This Bear is Just Waking from Hibernation

As the market drops 200 to 300 points daily on a fairly frequent basis these days, and has now dropped 13% in the last four months, John Hussman’s valuation analysis based upon historical facts is proving to be accurate. He’s not an “I told you so” type of person, but I am. The MSM stories follow the same old storyline – this is just a correction, time to buy the dip, stocks are undervalued, the Fed won’t let the market fall. We’ve been here before, twice in the last fifteen years. Wall Street and their media mouthpieces attempted to spread misinformation about the nature of the markets in 2000 and 2007, as epic bear markets were just getting underway. John Hussman cut through their crap then and he is cutting through it now.

The Dow has dropped 2,300 points with no particular event responsible. The Fed has continued to delay their perennially imminent interest rate increase, six years into a supposed economic recovery. Bernanke declared he would raise rates when unemployment reached 6.5%. According to BLS propaganda, that happened sixteen months ago. The Fed will not be coming to the rescue. Their credibility is shot. This correction is just the beginning. As Hussman points out, this market is still overvalued and primed for a vertical drop. The collapse of Glencore and their $18 billion derivatives book seems like as good a trigger as any.

When you tell people in self denial the market could drop 40% in a few months, they think you are crazy. They declare this could never happen. They would get out of the market before it would fall vertically. Their memories are conveniently short as their normalcy bias and cognitive dissonance blind them to what happened over three months in 2008/2009.

Now for the really bad news. When markets are extremely overvalued, reversion to the mean requires a long period of undervaluation. They call this a secular bear market. We had one from 1966 to 1982. This one began in 2000 and will likely extend into the early 2020’s. We’ve now had two cyclical bear markets and one cyclical bull market within this secular bear market. Secular bear markets end with extremely low valuations (PE ratios of 10, Price to Book values under 1.0, Price to Sales ratios under 1.0). We are a long long way from the bottom of this secular bear.

If there’s any “count” to be considered, investors might consider the one that began at the 2000 peak. They might also consider that the market peak in May of this year reached valuations more extreme than we observed at the beginning of every secular bear phase except 2000. The good news here is not only that secular bear markets contain a series of individual cyclical bull market advances, but also that the low of a secular bear, from a price perspective, has typically occurred earlier than the low from a valuation perspective (for example, the lowest price of the 1965-1982 secular bear was actually in late-1974).

I wonder how many willfully ignorant investors can handle a 50% to 70% haircut in their 401k, especially if they are over 50 years old. I wonder how many people still trust Jim Cramer and the Wall Street muppet fleecing machine to tell them the truth about the markets. The saddest part of this entire Federal Reserve created debacle is there is no place to hide. Bonds yielding 2% will provide a negative real return over the next ten years. Real Estate is at least 30% overvalued nationally, and as much as 60% overvalued in hot markets like San Francisco, Miami and NYC. The bear market will ravage all markets. I wonder how much angrier the populace will become when the current recession results in more job losses, bankruptcies and revelations of Wall Street malfeasance. Beware of the bear.

Full article: This Bear is Just Waking from Hibernation (The Burning Platform)

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