Why Bull Market Absurdities Disappear in Bear Markets

It's summertime...and the livin' is still easy here in France.

But the children are all gone. The house is quiet. Our office - usually a hive of activity when the children and their friends are here, checking email...searching for cheap tickets...or just hanging out - is as dead as a tomb. The only sign of life is the clicking of computer keys as your editor prepares his Daily Reckoning.

And what is there to reckon with today?

Slowly, the idea of "recovery" is fading. People are beginning to realize that we are in a Great Correction, not a typical post-war recession.

"The Never Ending Recession," is one title in the financial news.

"Consumers slow to spend, businesses slow to hire," The Washington Post sums up the situation.

"US Restaurants Starved for Business," reports The Los Angeles Times.

The Dow fell 57 points on Friday, after a big down day on Thursday. Gold lost $6.

Are you invested in stocks, dear reader?

You are? Shame on you!

Of course, there are always one or two stocks that will buck the trend. And if you're willing to wait, say, 20 years, you might be okay.

But in the next few years, US stocks are not likely to pay off. The stock market entered a bear phase in January 2000. Since then, stock market investors have made some money and lost some money. Some are ahead a little. Some are behind. Most have gotten nowhere.

But the bear still hasn't fully expressed himself. The stock market still hasn't reached its rendezvous with desperation. That's when you will be able to buy stocks without worrying about further price erosion. That's when the sellers have sold and the typical person wants nothing more to do with stocks.

The ideas of "stocks for the long run" and "stocks for everyone" are not permanent, universal truths. They are merely cyclical fads. People believe in stocks when stocks have been doing well. They stop believing in them when they stop doing well.

There are times when most people believe they should never buy stocks at all. They think stocks are a specialists' game - for professionals who can take the time and trouble to figure out what is really going on in the companies they invest in. The notion that you can just buy a stock because you like the product...or because you've heard that the industry is doing well...is regarded as absurd. And it is absurd.

But it's an absurdity that comes around in a bull market and disappears in a bear market. We're in a bear market now. The next leg down should drive the last moms and pops out of the market and bring prices down to bargain levels.

The next leg down will also drive investors even further into the bond market. That's right, dear reader, investors will jump from the frying pan of equities into the fire of US Treasury debt. They'll be looking for a safe place for their money. And nothing will seem safer than the credits of the biggest economy on earth.

"Default?" "The US government?" "Don't make me laugh," they will say.

But the US will default - one way or another.

It has more financial obligations and commitments than it can bear. Somehow, someway, sometime they'll have to be sloughed off - probably by a combination of trimming, taxing, and inflating.

And sooner or later, those super safe bonds will lose half their real value. Probably not sooner. But maybe later.

And more thoughts...

"Well, I'll never forget this summer," said Henri, a 70-year-old neighbor, yesterday.

"And that's thanks to you."

Henri has a son who is in his 30s and unmarried. When he heard that our daughter Maria was visiting - with two of her actress friends - he quickly put two and two together.

"You should invite my son over..." he had suggested.

So we did. And the young people got along well. And the girls were soon hanging out at Henri's pool.

"It was such a pleasure," Henri reminisced, "the girls came over in their bathing suits. And they are so polite and nice. And I think one of them was from Australia. I don't know where the other one was from, but she was just as beautiful. And Maria had told them that the French always kiss each other on the cheek. So when I met them, I was prepared to shake their hands, but they each kissed me.

"And I can tell you frankly that that is something that doesn't happen every day at my house. After all, we're in La France Profonde here. This is not the Riviera. It's not every day that I am kissed by three lovely young actresses wearing bikinis.

"I hope they come back next summer!"

Alas, they are all gone now. The actresses. The aspiring doctor. The musician. Even the high school student. All have moved on...back to school...off with friends...on to their careers and companions.

And it is raining.

"Well, it is good and it is bad," said another neighbor. We had our four children visiting...with 12 grandchildren. I can tell you, things were pretty lively at our house. And what a pleasure it was to have them.

"But it's a pleasure when they leave too. You get to sit down...put things back in order in the house.

"They're not all gone yet. But they're leaving on a pilgrimage tomorrow. Each year we do a section of the route of St. Jacques de Compostelle with the children and grandchildren. You know, it's a hiking trail that goes all the way through France, then across the Pyrenees to Santiago. We hike for three days, normally, and do about 80 kilometers. We carry our backpacks and sleeping bags and sleep out under the stars. It's a great experience for everybody."

"What if it rains?" we wondered.

"Then, it's not so nice..."

For reference, here is John Adams on the St. James' Way...also known as the Milky Way, since it follows the general direction of the Milky Way, from Northern Europe to the Atlantic Coast of Spain.

Adams was sent to Paris to raise money for the American War of Independence. His ship started to leak so he was put ashore at Finisterre on the coast of Spain. From there, he and his two sons made their way to Paris by following the route of St. Jacques de Compostelle backwards:

I have always regretted that We could not find time to make a Pilgrimage to Saint Iago de Compostella. We were informed...that the Original of this Shrine and Temple of St. Iago was this. A certain Shepherd saw a bright Light there in the night. Afterwards it was revealed to an Archbishop that St. James was buried there. This laid the Foundation of a Church, and they have built an Altar on the Spot where the Shepherd saw the Light. In the time of the Moors, the People made a Vow, that if the Moors should be driven from this Country, they would give a certain portion of the Income of their Lands to Saint James. The Moors were defeated and expelled and it was reported and believed, that Saint James was in the Battle and fought with a drawn Sword at the head of the Spanish Troops, on Horseback. The People, believing that they owed the Victory to the Saint, very cheerfully fulfilled their Vows by paying the Tribute... Upon the Supposition that this is the place of the Sepulchre of Saint James, there are great numbers of Pilgrims, who visit it, every Year, from France, Spain, Italy and other parts of Europe, many of them on foot.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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