Every Major Bull Market Needs a Major Bear Market

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Here’s a cartoon sent by one of our dear readers. We have readers all over the world. But Pamela must be one of the most remote. She lives on a tiny island in the middle of the Pacific. We’ve seen the photos. It looks stunningly beautiful. A South Pacific paradise.

Economic Cartoon

It’s a little surprising that someone who lives in such a paradise setting would trouble herself worrying reading The Daily Reckoning and worrying about macroeconomics. But the world of money is fascinating. And probably a lot more entertaining if you’re not in the middle of it.

Yesterday, investors must have felt like they’d rather be somewhere else. The Dow registered a loss of 268 points. Gold took a $49 beating.

We won’t know for sure until tomorrow. If tomorrow is another bad day – as it probably will be – then it will be clear that the last stage of the bear market has arrived. This should be the final drop…when stocks should go down to their ultimate bear market low.

Where will that be? We don’t know. Maybe Dow 5,000. Maybe lower. One way or another every major bull market needs a major bear market. The two go together like yin and yang, Abbott and Costello, or gin and tonic. Take one out of the picture and the other one no longer makes any sense.

We’ve had our bull market. It took the Dow from under 1,000 to over 14,000 in the space of 26 years. We’ve had a bubble too. The party was a lot of fun for everyone.

Now, it’s time to clean up. It’s time for the bust in the economy…and the bear market in stocks. That’s just the way it works. Sorry.

If this bear market is going to correct the entire bull market from 1982 onward, it has to take prices back to the levels they were when it began. Back then, you could buy the Dow (from memory) for about 5 times earnings. Now, (we’re not doing any research here…just broadly remembering the figures…) it’s at about 20 times earnings. If those numbers are correct, you’d expect the final low to come in about a quarter of where it is now…or about 2,500.

Another way to look at it is to ask ourselves what the Dow of ’82 would be today, adjusted for consumer price inflation. We don’t know the answer to that either…but we’ll guess that it would be about 4 times what it was then – or about 4,000.

So, now we have a range… We know roughly where this market could be headed – if it is the yang we’re expecting. And if that’s where it is going, a South Pacific island paradise would be a good place from which to watch it get there.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. The Dow may come down to as low as 7500 and that’s about it.

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  2. 40% of the value of the Dow is based on overseas earnings, like all the Big Macs Aussies eat and things like that, in years past that figure was lower and thus the Dow was lower

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  3. I tend to agree, Bertie, but a fall in the USD could make up the rest of the distance.

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  4. YES FOLKS, roll on up to The Daily Reckoning if you are negatively biased and want to converse with other negatively minded people.

    Dow at 4000. Yeah right!!

    I have a mate at work who is similar. The “glass half empty guy” we call him.

    Why don’t you start your own website called “The Doomsayer” and get this 4000 Dow sensationalised rubbish off this site. I logged on here as I have an interest in the economy but lately the naysayers are running amok on this site and it has gone from being based on fact to being based on fiction.

    I might click here again as the site is saved as a favorite. But if it’s full of fiction again I’ll be looking elsewhere for some decent in depth commentary. We are all Time Poor and need to make the most of any time we spend on the net. You do not need to sensationalise to get people to read your articles.

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  5. Some people know that the world changes constantly. They know that everything comes to an end…that we are born alone and we die alone. To these changes are a time to experience grief but also to embrace new things, things they never thought they could have even. Because every cloud does have a silver lining. Some people deduce the truth from observing their surroundings and march out towards destiny. They resist their fear. They are not negative. They are honest, brave and optimistic.

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  6. And others just get on with things and fix up their houses and look after their families and live on expecting the worst, yet hoping for the best, being neither optimistic or pessimistic. they know who to not to trust and how to be diligent. With their spare dough they invest in things they understand and believe in, and gradually they profit, regardless of global ups or downs, not expecting jackpots or money for nothing. They do the same thing with large things as they do with small.

    I think Bill just saying shares stink right now so don’t buy them. The rest is his usual hyperbole – he’s sometimes wrong but at least it’s thought provoking.

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  7. Brian, as Lachlan and Dan point out – it’s not pessimism, but really a distrust for the group-think of the mainstream. Question things, especially commonly held ideas.

    And if you really don’t like it here, I am sure ADR will be happy to give you a full refund.

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  8. @Brian.. Markets are made up of bulls and bears, both have a right to express what they think is going to happen… just because you dismiss these views or maybe don’t like to see them because you wish to see only “positive” feedback to maybe make you feel that all is good in the world and that the economies can only go up from here then maybe just maybe you should not be an investor..

    Yes I am a bear in the current market, but the difference between you and me is you think I am wrong and I hope I am… I believe the DOW and the ASX will both test new lows.. DOW <5000 and the ASX around 2400, as I said I HOPE I am wrong.. We are in deep do doo if I am right…

    Stillgotshoeson
    February 9, 2010
    Reply

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