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Rant & Rave Blog

Panics, Recessions And Depressions. Which One Is This?

Posted by InTheMoneyStocks.com Thursday, March 12, 2009, 08:00PM ET

Read 489 times

Panics, Recessions And Depressions. Which One Is This?
Throughout time, the markets have gone through ups, downs, peaks, valleys, highs and lows. Mark Twain said, "History does not repeat exactly, however, often it rhymes." This bear market, which began on October 11, 2008, is now being compared to the 1929 stock crash, which consequentially lead to the great depression. Perhaps this is a repeat of what took place some eighty years ago. In my personal studies of bear markets going back to the 1800's, it seems as if there is one common denominator for the cause, the over extension of credit. The longer the period of prosperity, the more severe the decline. Many believe the most recent bull market began in 1982 with the Reagan administration. By looking at the charts, this looks very likely. From the Reagan era all the way up to year 2000, the market took off, although it did encounter some bumps along the road (1987 to mention a one). The market seemed to recover from the savings and loan crisis, junk bonds and LBO's, late 1980's housing crisis, cold war, Long Term Capital blowup, the tech bubble, Enron, MCI Worldcom, Adelphia, September 11th, and now the most recent subprime loans, derivatives and credit bubble. There is a lot more that could have been put on that list but for the scope of this writing those will suffice. With all of these events taking place over the last 25 years and the markets still managing to make new highs into 2007, is it any wonder that the economy is where it is today, in crisis?

Let's examine some bear markets from the past and see how this one matches up to history. The market crashed in 1857, but began its decline in the 1856 peak. A slight recovery took place in 1859 and dropped again in 1861. In 1862, it recovered until 1865(Civil War). In 1865 the market declined until 1871, which lasted until 1873. In 1873 the market crashed and the U.S. went into a depression that lasted into 1879. This was a 6 year depression. This historical bear market looks very similar to the market of today. The causes of each are always very similar and this bear market is no exception. If this time factor were to repeat that would call for the current bear market to bottom in 2013, this certainly looks like a possibility. Now let's examine the 1929 stock crash. The 1929 market crash was a result of easy credit and over speculation which is exactly what we are witnessing today. This decline lasted until 1933 before slightly recovering. Many traders believe a real recovery did not happen until 1942(WWII). That being the case then the next bull market did not occur for another 13 years.

Which bear market is this? Personally, I believe that this bear market began in 2000. However, with all the intervention taking place the market was never allowed to function as it should and the business cycle was forced into a massive bubble for the second time. After the 2000 bear market began, interest rates were lowered to 1% causing a huge credit bubble. The bear market that was supposed to begin in 2000, was stalled. We are now seeing it but because of the stall, it is far worse. Instead of the bear decline generally being half the length of the bull market it now gets extended. 2000 minus 1982 equals 18 years. Therefore, the bear market that followed should have lasted 9 years and would be coming to an end this year. However, we now need to extend out to 2007. Using 2007 and subtracting 1982 gives us 25 years. Half of 25 is 12.5 years and that simple calculation puts this bear market into late 2012-2013 before a real recovery takes place.

As long as modern man consistently tries to advance in society, the business cycle should ultimately recover. It is when man interferes with the system that these problems can last longer, not function normally and will be much more severe. Some may argue that it is better to get hit hard and fast and begin a recovery. However, this constant interference is death by a thousand razor cuts and prolongs the bear.

In 2004, I recall reading a statement made by the late great trader and technician Sir John Templeton. He simply stated that housing prices should not be any higher than 1991 levels and will ultimately go back to those prices. Most traders and investors that I discussed this with said he was old and probably suffering from memory loss. It is now evident that he was dead on accurate and as sharp as ever. History speaks words of wisdom in plentiful doses. Hopefully future generations will be willing to obtain some of this wisdom and learn from the greats before them.

Source: Nicholas Santiago,
www.InTheMoneyStocks.com
The Leader In Market Technical Guidance

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