Wednesday, March 11, 2009

THE 4 Big Bears

The above chart outlines the 4 biggest bear markets in history. One of which we are currently in and see no end in sight. The current bear market is noteworthy because it comes in the middle of a 25 year credit expansion. I do not expect the S&P 500 index to go down 90% from peak to trough like the 1930's. But I could reasonably see values at 350 or a 75% peak to trough decline.
The Austrian school of Economics has written publications regarding credit expansion and the destruction of the excesses after the bubble bursts. Basically much of what comes during the expansion goes away afterwards. The destruction after the collapse is so great that many people wonder if the credit expansion was worth it. Japan and the lost decade of the 1990's is a perfect example of the end result in a credit expansion gone awry. Credit is an illusion of wealth and using credit is an unwise habit. Past generations used to call people with second mortgages "losers". Our generation called them home equity lines of credit and some how this made second mortgages more acceptable. What we learn from the past is that we don't learn from the past. History always repeats itself.

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