Massive Bear Market Imminent

February 7, 2000

The final market top we have all been waiting for has arrived. The great millennial bear market, which remained elusive in scope and timing, is about to ravage investors with gut-wrenching violence. Is this a certainty? Not a 100% guarantee, no. While nobody can discern this with exact certainty, in terms of precise date or magnitude, it is the strong belief of this author the ultimate top was already reached on January 15, 2000 at Dow 11,722, and if not, then a brief rally to a new high sometime in February.

My prognosis on December 6, 1999 was:

"It appears that the market will remain adrift until early January 2000... when it is guaranteed to begin the long road into the abyss. Bear markets rarely start in this time frame (January) but when they do happen they're of very large consequence, as was the case in 1974."

The beginning starts with a top.

The pre-y2k crash expectations made herein were averted and foiled in part by market tampering by the central banks (read: Greenspan) by flooding the system with fiat money, which then flowed into the markets--particularly the technology sector, and thus have been laid the foundations of the imminent market collapse.

Michael Belkin, a Fed expert who writes the Belkin Report said on December 8,1999:

"This all adds up to the biggest Fed credit expansion ever. This monetary boost is wildly stimulative for the U.S. equity market in the short term," Belkin says, "but will leave equities painfully vulnerable to a crash once the Y2K-related credit expansion is withdrawn in the new year."

While Greenspan has been reappointed, which Clinton did for public applause, and elevated to guru, celebrity status of late, this shall change and come back to haunt the chairman when he is blamed for creating this bubble after it pops, and pop it must. Indeed, he will be scapegoated and remembered for orchestrating the coming financial disaster of his own making by irresponsible policy actions of over-abundant money growth and stimulative credit issuance. It is thus which contains the ultimate seeds of the up-coming economic catastrophe. As such; the longer and stronger the recent and current boom and bubble continues, the greater the final reckoning.

This is the data for M3 Money Stock, in billions:

      % change
from last
period AR
% change
from last

1999 4 6104.45 9.24% 9.28%
1999 5 6133.5 5.86% 8.98%
1999 6 6166.42 6.63% 8.74%
1999 7 6192.45 5.19% 8.81%
1999 8 6216.45 4.75% 8.17%
1999 9 6247.35 6.13% 7.53%
1999 10 6296.26 9.81% 7.22%
1999 11 6384.57 18.19% 7.54%
1999 12 6484.66 20.52% 8.16%

Now compare that, for example, with 1994:

      % change
from last
period AR
% change
from last

1994 1 4284.22 1.23% 1.88%
1994 2 4266.91 -4.74% 1.52%
1994 3 4273.35 1.83% 1.67%
1994 4 4283.48 2.88% 1.73%
1994 5 4289.28 1.64% 1.20%
1994 6 4288.75 -0.15% 1.17%
1994 7 4309.45 5.95% 1.69%
1994 8 4309.82 0.10% 1.66%
1994 9 4318.06 2.32% 1.62%
1994 10 4327.43 2.64% 1.68%
1994 11 4341.36 3.93% 1.65%
1994 12 4353.92 3.53% 1.73%

Based on the Fed's own valuation model the market is presently (as of Feb. 2000) 60% overvalued! Very recently it approached 70%! If the Dow is this much overvalued at the current 11,000, this means a crash of 60%, or 6600 points, would place it at Dow 4400. This would simply be normal valuation. To the public, investors and the economy this would be a total calamity. Earnings will not grow forever. The Nasdaq is the worst: valuations are completely indefensible by all measures.

No sane investor would dare look at present valuations and conclude that this is a healthy market to buy into...unless they are a speculator or into shorts and options.. Market capitalization historically averages 50% of GDP. Shortly before the crash of 1929, an era of extreme speculation, it was a whopping 87%. What should make any investor paranoid is the fact that it is now 125% of GDP in the U.S.! To bring it down to a sane level by this measure means (approx.) Dow 3,300. But in a crash/depression situation it would temporarily drop to (say) 25% of GDP which would mean a Dow of 1,500. If a depression occurs where GDP drops 20-30% then the Dow, correcting for these numbers, would approach 1,000 or less.

Price to earnings levels are at a range never before seen. P/E ratios in a normal market typically range from 8-15-to-one. When it hits 21 or 22-to-one, one of two things usually happen: The price of the market must decline or the earnings must be raised. The insanity of the current mania is the fact that it reached a never-before-seen 35-to-one! (in the S&P) This is only the broad average ,of course, and many individual stocks are in the triple digit range. Many, having no earnings, are at infinity.

It's only a short matter of time before the bubble bursts, and a tremendous amount of wealth will be lost.

General outlook for the year:

There should be major declines over the next two months, in March and April, possibly delayed to May, when a panic crash will most likely occur. It should definitely close below Dow 10,000 and in a worst-case to a 7,500 level before rebounding back to 10,000-ish, Summer should be side-ways and/or rising, but not to new highs. As was the case last year, and the year before... AND the year before; declining in August and September then posibly crashing before or during the elections, probably in October. Bush (or Mc Cain) elected president, and like his father, and political party, becomes scapegoat for major global recession occurring most of his term. Economy should remain strong for most of this year. Though some caution should be used, and this chart indicates the real portion of the coming collapse should well into 2001 and into 2002, possibly 2003. This short-term bear market of this spring shall come to pass if the Fed decides to dish out the medicine of higher interest rates in the first half of the year to avoid doing so during the elections. Bear market bottoms tend to occur in the first, and more often the second year after a presidential inauguration.

When the market declines significantly, expect consumer sentiment, confidence and spending to shift, taking an alarming nose-dive. The economy has been too dependent on massive consumer borrowing and spending also fueled by the "wealth effect" of sky-high market valuations. We are soon to pay the price for it too. As said by legendary Federal Reserve Chairman Paul Volker:

"The fate of the world economy is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings."

In order to bring this mania back from insanity, it can be expected for the Dow to eventually plummet to at least 2400, and that may be optimistic; it may very well dip below 1,000. The Nasdaq will be hit the hardest and will lose 60% at least and ultimately 90% (peak to trough) in the coming years.

Following this mania will be a constant, agonizing decline throughout the times ahead, until roughly late 2004. The U.S. will join the rest of the world in recession/deflation in due time--no bubble lasts forever, nor do they slowly deflate, as we saw in 1929. Watch for higher interest rates. Make no mistake about it; the bull is nearly dead and the overall trend will be down.

There is a mistaken sentiment that double digit gains will always be made. Historical data show that over the VERY long term (generations) stocks do in fact earn better returns than other instruments However, they tend to go through 16-20 year periods when it's either bullish OR stagnant, as in the case of 1929 to 1950. For instance, from 1966-1982, the Dow barely moved. In real inflation adjusted purchasing power, long term "buy and hold" stock investors LOST money. In fact, long term, dividend re-invested, inflation and tax adjusted S&P 500 annual returns are NO MORE THAN 4% !! Since 1871 it averages only 1.46% !

How long will this one last, in order to purge and recoup? Oh, 16-20 years.

The coming bust will in part be determined by policy actions or inactions of the Fed and government officials, as well what degree consumers retrench and panic. It will certainly be a recession, and it will certainly be global, severe and prolonged, and may very well be identified as a genuine depression.

There should be a massive pull-out of US markets which is currently viewed as a haven of foreign investors, thereby inducing a dramatic drop in the dollar. This, combined with the astronomical money growth of recent years, may very well produce an inflationary depression, or stagflation with a drop in standard of living.

On the other hand, there are strong underlying deflationary forces at work, such as the technological, productivity revolution and intense competitive forces. The sharp reduction in demand on the part of consumers--consisting of two-third of all domestic spending, who have been spending far beyond their means, would further exacerbate this deflationary spiral. A reversal from borrow-and-spend to retrenchment and the resulting reduction in demand, bringing the currently non-existent savings rate back to historical levels will also be deflationary.

Investor and public sentiment took a dangerous turn to complacency and over-confidence in the immediate post-y2k time frame. Since then, anyone with bearish thought has been scoffed at; ridiculed and met with sour hostility, even from many former bears now converted into perma-bulls.

The only fear investors seem to have at present is of missing out on triple digit gains in the Nasdaq. Ed Yardeni has gone back his bullish New Economy/Dow 15,000 by 2005 mantra, and 99% of the public is content with a booming economy and tight labor market. It's wine and roses forever--forever and ever, or so they think. The US economy grew at a 5.8% annual rate the last quarter of 1999! The federal budget deficits rebuked; never-ending surpluses until 2010, or so says Clinton. ( the actual debt is still over $5 trillion) Minimal inflation! Unemployment rate 4.1%!

This, of course, is about to change. Enjoy it while you can, but don't let all this good news fool you. There's a beginning and end to everything. We are quickly approaching the last hurrah of our current bubble economy; and the tail end of the record 9 year-old business cycle and now awaiting the soon-to-arrive U.S. and global recession-come-depression.

Indeed, it is almost amusing to watch this mass delusion of extreme froth of over-confidence, and how it is extrapolated into the future. 1999 and early 2000 will be remembered as one of hubristic euphoria; the ultimate calm before the storm, or, the eye of the storm. Sit back and take a wide-angled picture of this current environment and save it for future reference, as it shall contrast wildly with what is in store for the near and long-term future.

Recognizing this "sheeple" phenomenon of mass delusion and sentiment, and the cyclical swing to and from pessimism or optimism is a fascinating pursuit. Throughout history the mood of any given population repeatedly shifts in unison, often with abrupt turning points. It is the reward of social historians and futurists to first capture and identify this sentiment after objective observation, then through worldly events and other forces, cycles or evidence, determine when the next shift in mood will occur.

The general resurgence and boom/bull market that America has witnessed for nearly two decades will soon be consolidated into a period of crisis and upheaval where the nation's current mindset of superficial well-being led by greed and blazing economy is swept away and imbalances and structural weaknesses are exposed.

The limitations of such long-term projections is determining, with any degree of accuracy, the precise year, month or day such a turning point really begins. Fortunately, there are shorter cycles that can be found within the larger spectrum.

Using recent history as an example, we observed a brief period from 1983 to 1985 where the national mood of America shifted from one of deep pessimism (Remember down-beat 1980 when the consensus forecasters expected oil to run out and inflation to skyrocket? Disinflation and cheap petrol became the reality.) to that of a pseudo re-birth coinciding with President Reagan's "Morning in America." The prevailing mood for the remainder of the eighties was that of a hollow optimism with an underlying sense of a foreboding future as the nation's fundamentals worsened (fiscal, trade deficits, relative social/economic decline...the unraveling)

The last hurrah of this epoch (in a sense it is not over yet, merely interrupted) was the 1991 gulf war and the burst of patriotism it produced. The following prolonged economic decline and recession plunged the national mood into another period of general despair that lasted until roughly 1994/1995. Economists and forecasters at the time were making all sorts of dire predictions, such as $500+ billion budget deficits and government bankruptcy by 1996 etc. It turned out, of course, that these extrapolations--based on the status quo consensus of the time--were once again dead wrong. Remember how Japan was supposed to take over the world? It is now near collapse and is running government deficits equal to 10% of GDP!

1994 marked another short-term turning point in public sentiment--though few recognized it at the time. Since then the domestic US economy has grown at a brisk pace, the stock market tripled and deficits became surpluses. The previous consensus forecasts were wrong. These conditions have accelerated to that of hubris, which we are now in. There have been short-lived times within this period when bursts of pessimism reigned. The Asian crisis began in the fall of 1997 whence the Dow crashed 500 points and confidence (temporarily) receded. While the crisis continued to worsen overseas, the US economy continued to advance when yet another short-lived grim mood took hold in the fall of 1998 and stocks dropped 19%. The concerns of 1998 have been all but forgotten--but will eventually resume; the bubble wasn't ready to burst yet; there was still more momentum to carry through 1999 when it rebounded sharply to its recent January 11,722 high. Mark this number down, it may be referred to by historians as the final top.

As in previous eras, the mainstream is foolishly extrapolating present conditions and trends into the future which, as time will tell to prove not only wrong, but recklessly way off base.

These projections and the status quo consensus; such nonsense as "Dow 36,000" even Dow 100,000 and multi-trillion dollar federal budget surpluses will surely prove wrong, and assume the current boom and business cycle (already a record-breaking 9 years) will continue with absolutely no set-backs such as a recession! This much touted, so-called New Economy of rapid technological and productivity revolution is, to be sure, a very real phenomenon, yet co-existing and super-imposed with the most extremely overblown bubble the world has seen. The Old Economy, with its familiar and time-tested fundamentals of booms and busts governing a capitalist system is very much alive and well. The situation is eerie and frighteningly reminiscent of 1929. History does in fact repeat. In fact, almost a carbon copy as this oft-quoted professor declared just days before The Crash:

"Stock prices have reached what looks like a permanent high plateau... I expect to see the stock market a good deal higher than it is today within a few months" Irving Fisher, Professor of Economics, Yale University, Oct 15, 1929

"The markets generally are now in a healthy condition... values have a sound basis in the general prosperity of our country" Charles E. Mitchell, president of the National City Bank, October 15, 1929

About 40 years after a key technology begins to permeate society, an historic depression takes place.

1920's: Technological revolution and mania in newly-emerged telephone and radio; automobiles. RCA and 500 auto manufactures, then consolidated into a tiny handful by the end of the 1930's. Automobile technology, which evolved in the 1890's, hit 40 and the mid-technology depression of the 29-33 resulted.

1990's: Technological revolution and mania in newly-emerged internet and tech-heavy Nasdaq sector. Microsoft, Yahoo! And the thousands of upstart technology and internet business, to be consolidated into handful by decades' end. The computer revolution that essentially began in the mid-1960's points to the early 2000's.

1920's: Newly emerged fad investment vehicles called Trusts.
1990's: Newly emerged fad investment vehicles called mutual funds, among a myriad of others.

1920's: President Calvin Coolidge prosperity; declares "The chief business of the American people is business." Hoover becomes scapegoat for following depression.
1990's: President Clinton prosperity; declarations of prosperity in final state of the union address. Bush (or McCain) and Greenspan made scapegoat for coming depression.

1920's: Moralistic crusade against vices. Lost generation; prohibition; gangsters; rum-runners; flappers.
1990's: Moralistic crusade against vices. Generation X; war on drugs/cigarettes; gangsters/rappers; drug dealers; grunge.

1920's: Sky-rocketing personal debt; over-leverage in financial markets.
1990's: Sky-rocketing personal debt; over-leverage in financial markets; savings rate effectively zero; record bankruptcies despite boom.

1920's: Breadth on the NYSE began to deteriorate in May 1928, long before the Great Crash.
1990's: Since mid-1998 until present market breadth has made its greatest divergence in stock market history.

1920's: Dollar trading volume shortly before the 1929 crash in stocks approached 130% of GDP, which normally, historically averaged 25% in normal times.
1990's: Dollar trading sky-rocketed and has now reached 200%!

1920's: The saying of the late 1920's: "When the average Joe Public starts entering the market en mass, then a crash is imminent.."
1990's: Baby boomers and the public plow their savings into the market for retirement and internet traders take part in the boom.

1920's: Historically, market valuations are about 50% of GDP. Before the 1929 crash it was 87%.
1990's: It is now over 125% of GDP!

1920's: Historically extremely-priced stock bubble.
1990's: Historically extremely-priced stock bubble. Aggregate index of S&P 500 plus Nasdaq plus Dow almost identical in scope and run-up. In fact, exceeding it.

1920's: Germany lost World War One, suffered massive hyper-inflation and depression throughout decade, resulting in dictator, ultimately leading to World War Two.
1990's:Russia lost Cold War in dissolution of Soviet Union, followed by hyper-inflation and depression throughout decade. Will ultimately lead to dictator (Putin?) who will lead us to World War Three.

We're facing a few rough years ahead, but it won't be the end of the world. There will always be nations and human civilizations to inhabit the Earth. Despite temporary hardships, we will once again climb out of the rubble and start over. Like a Phoenix rising from the ashes, soaring to ever greater heights. However, as history demonstrates, the price paid for social and economic progress are periods of severe wars, chaos and human suffering. This tends to repeatedly occur once every fourth generation.

Since the last major era of crises and conflicts ended in 1945, we are now soon due for another.

To the casual observer--particularly the average American who has never experienced the trauma of depression or global war--such dark visions are difficult to comprehend or emotionally accept. Even more so when taken in the context of our current era of prosperity and general optimism. Unfortunately, we are now passed the point of no return; the journey has begun.

One may be consoled by the inevitable return of stability after the up-coming times of trauma consolidates into resolution beyond 2010 or 2015... Such evolution from birth, maturity, decay, death then rebirth of humans, societies and nations is not only natural and (in a sense) desirable, but unavoidable. How we emerge from these crises ultimately depends on how we prepared for and reacted to its consequences within the larger framework of human destiny.

Gold is the world’s oldest and most known currency.