Saturday, October 10, 2009

The battle of Bull Runs and Bear Runs

Click on chart to enlarge; right click it to enlarge in a separate window (Firefox).

While putting that thousand word picture together, Guambat recalled a paper he wrote back in 2002, addressed to no one in particular and never published or distributed to more than a couple of friends at the time. He found it buried away in the cyber-burrow.

Guambat has blown the cobwebs and burrow dust off the paper, which he then titled "That was then, this is now", and posted it online at

Its interesting. Some excerpts of what Guambat wrote:
I’ve seen so many pundits comparing our market now with the major declines of the last century that I decided to look back to the times of the prior major bear markets of the 20th Century, with the help of a used book I just bought, which is a newspaper-style account called Chronicle of the 20th Century (Chronicle Publications, Mount Kisco, N.Y. (1987). This edition only goes back as far as 1986.

... putting it in its most simplistic terms, the period from 1918 to 1942 was basically a diamond shaped consolidation to break the Dow 100 mark, and the period 1965 to 1982 was basically a rectangular consolidation to break Dow 1,000.

The point of this study paper is to say, simply, that that was then and this is now and we can draw nothing of predictive value from either of those times to infer what action the market may take in the context of trying to mount Dow 10,000. We can only note that the market did need time to consolidate at those particular levels, that the declines experienced in those times were severe, and that the market recovered to go on to higher levels.

Indeed, the market moves up and down within the patterns of those consolidations served as ideal entry and exit points to trade the market profitably during those trying times (which is not to say that anyone could have picked the exact turning points each time, but to say that an astute trader would have had a pretty good guide to know to accumulate stock below the mid-range of the pattern and distribute above the mid-range, until the break-out.)

The contrast between the conditions in the world prevailing during that period [the 29 Crash era] and the present period could hardly be more stark. Geo-politically, that period witnessed the international version of the musical chairs game that became the beginning of the end of the great colonial powers. Revolutionary instability came right up to America’s southern underbelly. By being the last hold-out in the all-consuming WWI, the US was able to amass and husband extraordinary wealth, and to emerge as the last man standing. As I see it, that is the critical factor that gave rise to both the Roaring ‘20's and the Crash of ‘29.

The thing about the ‘65-‘81 bear market was its stealth. It was the bear market you have when you’re not having a bear market. It was undramatic. It was unheralded. It was a silent, patient, relentless, grinding down weariness that finished off the last of the bulls before the market finally found the strength to mount Dow 1,000. While the worst of it was seen in 1974, the strength to bust 1,000 did not gather until 1982. On five occasions, from 1965 to 1981, it tried to bust that barrier, only comprehensively achieving that goal on its last attempt.

Internationally, the world was a much more stable environment than it was in the period of the ‘29 crash. Colonization was replaced with self-determination, with the attendant many “flash fires” but not any major conflagration; many old fires continued to burn, such as Northern Ireland and the Mid-East. The “great powers” were reduced to 2 for all intents and purposes. Fear of nuclear annihilation kept the Cold War pretty much on ice. So US national expansionism was really not on the agenda, although the aggrandizement of global corporate expansionism, led mainly by the US but not restricted to it (see, e.g., Nestle, Toyota, Unilever, HSBC, News Corp) was a nascent private colonial movement not much talked about.

At home, there was a major cultural challenge to the old social orders as Blacks and other ethnic minorities, and then young people and women generally, demanded and obtained a place at the table. Community order, composition, values and structure were rearranged, right down to the fundamental make-up of the family.

Curiously the “Chronicles” don’t reveal that much about Wall Street and the market during this whole period. It was, as I said, an unremarkable, stealthy bear.

The ‘74 low on the DJIA was 577, 43% off the 1,000 mark and about 45% below its high, and the S&P lost almost 48%; probably not much worse than now, considering the damage done to the Nasdaq and S&P. Other than the oil hostage situation, the world did not have that flavor of flying apart at the center as did the period of the ‘29 crash. While wage and price inflation may have been a problem in either event, the “external” shock of the oil embargo seemed to be the straw that broke the bull’s back this time. Unlike ‘29 and now [at least in the US], inflation was the villain. It is too simple to say that the oil embargo caused the ‘74 Bear, but at least it was a blatantly obvious contributor. Over-valuation was an unmistakable aspect of ‘29, but not so obvious in ‘74.

Like ‘29, over-valuation was critical to the Millennium Melt Down [the "Dot-Com Bust"]. Unlike ‘29 or ‘74, there were no obvious causes of the Millennium Melt Down other than valuation issues (though there is a large body of doomsayers who believe we are on the verge of a credit binge induced deflationary period of gigantic proportion).

My own theory of the cause of the MMD is based on the commercial exploitation of “virtual property”. For the first time in history, a company that owned and made nothing of any tangible value became the richest corporation in the world, placing 3 of its owners in the 5 most wealthy individuals on the globe list. It is a company that didn’t exist until the beginning of the ‘82 Bull Run. Microsoft epitomizes the virtual property business. The discovery of virtual property ignited the business world in the same way that California was built overnight by the gold discovery in the mid-1800's.

And the virtual property boom was not restricted to (nor necessarily discovered by) the dot-com world of the internet. The exploitation of intellectual property has its roots way back in common law days of copyright and patent. But it wasn’t until recent times that whole industries have rallied to the protection of intellectual property across the globe in the pursuit of the riches that come from licensing property as a business model distinct from the more traditional model of alienating property for profit.

The commercial control of ideas rather than things has never before been so commercially valuable, or temporally precious. It has engendered the rally, “content is King”; it has sent the world’s largest companies with the world’s most expensive lobbyists and lawyers chasing after kids in garages running Napster or otherwise sharing their oldies but goodies music over the internet, and after back-alley pirates in way-off third world countries trying to make a few bucks with CD duplicating machines and fake designer labels. It has replaced the traditional business model of discreet sales, [with] the model of the toll taking gatekeeper. And it has meant that one good idea may beget another that trumps the former and leaves it a goner just as fast as the notion takes hold in the noggin (so long as the latter has not trespassed on the virtual property rights of the former).

And there is another form of virtual property that has perhaps contributed even more to the explosion of the wealth from ideas than that form discussed above. This form takes its inspiration from the efficient and rich geniuses who developed the Chicago stock yards to such a state of perfection that when they were through with a cow, there was nothing left but the moo. This virtual property is the domain of the rocket scientists of the big financial institutions, who have been able to so completely tear apart and repackage traditional debt, capital and currency instruments and on-sell them in so many derivative forms that they rival the number of stars in the sky. Today literally untold trillions of dollars worth of these instruments are traded daily across the globe, in streaming electronic hints of matter and meaning. They have the weight of wealth to make or break whole countries in a blink of the eye. And not even the world’s central bankers combined seem to have any real sense of the size or scope of this business.

My theory is that the major impetus to the rise and fall of the ‘82 Bull Run has been the discovery of this new world of virtual property, of legally protectable good ideas and bad, and of the inexactitude of the methods available for valuing this newly found, and sometimes fleetingly held, form of property. In this context, it is absolutely no wonder at all that valuations have outstripped traditional analysis. Who is to say when these ideas are over or under valued?

Well, the market is. That has always been the market’s job; to put a price on something. That does not mean that the market is always, or even often, right. It overshoots, it undershoots, and it carries on like a madman sometimes, but it is simply trying to do its job of pricing the products it trades in the best way it knows how.

You might want to have a look at the paper.

Then, again, probably not.



Blogger Jack said...

Well, now, Guambat, look at the article in this week's New Yorker: "The Secret Cycle - Has the Key to the Market Been Found?" There is a body of financial savants, only a minority of whom have ever been convicted, who convincingly demonstrate that we are at the mercy of mysterious numerical forces that wash over all manner of human activity. It is comforting to think that we are not really responsible at all for our financial decisions that go south.


11 October 2009 at 9:48:00 am GMT+10  

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