First Bear After a Bull Market
Posted
Mar 12 2008, 01:20 PM
by
Richard Schwartz
Here’s a quote I could lead off the economy or stock market sections with, from www.comstockfunds.com: “The world is burdened by excessive debt and leverage throughout a large part of the financial system, and the working off of the debt and deleveraging of the system is a highly complex matter that will not only take time, but will result in significant restriction of new credit while this is happening.” Comstock goes on to say that many economists haven’t seen this type of recession before and that’s why so many of them have been and still are missing the boat. Anyhow, as I wrote Friday, the stock market is out of control now, that’s because the economy is out of control. Everywhere we look, the contracting financial system is putting the kibosh on new economic activity far and wide. Whether it be commercial construction, retail, private equity, China, Europe, states and local municipalities, US jobs, housing prices, auto sales, gaming, arcane credit financing vehicles, things are now stuck in reverse. I even see Investor’s Business Daily in today’s paper running a chart comparing today’s stock market performance with back in 1937. That’s long been a theory of mine, that this first bull market, October 2002 to October 2007, after the big bad bear market of 2000 to 2002, was similar to the first bull market after that awful 1929 to 1932 Papa Bear market. Similar because is was artificially pumped up by multiple tax cuts and interest rate cuts and eventually all the steam would dissipate and the economy would fall off the cliff. Sort of like what’s been happening now with the US consumer now getting squeezed from all sides. I even emailed BARRON’s comparing 1929’s massive, sudden margin call on individual investors buying on 95% margin to last year’s similar sudden margin call to institutional investors buying on 10 to 1, 20 to1 and more margin this time around. Eerily similar I’d say! Schwartz View: The US economy started down two months after the March 1937 top although many business leaders were advising to “buy boldly” and that “business is sound.” Sound familiar? Anyway those bullish words didn’t end up holding water as stocks lost 49% off the bull peak and gave back 2/3rds of all the ground gained in the extended, five year, first bull market after the Papa Bear of 1929 to 1932. Along the way, from March 1937 to March 1938 economic output fell 32% and unemployment jumped big time. Net, net, the past is proving to be prologue telling us to tread lightly.