happen whether we like it not, so why make it worse in trying to prevent it happening? Because very few understand the real lessons of the Great Depression. Ben Bernanke is not one of them.

  2. watcher7,

    Thanks for the leg work. Put out to pasture this Moggs fellow.

    Keynes was a shill liar, hired by the Political Elite to conjure up stories to justify political action.

    Keynsianism is a fraud. The rank and file who believe in it are suckers and the dumb.

    Smack MacDougal
    November 15, 2008
  3. We won’t see the top end of town lobbying for a french revolution ( although “right wing” Sarkozy is stupid enough to want to inflict a global version on us).

    Asset values have to return to that sustainable by reasonable debt-income ratios. So one side has to give.

    The guy in the street thought that asset inflation was “trickle down economics” at work. It wasn’t …

    But taxing Joe public’s income is regressive and any asset stripping of the wealthy would have to surgically remove unproductive wealth and increase velocity without inflating.

    My thoughts on how to do that are :

    1. The numbers are too big (over valued assets with underwater borrowers) for governments to recapitalise the banks and to reflate.

    2. Instead of talking loan principal adjustments, government should subsidise the interest payments of affected borrowers.

    3. That new asset sale values would settle at nominally deflated levels with lending criteria normalised.

    4. That the banks be liquidated (Mellon) followed by short term govt recapitalisation.

    5. That such government interest subsidy and recapitalisation programme borrowings be financed by death duties.

    And why Coffeeaddict won’t they print me?

  4. Of coarse they can reflate if they monetise but we all know what that means. And if trickle down didn’t do anything for the real economy neither will paring back from the top for the period necessary to rebalance the distorted financialisation of the western former hegemony economies (the period of moral hazard enforcement).

  5. Doug Noland in his latest weekly article,, reinforces the theme of conventional wisdom being wrong:

    “I think often of the great economist Dr. Kurt Richebacher. My analytical framework was over the years heavily influenced by his writings and mentoring. He would always say, “The only cure for a Bubble is to prevent it from developing.” Today’s crisis confirms the brilliance of Dr. Richebacher’s work. At the other end of the spectrum, conventional economic doctrine is revealed as shallow and fatefully flawed.

    “I have repeatedly pointed to Milton Friedman’s analysis of the causes of the Great Depression as the keystone for our nation’s deeply flawed economic perspective. By the 1960s’, there was an eagerness to cast blame for the Depression on policy mistakes made in 1929 and subsequent to the crash. The depression, it was determined, was not due to any weaknesses or vulnerabilities associated with the Credit system and market pricing mechanisms. Instead, the 1920s were conveniently recast as the “golden age of Capitalism.” Over the years, Dr. Bernanke has repeatedly excoriated the “Bubble poppers” for their principal role in instigating the thirties downturn.

    “Those of us who have studied the nature of the financial and economic maladjustments engendered during the rampant Credit excesses leading up to the ’29 crash take serious exception. Indeed, the Friedman/Bernanke/conventional view of that historical Bubble and bust has been a most dangerous case of historical revisionism and flawed analysis. I am more interested today in working to change failed economics than fingering blame for the crisis on our public servants working desperately to avert collapse.”

  6. Watcher7 … and Doug Noland goes on to say that there are no rules on how to fix the current crisis and implies that it needs innovation. I disagree with him for giving Paulson a benefit of the doubt because class warriors don’t change spots or their motivation. But I agree on the need for innovative responses where they can avoid monetising, and that it will require debt financing & a system of payback that doesn’t choke the economy. Full mobilisation for war is proven to have done trick in the past but I hope minds are occupied with better options and that we are on guard against the dogs of war among us.

    Ross Delaney
    November 17, 2008
  7. Watcher 7, Doug Noland goes further in that article to say that there are no rules in how to respond and in essence recommends innovation. I agree with Smack McDougall regarding Keynes. I agree with the notion that a mobilisation for war is a proven cure (but a human and societal disaster). I agree with Doug Noland on innovation but disagree that a conflicted class warrior like Paulson has anything to offer and we have much to lose with him running interference and monetising or unleashing the dogs of war for the benefit of his mates.

  8. Ross

    While it is true that our financial problem can be notably improved by going to war, it can also have exactly the opposite effect. If war mobilization results in us losing the war, or results in a long, drawn out war in which we have high expenses and low gains, the result may be a furthering of the depression. Not only is it possible that we may not gain valuable territory that we could use as a cushion, such as the american western frontier was used, should we lose, but even if we won, if there was a low death toll and a limited change in the distribution of wealth, there would not be improvement through a decrease of responsibility and unemployment. The only change that may occur is through the investments and jobs created by mobilization for war, and that could be created many other ways, such as jobs in public improvements or investments into research and development of new technologies. I, however, know nothing, so if you see a problem with my logic, inform me please.

  9. Bill,
    Forgive me for correcting you, but Keyne’s theories have to apply in the reverse order: when the economy is beginning to grow, taxes should rise. And rise again. Until the downturn. Appealling? Do you see my point? Keynes is only quoted when mercantilists want their bottle! They never accept that taxes and high taxes at
    that, have their place!

    The Austrian school is much more straightforward and capitalism based: if you must over-inflate be prepared to liquidate ferociously to shorten the recession. Hoover was incompetent and almost without needing to say, corrupt. FDR was able to play with socialist policies before he eventually decided and achieved war as his stimulus of choice. Neither is a shining light.

    Oh and here’s a heads up: we’ve been at war, against drugs, terror and carbon for some time. Real wars are no longer an option, as they will become too damaging to the interests of certain sectors. The Islamic business may become unstable, but the timetable is for more decades to pass. So steer straight ahead for deflation and remember to look surprized!

    Pat Donnelly
    April 12, 2009

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