Why Bull Market Absurdities Disappear in Bear Markets

It’s summertime…and the livin’ is still easy here in France.

But the children are all gone. The house is quiet. Our office – usually a hive of activity when the children and their friends are here, checking email…searching for cheap tickets…or just hanging out – is as dead as a tomb. The only sign of life is the clicking of computer keys as your editor prepares his Daily Reckoning.

And what is there to reckon with today?

Slowly, the idea of “recovery” is fading. People are beginning to realize that we are in a Great Correction, not a typical post-war recession.

“The Never Ending Recession,” is one title in the financial news.

“Consumers slow to spend, businesses slow to hire,” The Washington Post sums up the situation.

“US Restaurants Starved for Business,” reports The Los Angeles Times.

The Dow fell 57 points on Friday, after a big down day on Thursday. Gold lost $6.

Are you invested in stocks, dear reader?

You are? Shame on you!

Of course, there are always one or two stocks that will buck the trend. And if you’re willing to wait, say, 20 years, you might be okay.

But in the next few years, US stocks are not likely to pay off. The stock market entered a bear phase in January 2000. Since then, stock market investors have made some money and lost some money. Some are ahead a little. Some are behind. Most have gotten nowhere.

But the bear still hasn’t fully expressed himself. The stock market still hasn’t reached its rendezvous with desperation. That’s when you will be able to buy stocks without worrying about further price erosion. That’s when the sellers have sold and the typical person wants nothing more to do with stocks.

The ideas of “stocks for the long run” and “stocks for everyone” are not permanent, universal truths. They are merely cyclical fads. People believe in stocks when stocks have been doing well. They stop believing in them when they stop doing well.

There are times when most people believe they should never buy stocks at all. They think stocks are a specialists’ game – for professionals who can take the time and trouble to figure out what is really going on in the companies they invest in. The notion that you can just buy a stock because you like the product…or because you’ve heard that the industry is doing well…is regarded as absurd. And it is absurd.

But it’s an absurdity that comes around in a bull market and disappears in a bear market. We’re in a bear market now. The next leg down should drive the last moms and pops out of the market and bring prices down to bargain levels.

The next leg down will also drive investors even further into the bond market. That’s right, dear reader, investors will jump from the frying pan of equities into the fire of US Treasury debt. They’ll be looking for a safe place for their money. And nothing will seem safer than the credits of the biggest economy on earth.

“Default?” “The US government?” “Don’t make me laugh,” they will say.

But the US will default – one way or another.

It has more financial obligations and commitments than it can bear. Somehow, someway, sometime they’ll have to be sloughed off – probably by a combination of trimming, taxing, and inflating.

And sooner or later, those super safe bonds will lose half their real value. Probably not sooner. But maybe later.

Bill Bonner
for The Daily Reckoning