The Great Depression Online

Great Depression Online Archive Issue:

Where Are We Headed?

Great Depression Online
Long Beach, CA
July 13, 2010

Inside This Issue You Will Discover…

*** Bull and Bear Markets
*** What to Make of It
*** Where Are We Headed?
*** And More

“If we don’t change the direction we are going, we are going to end up where we are headed.” – Chinese Proverb

Bull and Bear Markets

Where’s the stock market headed?  Will it be up or down?  Looking to the past to project into the future we observe a number of secular bull and bear market cycles. 

In fact, between 1929 and 1999 there were two secular bear markets and two secular bull markets.  Since 2000 we’ve been wading our way through another secular bear market.  Here’s a quick review…

From 1929 through 1941, as measured by the S&P500, the stock market lost 2.4 percent a year on average.  Then from 1942 to 1965 the stock market went on a spectacular 24 year bull market run…returning on average 12.2 percent a year in inflation adjusted returns.

By 1966 the incoming tide of stock prices had begun to recede as a mammoth wave of inflation began rolling toward shore.  For the next 16 years the S&P500 lost on average 0.9 percent a year accounting for inflation.  In 1979 BusinessWeek published a cover story titled “The Death of Equities.”  By 1982 only dorks and weirdos were still buying stocks.

~~~~~~Save the Virgins!~~~~~~

Most prevalent among the modern belief systems is that shamans of government and high finance can, by virtue of their Harvard degrees and clearly advanced intellects, effectively manage large economies.  The fallacy in this notion should be evident to everyone – here in the U.S., it’s as simple as noting how everyone from the Fed chairman to almost all of the nation’s political leaders and the best and brightest on Wall Street failed to anticipate the current crisis.  Any way you slice it, the lot of them were caught as flatfooted as the crew and passengers on the last voyage of the Morro Castle.

Save the Virgins!


Then, wouldn’t you know it, from 1982 to 1999 the S&P500 ballooned 14.7 percent a year – after inflation.  Of course, by then, everyone knew stocks were the easy road to riches…all you had to do was be “in” the market.  Mutual funds, 401Ks, Roth IRAs, buy and hold; you name it, by 1999 everyone’s retirement was banking on DOW 36,000.  Alas everyone got clobbered…and then clobbered again.

What to Make of It

If someone told you back in 1999 that, eleven years from now, the S&P500 will be at a loss, would you have believed them?  Only true stick in the muds would’ve believed such rubbish.  But that’s precisely what has happened…

“Markets make opinions,” the old timers say.  And after such a pleasant bull market run from 1982 to 1999 opinions were stubborn to change.  The idea that buying and holding stocks is a sure means to riches had to get crushed out of the average investor. 

After topping out in early 2000, the S&P500 crashed 49 percent to 776.76 on October 9, 2002.  It then advanced until October 9, 2007, where it peaked at 1565.15.

Then it crashed again – this time 56 percent.  On March 9, 2009, the S&P500 closed at 676.53…850.93 points below the year 2000 high and 888.62 points below its all time high.

Even with the stock market’s mammoth rally off its March 2009 low, as of last Friday, it’s still down 29 percent from where it was in early 2000.  But is this really a surprise?

It shouldn’t be.  Not if you’ve ever looked at a chart of stock market prices going back further than 20-years.  So where are we headed?

Where Are We Headed?

Secular bear markets can easily last 15-years.  Sometimes longer.  Yet we’re only 11-years into the current bear market.  What’s more, when we lick our index finger and hold it up to the economic winds, the gusts and gales feel quite different than in 1982.

The main difference, naturally, is the credit market.  In 1982 stocks were cheap and credit was expensive.  Considering the current S&P500 P/E ratio of 19, stocks may be a tad on the expensive side, but what’s more compelling is the price of credits…it’s dirt cheap.

Here’s what we mean…

Interest rate cycles span long periods of time…often they last between 25 and 35 years.  U.S. Treasury yields reached a peak in 1920 and then slowly slid until the mid 1940’s.  Then, they rose again – along with inflation – and Franz Pick famously declared that “bonds are certificates of guaranteed confiscation”.

But then, in early 1982, yields again ventured over the mountain and slid down a soft slope to historic lows in December 2008.  Since then they’ve skidded along yielding around 3-percent.  One day, perhaps next year, the price of credit will increase.  As the price of credit increases the price of stocks will decrease.

So even if we get a little boost in stock prices over the coming months, don’t think you’re missing the next big bull market run.  For the stock market – and the economy – will most certainly get clobbered again before the next secular bull market commences.  The debt will have to be crushed out of it.


M.N. Gordon
Great Depression Online

P.S.  The best thing you can do is to become as self-responsible as you can – trusting no shaman and approaching every important decision with a clear understanding that if things go wrong, no one – and no entity – will be there to make it right.  Increasingly, as the sovereign states get noticeably bankrupt, that will be the case.

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