Stock Market Continues Its Recovery


Other Americans may take the day off. But not us…not here at the headquarters of The Daily Reckoning. We’ve got some reckoning to do.

But let us take a moment to bow our heads and offer this Prayer of Thanksgiving…

Thank you, good Lord, for everything.
We are still alive. We are still solvent.
Help us stay that way. If not both, at least the former.
Lead us not into temptation. Keep us in gold and cash until this is over.
And thank you for bringing the man called Obama to the White House…he might not be any better, but he could hardly be worse; or could he?

Okay, we’ve said our prayers…now, down to business…

Yesterday, the stock market continued its recovery. The Dow was up 247 points. Oil sank to $54. Gold lost $7.40 to come to rest at $811.

We have been waiting for a major rally. Perhaps it is here. But watch out. It is probably temptation coming…

Wait…this is national holiday in America. This is probably a good day to tell you:

What We Believe

Yes, dear reader, we may be cynics, scoffers and doubters here at The Daily Reckoning, but we’re not nihilists. We have our beliefs. And feelings too. Really.

Here is what we think:

Financial markets are part of public life. As a consequence they follow the rules of all public spectacles. That is, they are one part rational and sensible…one part incomprehensible…and one part pure humbug. You never know exactly which part it is you’re looking at.

But the markets are also moral, not mechanical. That is, they follow moral rules, such as – Thou Shalt Buy Low and Sell High…Thou Shalt Save Thy Money…Thou Shalt Not Speculate Unless Thou Knowest Exactly What Thou Art Doing.

Break those commandments…and you’re on the road to money Hell. No point in tinkering with the machine. You can’t ‘fix’ it. That’s just the way it works. Financial sins are punished, one way or another.

But moral lessons – as opposed to mechanical knowledge – are cyclical, rather than cumulative. One generation learns. The next forgets. That’s why the biggest market trends tend to follow great, long cycles – approximately generational in length. In 1929, for example, stocks hit a generational high. They didn’t recover until 1954 – 25 years later. They reached a peak in 1966…and then declined until 1982. They didn’t reach another major peak until 2000 – 34 years later.

We all know what has happened since. The market tried to correct in 2001-2002, but the feds wouldn’t let it. They inflated the biggest bubble of credit and speculation in history…

…that bubble has just burst.

What now? Well, we can expect a long period of regret, reorganizing and repentance. It takes time to undo mistakes. It takes time to learn. It takes time to correct the errors of a 25-year bull market.

If the real top of the bull market cycle came in 2000, we will probably see the next peak around 2025. Meanwhile, there is a dark valley to cross.

But wait…there’s more.

Because while the private economy is reluctantly owning up to its mistakes…going into rehab…making amends…rebuilding balance sheets….and promising never to do such stupid things again…

…our leaders are doing all they can to stop the learning process.

“Here’s $800 billion,” was yesterday’s temptation. “Go out and have a good time.”

“Rescue, Part 2” is how the International Herald Tribune describes it. The plan itself has two features. In the first, the feds will spend $200 billion to buy up loans made to consumers and small business. In the second, another $600 billion will be offered to the mortgage industry.

Our colleagues at describe the program:

“It’s an $800 billion slush fund aimed at loosening credit for homebuyers, consumers and small businesses.

“And it may get bigger…

“Treasury Secretary Hank Paulson has left the door open for more funds. He says, “The facility may be expanded over time and eligible asset classes may be expanded later.”

“Why doesn’t this come as a surprise?

“So there is still no telling how much more money the government will throw at this crisis. But our back-of-the-envelope calculations puts the running total at over $8 trillion.”

The Washington Post sums it up beautifully. “A year ago, the central bank had assets of $868 billion, of which about 90 percent was in Treasuries. Last week, it had assets of $2.2 trillion on its books, of which 22 percent was in Treasuries.”

How this will end, we don’t really know.

But we know this: You can’t pump $8 trillion in funny money into the economy and not expect consequences.”

Meanwhile, the Europeans don’t want to be left behind:

“The European Commission urged EU governments Wednesday to jointly combat the economic slowdown with euro200 billion (US$256.22 billion) in spending and tax cuts to boost growth and consumer and business confidence.

“If fully enacted, its two-year “European Economic Recovery Plan” would see the 27 EU governments spend 1.5 percent of the bloc’s gross domestic product to halt the slowdown that has already pushed some European nations into recession.”

But let’s not get distracted by the details. The markets are teaching people a lesson. The feds don’t like it. They want people to believe that the economy is a mechanical system…that they just need to find the right screws to turn…and the right levers to pull.

Since the “machine” is visibly slowing down, these simpletons think they can get it going again. Just add more fuel!

Of course, as we saw in 2001-2007, the feds can certainly have a big effect on the economy. Their “economy as a machine” theory often seems to work. In fact, practically everyone believes it will work. They just argue about which screw to turn…and who should do the screwing.

The Keynesians say you turn the screw marked “fiscal policy.” When private spending slumps, just replace it with government spending. Pretty simple, no? But when the feds turned that screw – arguably, too far – in the ’60s and ’70s, it didn’t seem to work. Instead, they got stagflation.

So, Milton Friedman pointed to the lever marked “monetary policy.” Give that a pull, he said. It will make sure that the economy always has just the right amount of credit at just the right price. So, Maggie Thatcher and Ronald Reagan both pulled on the monetary policy lever. And Alan Greenspan swore by it. He yanked it so hard in the recession of 2001-2002, the handle practically broke off. Milton Friedman was still alive at the time and actually approved of Greenspan’s handiwork, saying that he had ‘spared the economy a worse recession,’ or words to that effect.

Now the machine has broken down again. It has thrown itself into reverse; the 3rd quarter showed an absolute decline in US output – and it’s speeding up in the wrong direction! And now the terrified feds are ‘pulling out all the stops.’ Which means they using both Keynes and Friedman, and every other tool they can get their hands on.

But the real problem is this: the “economy as a machine” theory is much too simple. No theory, said the philosopher Godel, is ever complete. In science, each one is a stepping stone, towards a fuller and more complete theory. Even theories that take you in the wrong direction are useful – at least in science. They are eliminated…and discarded, so science can take a new direction.

In economics, no theory is ever discarded. Instead, they are merely recycled as market conditions change. “Markets make opinions,” say the oldtimers. In a boom, it is the free market theories everyone wants. “Leave the market alone…it will take care of itself,” they say. But in a bust, the cry goes up: “Help!”

For the moment, Mr. Market’s correction still dominates the economy. One way or another, it will continue for many years. But the Feds are turning the screws and pulling on the levers. Keynes is in fashion…for the present. But Friedman is still around too. Between the lot of them, they ought to be able to do some spectacular damage

But there is plenty of room for surprises…and more mischief from the feds. At some point, we presume the feds will succumb to the lure of the printing press. By some accounts, they already have. Then, we’ll really see some excitement.

So, enjoy your Thanksgiving turkey…and stay tuned.

*** Frugalista. It’s the latest thing, dear reader. Just as we predicted, being thrifty has become fashionable again…so fashionable they even have a word for it: frugalista. It means someone who doesn’t like to spend money but it nevertheless very stylish.

Spending money is soooo 2007…appearing rich is soooo passé…..having a big car, a big house, a big bank account is soooo, like, yesterday.

Chic poverty. Coming soon, to neighborhoods near you.

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.
Bill Bonner

Latest posts by Bill Bonner (see all)



  1. Ok… I completely agree with your logic and can see that you have been correct at the daily reckoning about this crisis.

    what i want to know however is how central bankers and legions of MBAs can be blind to what seems so simple. surely they have economic advisers who can appreciate the same macro economic results that you can. surely some of these individuals are on a circulation list and have a comment they would like to make… ?

    i can’t believe that paulson and co are at the helm of an evil empire with intentions of committing everyone to servitude. i, like many of your readers, wish to understand why it seems far more plausible this is based on motivating people to buy gold through preferred suppliers than an ideological war against misguided policy.

    so so so confused.

    confused in australia
    November 28, 2008
  2. “If the real top of the bull market cycle came in 2000, we will probably see the next peak around 2025”. Yes, but the location of the middle of the valley between them is far more interesting. Promise you’ll tell us when we get there.

    Philip Coggan
    November 29, 2008
  3. Mistake in argument.

    The Dow Jones took roughly 25 years to close above the 1929 high. But it was roughly another 12 years before a valuation peak comparable to 1929 was attained.

    So in Bill Bonner’s argument the next high should have been 2037, using his historical precedent.

    Using the valuation peaks of 1901, 1929, 1966 and 2000 the average peak to peak is 33 years – peak in 2033?

    From valuation peak in 1901 to valuation trough in 1920, the duration was 19 years, using trailing ten year earnings.

    From valuation peak 1966 to valuation trough in 1982, it was 16 years, also using ten year earnings.

    From valuation peak in 1929 to valuation trough in 1949, it was 20 years, using trailing one year earnings to make a suitable comparison in the cycles.

    So that the average duration from peak to trough is roughly 18 years. Which suggests that the duration from valuation peak to valuation trough maybe around 2018.

    While the recent interventions of the Federal Reserve have been contrasted to post 1929 it is suggested that the contrasts should be 1927, 1971, 1987, and 1997-99.

    This then suggests that a major rally in the stockmarket will occur in the aftermath of measures taken to prevent the unpreventable, as has occurred, more or less, in the above interventions.

    The argument for the above is presented in “Crisis then Last Hurrah” in “Barack Obama, Jimmy Carter and JFK – Clues to the Future”

  4. Rick Ackerman’s daily post

    Best & Brightest See Rally Ahead

    For edition of December 01, 2008

    Some of the most astute bears we know have turned bullish in recent weeks, none moreso than Porter Stansberry. Porter was a good six months ahead of the crowd when he read Fannie and Freddie their last rites early in 2008. Although we can’t recall the last time he waxed enthusiastic about stocks, he is doing so now: “The investments you make right now will become the best investment of your entire life,” he asserts in his latest advisory. He sees this as one of the great buying opportunities of the last 30 years.

    Bob Hoye is another seer of renown who thinks a turn is at hand, although not a full-blown bull market. In recent years he’s been a bear’s bear, and he’s gotten it right for as long as we can remember. He now thinks equities are building steam for a powerful rally that could carry into 2009: “A [bear rally] amounting to fifty percent of the loss from the May high seems possible,” writes Bob in the November 27 edition of Pivotal Events. That would imply 10,300 for the Dow and 1090 for the S&Ps. (They are currently trading, respectively, for around 8800 and 896). Another favorite of ours, Peter Eliades, sees a bullish correction that could last till April or May. Peter, whose Stockmarket Cycles was recently ranked by Hulbert’s as the top performing newsletter in the country for the first nine months of 2008, says that although the odds are small that the November 21 low will endure, conditions are improving for an intermediate-term rally.

    Powerful MACD

    And finally, there is our old friend and former PSE options-floor colleague Tom Tankka, a trader who has lived by his wits, and lived well, since we first met him nearly 30 years ago. An e-mail we received from Tom last week took a skeptical view of our recent assertion that the so-far 1200-point rally in the Dow was just one more short squeeze, destined to fizzle out as quickly as those that have preceded it. Tom responded as follows: “A short squeeze, pure and simple? Possibly. But there’s one thing you can’t ignore on the last low: the huge MACD bullish divergence. It’s one of the most powerful MACD patterns I’ve seen — and I follow them diligently, as you know. The kicker is, it exists in hundreds and hundreds of stocks that I track, and I have never seen this before. Bottom line: This rally will probably go much further than most think. The test should arrive shortly, as this wave up gets overbought. A shallow pullback should lead to a further squeeze into year end, as I think most are underinvested — especially the hedgies, who just got done selling for all the redemptions. Also, we aren’t that far off in tracking ’29: The market dropped 49% off the highs, then rallied back like 40-50% in four months before a very painful 2-1/2 years down. We just dropped about the same, and could be set for a similar bounceback. Stay tuned.”

    Investor’s ’A-List’

    For our part, with the global economy sinking into its deepest bog since the 1930s, we would be astounded if stocks were indeed about to embark on the kind of sustained rally that our friend Porter envisions. However, we think his “A-list” of stocks is a good place to start if you’re seeking relatively value, safety, and long-term returns. The list includes ExxonMobil, Wal-Mart, Microsoft, Johnson & Johnson, AT&T, Chevron, IBM, Pfizer, Cisco, Apple, Verizon, Intel and McDonald’s. These companies are not going out of business any time soon, and, if truth be told, the way they conduct business looks better suited to survival than the methods and policies now being pursued by the U.S. Government.


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