Top Five Bear Markets of All Time

The good news is that the credit market is unfreezing. The bad news is that no one in the stock market cares.

All the hot money being pumped out by central banks is finally starting to de-thaw the inter-bank lending market. You probably now know more about the inter-bank lending market than you ever expected or wanted to know. But the decline in the rate banks charge each other to borrow overnight (LIBOR) really just means that banks have slightly more trust in each other this week than they did last week.

Yet on Wall Street, the Dow fell 514 points overnight. It was a 5.7% one-day fall. The S&P 500 is down 39% year-to-date and 43% from its high last October. You'd think the global warming in the credit market would be a good thing.

But investors have other worries on their mind now. Earnings, for one. In the bigger picture, they are wondering just how big this global recession is going to be. How many more layoffs will there be? How bad will it get? Judging by stock prices, pretty bad, and maybe worse.

Oil fell to under $67. Gold's at $735. Copper and aluminium fell, as did the Reuters/Jeffries CRB Index of commodities. If you look at the action in this market, investors are pricing in a shocking 2009, not just a run-of-the-mill recession.

Apparently there's a small silver lining in all of this. A recession means the Reserve Bank of Australia can ignore yesterday's inflation numbers and cut interest rates again on November 4th. The Australian Bureau of Statistics reported yesterday that inflation ran at 1.2% in the most recent quarter and 5% for the year.

If inflation keeps rising and the Reserve Bank keeps cutting rates, there won't be any need to guarantee bank deposits in Australia at all. Bank interest won't even keep up with the inflation rate. Cash will be a wasting asset. And if shares are still falling and property can't recover...ummmm.

Maybe the RBA won't ease after all. Maybe the concern that future growth could slow will be trumped by actual real signs of inflation in the economy now. Or maybe not. "This won't stop the RBA from easing," Mac Bank interest rate strategist Rory Robertson.

"History shows that recessions solve inflation problems, so much of the world is about to have their inflation problems solved, and pretty rapidly," he told a reporter. History also shows you can have rising prices AND a recession. That's the good old stagflation of the 1970s. And in any case, we wouldn't say that a recession "solves" the problem of inflation.

But maybe we're overly worried about inflation. After all, most central banks target or tolerate annual official inflation of 2% and call it "price stability." And Jeremy Grantham, who's been bearish on stocks since at least 2003, seems to think that value will be destroyed in financial asset markets faster than new lending and credit can reflate it into a new bubble.

"Don't worry at all about inflation," wrote Grantham in a note to investors. "We can all save up our worries there for a couple of years from now and then really worry! Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows."

Ouch. A year or two of lower lows on stock markets until inflation rips through the economy? That sounds...depressing.

But Grantham is dipping his toe into equity waters. "At under 1000 on the S&P 500, U.S. stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10th prices, but even more so. History warns, though, that new lows are more likely than not."

The S&P 500 made its bear market low in October of 2002 at 776. That's 13.3% below yesterday's close of 896. And should it decline to that level, it would be exactly 50% below its all time intra-day high of 1,552 (set on October 31st of last year).

By any historical standard, that's a whopper of a bear market. So Grantham dipping a toe in now is an assumption that this bear market is roughly consistent with similar bear markets of the last 137 years. Take a look below and you'll see what we mean.

Five Worst Bear Markets on the S&P 500 Since 1871

Rank	High Date	Low Date	High	Low	% Drop
1	September1929	June 1932	31.3	4.77	-84.8%
2	August 2000	February 2003	1485.46	837.03	-43.7%
3	April 1973	December 1974	118.4	67.07	-43.4%
4	August 1937	April 1938	16.74	9.89	-40.9%
5	February 1876	June 1877	4.52	2.73	-39.6%

The bear market of 2008 already ranks up there among the all time greats. The only question now is whether the bear market in stocks triggers a bigger recession in the economy that leads to an even greater fall in stocks in the coming years. So is it 1929 or 1974?

There aren't long bread lines...yet. And from Australia to America, the government is searching for ways to keep existing mortgage owners in their homes while brining new buyers back into the market. But it's all happening in the slow-motion depression way Bill Bonner and Addison Wiggin wrote about in Financial Reckoning Day back in 2003.

We've also been getting a lot of reader mail about how to buy physical gold. Good question. We'd say check the Perth Mint, but got this note recently from a reader:

I was in Perth the other day with a bit of time, and a grand burning a hole in my pocket so I headed down to the mint. I usually get the beautiful minted gold bars, just like a normal gold bar but set in a nicer Perth mint cast. None available. Any normal gold bars...none available. Oh, any 1oz Nuggets or Kangaroos? None available. Maple Leafs or Kruggers? None available. Anything at all in 1oz lots? Yep, a 1oz "lunar" gold coin celebrating the Chinese Year of the Rat! (produced by the Perth Mint)....that'll do! Thank You

We contacted the Australia Bullion Company here in Melbourne this morning-only to find out all the jewellery stock has been melted down, the bullion sold off, and the business restructured! So retail investors can't get bullion that way.

You might try Chris Mealin. He's the managing director at Downies Australia Coin Auctions. Downies has a retail store in the arcade at 98-100 Elizabeth Street in Melbourne. You won't find much bullion, Chris said when we spoke to him this morning. And the collectable gold coins Downies sells will typically sell at a 10-15% premium to the spot price. But if you're interested, you can reach them at (03) 8677 8800.

Dan Denning
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