General12 Oct 2008 10:44 am

The title of this post is for all of you US baby boomers out there who remember the old radio and TV commercials for Maxwell House coffee. The slogan closing each ad was “Maxwell House coffee, good to the last drop”. Well, I guess the same could be said for all the international stock markets.

The markets decline has rivaled any thrill packed roller coaster fall with just as many people screaming and up chucking from all the excitement.  Yet, I hate to be the one to tell you, but this ride is far from over. Very soon, like any good roller coaster, the market will rebound with a fury and we will be told that the greatest buying opportunity in decades is here. We will be told that the worst of the financial crisis is over, and that the stock market is a forward looking mechanism which sees better times on the horizon. Many will state the global recession is less severe than first thought and that the growth in developing nations cannot be side tracked for long.

Soon after that, the next round of US economic data will come out and quite plainly show that this recession  has some staying power. At that point in time the next market fall will make our current roller coaster fall look tame in comparison. Who’s ever been on a roller coaster where the first fall is the deepest and most scary?

Another old 50’s coffee advertising campaign comes to mind to illustrate my next point. Who of you remembers the old Folger’s coffee ads where the ubiquitous Mrs. Olsen appeared in neighbors kitchens all over America brandishing a huge can of Folger’s coffee to save people from having a bad coffee day?  Mrs. Olsen seemed to make it her life’s mission to make everyone in her neighborhood into caffeine junkies.

Well, the same focus of purpose can be said for the US financial and stvock market personnel. They need to keep you believing in the market all the way back down to reality.

I know many are losing tons of money right now and feel a need to get it all back as quickly as possible, but trying to do so is very dangerous indeed. If history is any guide we are still in round one of the market correction. Economic history is divided into bull and bear markets. Bull markets are times when the market climbs and bears are when they decline. The good news is that markets go up the majority of the time. The bad news is that when they go down they erase most if not all of the gains from the previous bear low.

Historical records show that the average bear market lasts 3/8 of the bull market that proceeded it. Since our most recent bull market lasted somewhere  between 24 and 27 years long it would indicate that the our fledgling bear will last around nine or so years. Again this is not to say that we will not have some impressive and breath taking rallies, but the overall movement will be down. When people recall the last international depression they focus on the stock market crash of 1929. Yet, few realize that what came next was far worse. After the crash in ’29 the market rallied quite a bit, then the next plunge was far worse. When all was said and done the market had crashed a stunning 86% from its “secondary” high.

If history is any guide the next roller coaster free fall could be almost twice as steep as the current joy ride. This is not a scenario which promises an opportunity to recoup your loses from the stock market. Yet, all is not hopeless.

They say that in a bear market: “Cash is king”. What this means is that while stocks, commodities and even bonds are decreasing in value in a deflationary economic environment, money actually increases in value. If everyone else is losing money and you are not, your relative worth is increasing. In a deflationary economy prices and wages  contract. Therefore, your money is able to buy more. It is very likely that $400,000 will buy more in 2014 than a million does today.

To give you an idea of how long it will take for the value of money and the stock market to return to 2007 levels we’ll take a look at how quickly the market recovered from its 1929 high. Well, it took until 1954, that’s 25 years before the market rose and stayed above its 1929 high. This would mean it will be 2032 before the Dow gets back over 14,000. Yet, since the length and magnitude of this bull is much stronger than the bull market of the 20’s it would seem logical that the climb back up will take more time.

Yet, will we even have a stock market in 25 years? Will capitalism survive? What would replace it? Though I have no answers to these questions I will discuss some of the possibilities in the next few posts.

Jim Guido

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