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The long view: a look at historical bear markets and very long term trends

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March 02, 2011 – Comments (17)

I have made a wager with this girl I hang out with quite a bit, at least unless she driving me nuts by sitting next and staring at my screen while I'm trying to make pretty pictures of long term stock charts, and quits threatening to post in my blog when I'm sleeping, to ignore the markets for 1 week.  As part of this agreement, if we get a significant spike in the VIX I am allowed to pay attention again.  In preperation for this I sold and hedged more today, I still don't like the market that much right now anyway.  I like it alot on a vix spike.  I have this budding theory about VIX spikes and the market behavior afterward that I want to tinker with. 

Something is messed up here and I can't put in pics until I am replying to my threads.  Content below.

17 Comments – Post Your Own

#1) On March 02, 2011 at 2:43 AM, checklist34 (99.73) wrote:

I have made a wager with this girl I hang out with quite a bit, at least unless she driving me nuts by sitting next and staring at my screen while I'm trying to make pretty pictures of long term stock charts, and quits threatening to post in my blog when I'm sleeping, to ignore the markets for 1 week.  As part of this agreement, if we get a significant spike in the VIX I am allowed to pay attention again.  In preperation for this I sold and hedged more today, I still don't like the market that much right now anyway.  I like it alot on a vix spike.  I have this budding theory about VIX spikes and the market behavior afterward that I want to tinker with. 

But anyway, just some plain-jane charts dug up off the internet, with some comments and lines added on.  To accomplish this I had to get a photodealie account, which should come in handy over my lifespan anyway.  Now, hopefully, I can post pretty pictures like Porte...  although I am prepared to fail at making one that will probably be updated 1000 times, go down in history, and be followed by hundreds.  Oh well.

First, from Jeremy Seigels "stocks for the long run", recently very out of favor and subject to controversy at seekingalpha (couple years ago).  

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This picture basically supports the claim that gold is a "store of value", provided one doesn't buy it in a bubble, and the basic concept of buy and hold investing.  It shows that stocks outperform bonds or commodities over time and have a fairly consistent return relative to inflation.  This chart is incredibly comforting until you realize that thos elittle tiny pimples on the chart involve 50% swings in your investment portfolio, or more.  All a question of timeframe.

Interesting that we dropped only to the trendline in the first cyclic bear market of this big messy secular grizzly.  In 2009, however, we plunged far below it, although we didn't stay there long, it was as dramatic as 1974.  

Conjecture:  I think that, assuming this data is accurate and reasonable, the reason stocks would offer a consistent return relative to inflation is probably related to human psychology and the fact that its some ROI/ROE that we need before we start into a business or keep a business running, and that this ROI/ROE results in the returns.   

 

Second, for a closer-view, the longest view of the S&P that yahoo finance has to offer, with a red line drawn through it:

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This shows about what all of this type of excercise I have done over the last year and a half has shown, that the trendline would sit at about 1400 or a bit higher.  Maybe 100 points above here.   If I was forced to bet my life on it...  I would bet that we are in a secular bear market for another 5-10 years.  I read at "the big picture" this evening the theory that secular bears were about generational in length because the scars from the bear market run deep in old traders, and its not until the majority are "new blood" that things can get themselves together and move higher.  

A note on dividends -vs- buybacks:  dividends have been a huge part of the returns shown in the first chart above.   If buybacks perform their duty and increase stock prices due to earnings being spread across less shares, that will accelerate the upward movement of index values, but not the total return.  Buybacks are now considerably in excess of dividends, 30 years ago they were just 10% of dividends. http://caps.fool.com/blogs/dividends-vs-share-buybacks/353816

 

Third, two pictures of gold vs the dow.  Courtesy of seekingalpha and fred the intelligent bear.  

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From  http://home.earthlink.net/~intelligentbear/com-dow-au.htm, thanks Fred, nice site. 

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http://seekingalpha.com/article/224930-dow-gold-ratio-approaching-20-year-lows, interesting write-up, Kirk.  

note:  the dow/gold ratio is upward sloping, probalby, because of the fact that stocks outperform inflation over time and gold tends to perform with it (over extremely long periods of time).  The outperformance by stocks over long periods of time would lead to the ratio increasing.  This is seen almost linearly in the peaks on the chart, but the bottoms are not as clear.  We'll have a third datapoint whenever the ratio bottoms this time around, but if I had to guess it would take ever-more-radical events to get the ratio as low as it was in 1932/1980.  In 1980 we had one heck of a gold bubble, which combined with the very depressed stock prices led to the extremely low ratio of 1.  It is simply not factual to say that "this ratio usually bottoms at 1".  one incident involving some extreme circumstances is not "usually". 

 

Fourth:  the long term chart with pretty conjecture lines, nice colors, and cute comment boxes.  

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My thoughts:  As I have said for a couple years, I simply think we are not in a secular bull market.  My reasons for that belief are

1.  Just history.  Not alot of secular bears lasted 9 years (which is when a secular bull would have begun if we were in one now).  Betting on history in reasonable and relatively simple ways has helped me a great, great dea.  

2.   Stocks aren't outperforming commodities THAT dramatically.  Or at all? Oil is up more than stocks from its 2009 bottom, gold isn't but its close, many others must be up more.  Throughout all of history, secular bull markets have begun when stocks jumped ahead of commodities.  They occur during periods of commodity prices deflating relative to GDP.  Secular bears have occured during periods of commodities INFLATING relative to GDP.  

Behold, the greatest chart of all time.  Taken from the greatest article on markets I have ever read, by some Stifel researchers.  It shows clearly that swapping from stocks to commodities over long-cycle periods makes great sense.  It also shows that the current commodity-inflation-cycle is relative old, and very dramatic.  (imagine if the chart was extended to show commodity prices as of today!).  

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I would offer that it may be a really interesting excercise to consider that we've done all this before, and sentiment and mood was probably really similar during the other times as it is today...  ?

 

So anyway, some pure-conjecture, as I clearly don't know the future, predictions:

A)  we bounce off that long term return trendline and don't break it convincingly for at least 10 years

B)  we get back to that trendline in the late 2020's.  But, remember, its ALOT higher by then.

C)  gold goes parabolic before the bubble breaks. 

D)  we have several more 10+% drops and one more big, memorable one, although its not 50+%.  

E)  we bottom in 2018 at S&P 1100 before the onset of the next secular bull

F)  the Nasdaq eclipses the Dow for longest time between peak and the last time it falls under the peak and dips below 5130 sometime after 2025.  

Just based on a sort of peeksie at history and no fantastic analysis or grand vision.  Just willing to lean towards this all playing out about as it has in the past.  Buy the big dips, lighten up as we approach that trendline or as the market moves way up. 

I'll throw out the possibility that, as the DOW and R2K made significant new highs in 2007, and as the first dip in this secular bear didn't break the trendlines, but jsut fell too them, maybe this one extends a bit...  And goes 20 years. 

I can't even imagine what participating in the markets during happy times would be like.  Maybe in about 10-15 yeras I'll find out.  I hope for sooner, but I'm not thinking thats going to happen.

Bad news:  I thik we're a long time from happy days and a secular bull and we have another bazooka round aimed at us in the coming years

Good news:  the worst part is probably over, if you made it this far you'll survive.  Theres really no historical precedent for a third 50+% drop or a drop to S&P 150 or anything crazy like that.  In fact, a drop to S&P 500 or 600 or something 5-6 years from now or farther in the future would be withotu precedent in history for its depth below the long term trendline.  

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#2) On March 02, 2011 at 2:44 AM, checklist34 (99.73) wrote:

That was random.  OK, I am sworn to a week off the markets, for my own sanity.  I guess I'll run stairs and do pushups or something.

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#3) On March 02, 2011 at 9:06 AM, jwebbzor (< 20) wrote:

I completely agree that all of the talk of the DOW/gold ratio always returning to 1 is garbage. I was absolutely shocked when I even heard Peter Schiff claim that the ratio would equal 1.

I do hold large portions of my investments in physical gold and silver, but I will probably sell mine before most will. When the DOW/gold ratio reaches 4-5 I will sell. Likewise, when the gold/silver ratio reaches 15-18 I will sell.

 

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#4) On March 02, 2011 at 9:30 AM, binve (< 20) wrote:

checklist,

this is a great post. I haven't read it all yet, but it inspired me to make this observation:

ENLARGE

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#5) On March 02, 2011 at 12:34 PM, fireman9119cac (25.88) wrote:

CL

Great article.  Somewhat over my head, I just have to read it a few time to fully understand it.

2 things

 Would you consider showing real life trades?  Somewhat simliar to what Port. is doing?  Us poor beginners need all the help we can get.

Instead of running the stairs, Try P90X.  I have worked out for years but nothing comes close to this workout.  If you are not familiar with it google it and have a boo.

 Thanks

FM

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#6) On March 02, 2011 at 3:31 PM, leohaas (31.07) wrote:

Very interesting indeed. But I really don't think what happened in the 19th century has any bearing at all on what is going on today. Society is just way too different to make this kind of comparison.

By the way, have you noticed that from 1801 through somewhere in the 1850s stocks and bonds performed almost the same? In other words, half a century of stocks barely outperforming bonds...

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#7) On March 02, 2011 at 6:11 PM, Option1307 (30.17) wrote:

Pure sweetness! Enjoy your time off from the markets, +1!

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#8) On March 02, 2011 at 6:12 PM, JakilaTheHun (99.93) wrote:

Checklist,

You always churn out some of the best blogs on CAPS, but you've topped them all with this.  This is spectacular research.  

Some of this info I was aware of before (e.g. dow-to-gold ratio), but I think the biggest thing you've opened my eyes to is the fact that bull markets tend to happen with disinflation in commodity prices. 

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#9) On March 02, 2011 at 8:23 PM, FleaBagger (28.10) wrote:

the biggest thing you've opened my eyes to is the fact that bull markets tend to happen with disinflation in commodity prices. 

I'd read this before in a book by Jim Rogers, penned in 2002 or 2003.

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#10) On March 08, 2011 at 11:37 PM, checklist34 (99.73) wrote:

jwebb, thansk for stopping by.

how does one unload physical gold/silver?  that might be something super easy to do BEFORE the bubble bursts, but suddenly very hard AFTER it bursts, no?

just a thought

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#11) On March 09, 2011 at 1:15 AM, checklist34 (99.73) wrote:

Binve, thanks very much.  I am frequently amazed, and actually spend a fair bit of time thinking about, the fact that we have extremely similar views for the 2010's, yet I am clearly bullish and you bearish. 

I am genuinely fascinated by that, and while I shouldn't even pretend to say that I DON'T consider my opinion more valuable than anybody elses**, I always read yours.  I try to dissect how we could conclude similarly with opposing general views.  

I'll read your blog shortly.

** EVERYBODY should consider their view more valuable than anybody elses.  And I will tell you why.  Because you have your own set of internal brain wiring, and your way of looking at the world.  YOU MUST INCORPORATE ALL OF THE INFO YOU CAN GATHER INTO THAT, into YOUR own way of dealing with and viewing things.  Otherwise you will fail.  don't listen to me, or anybody else.  take command of your own stuff.

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#12) On March 09, 2011 at 1:18 AM, checklist34 (99.73) wrote:

fireman:

for the most part, all my real life trades, sort of, loosely, have been blogged.  

I don't trade taht much.  I mostly just bought the ever-living love out of the big crash in early 2009 and rode it.  Selling along the way, hedging sometimes (sometimes badly), and stuff.

I am hesitant to start a trading blog for these reasons:

1.  I ABSOLUTELY was completely victorious at the march bottoms, in fact, not one single pro is even remotely close to the correctness of my call and theory or the returns of my doings... but

2.  I am not entirely successful in major picks since then, frankly, as I hope to document someday very soon

and

3.  I am not a reliable blogger, and I would probably eventually at some point forget to blog for 3 months and leave everybody hanging, which would cause them pain if they were following me

so

I'd rather not be followed.  Porte is a next-level human, and his service to the blog o sphere exceeds my own.

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#13) On March 09, 2011 at 1:24 AM, checklist34 (99.73) wrote:

leo,

i thin khumans haven't changed much since the 1800s, and in the end its our behavior that defines markets...

I notice taht as I read your blog...

maybe the US was still infantile and needed to offer attractive rates to get financing?

or, maybe... that was just one of the (several) times in human history where bonds outperfomred.  We have had a dramatic example of those recently.

??

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#14) On March 09, 2011 at 1:25 AM, checklist34 (99.73) wrote:

thanks option

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#15) On March 09, 2011 at 1:28 AM, checklist34 (99.73) wrote:

Jakila,

    I think that that report/article - the one I show the chart from by stifel - is teh single greatest piece ever.  It so clearly shows that one SHOUDL NOT buy and hold, but should swap between equities and commodities.  Between paper and hard goods, to use a phrase that would appease the gold/oil guys to an extent.  

    We have 200 yeras of history that show the alternating outperformance of these asset classes.  And, frankly, I think we should remain open to this kind of statistic and sort of plan around it.  After a bull market gets very mature, maybe just roll some funds into some commodities, average in, average out.

     For now, frankly, I think the existing commodity bull is quite a bit old, and EXTREMELY dramatic, already, in its scope, and I am not jupming on it one bit, period.  I'll just sit here and short some levered ETFs if I can't get in love with stocks, but I won't chase commodities after one of their all time record runs.

     That report, which I didn't write, is truly a thing of beauty.  Probably worth 5x your money to the average guy over a lifetime.

CL

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#16) On March 09, 2011 at 1:30 AM, checklist34 (99.73) wrote:

flea,

   isn't rogers something of a doom and gloom commodities-perma-bull?  Always down on the US?

 

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#17) On March 09, 2011 at 4:14 AM, binve (< 20) wrote:

checklist,

absolutely man. There is nothing bearish at all about the long term nature of that chart. And I don't think our positions are all that dissimiliar. We have a difference of opinon about the depth a future cyclical bear sometime in the next ten years. But we both are highly optimistic and see a secular bull market in stocks beyond that. The more I read your stuff and discuss these things with you, the more I am convinced that we are seeing the secular bear duration correctly (that commodities outperformace observation is simply brilliant) and that we will likely be bulls alongside eachother for decades in the future. That is actually very encouraging :)

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