Things
are happening as we feared they would.

The
new Afghan democracy – meeting in a beer tent from Germany – "deteriorated
into shouting, finger pointing and threats," said the International
Herald Tribune. No Western nation has ever gone to war in Afghanistan
without regretting it later.

Meanwhile,
the dollar and the stock market have been going down. Gold has been
going up.

Of
course, if I could tell you what would happen next I
wouldn't be sitting at my desk this morning writing. At the very
least, I might be tempted to charge something for it.

I
don't know what will happen, but peeking over my shoulder at history
and tradition…I can at least take a guess.

Fish
gotta swim…birds gotta fly. And I gotta reckon. What I think we're
reckoning with today is the beginning of the second major phase
of a
bear market. Stocks have gone down in 11 of the past 13 weeks. Despite
occasional rallies, investors' portfolios are being ground down,
day after day.

The
Dow is down 13% so far this year…and seems to be heading for its
3rd straight year of losses. Not in 60 years has such
a thing happened. Few investors can imagine that it might happen
again.

Double-digit
gains are a hard habit to break. Once they've had them, investors
want them to come back, real soon. And so the patsies believe that
the last couple of years are just a lull before another storm of
rising share prices. Stocks are down, they think, but only because
a few bad apples spoiled the barrel…or Greenspan didn't cut rates
enough…or whatever.

The
insiders, meanwhile, have a clearer picture of what it going on.
They see few profits coming…and a lot of disappointments hidden
in the small print. They've been selling more than 4 shares for
every one that they buy. But the lumpeninvestoriat holds on. Thanks
to these stock market bumpkins, the Dow gave up ground so gently
investors have hardly noticed. There has been no panic selling,
no fear, no revulsion. Two and a half years after the market turned
down, investors still pay $40 for every dollar of earnings.

In
the first stage of a bear market, investors are shocked. They thought
stocks never went down. They thought the bull market was eternal.
When they find out otherwise, they take the news with the equanimity
of the brain-dead. "Of course," they say to themselves
with new-found sagacity, "stocks don't go up every year. The
trick is to have patience. For in the long-run, stocks always go
up."

The
second stage of the bear market tests their conviction. Stocks get
ground down lower and lower. Investors begin to wonder…then doubt.
Then look for someone to blame. Why am I losing money, they ask
themselves? Typically, there are hearings in Washington and a few
show trials in New York. Companies go bankrupt and corporate chieftains
are tortured.

But
most people still believe the promise of long-run riches. The trouble
is, they have bills to pay. They have retirements to finance. So,
they begin to shift a little of their money out of stocks, just
in case.

Worst
case, think most investors, they will be down another 10–15%
this year. That is the risk they face in sticking with stocks. "The
whole secret is to stay the course…" they believe, "through
bear and bull markets. The worst thing you can do is bail out when
the going gets rough."

But
the going has not even begun to get rough; stage two has barely
started. Somehow, stocks have to get down to levels where people
are no longer interested in my stock commentary.

At
40 times earnings, stocks can lose 80% of their values before they
finally find the bottom. How many investors will want to watch CNBC
when the Dow is at 3,000? How many ads will be placed in Barron's?
Imagine how investors might feel if stocks suddenly crashed to half
current levels? Or the Dow dropped 100 points each week for the
next 12 months? How long would it be before they gave up?

A
bear market does what a bull market does – only in the opposite
direction. No logic, nor argument deters it; it keeps going until
it is exhausted – fully correcting whatever came before. In this
case, America enjoyed 20 years of near-perfect circumstances. Its
competitors collapsed. Foreigners competed to lend Americans money.
Interest rates fell, government budgets went into surplus. The stock
market boomed and new technology promised a Brave New World with
constantly improving productivity and riches for all.

It
was "just absolutely freaking wonderful," says the Mogambo
Guru. What might America need to correct such a great thing? What
might be absolutely freaking terrible enough to break the patsies
and destroy the confidence of the last two decades?

We
will see…as Stage Two of the Great Bear Market of ’00 – ?
continues…tomorrow!

June
21, 2002

Bill
Bonner [send
him mail] is the president and CEO of Agora Publishing
and the author of the daily e-mail The Daily Reckoning. Click
here for your free subscription.