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.
