Bear Market Actually Began in 2000

You’d again be spoiled for choice if you were trying to pick the most distressing story of the day. The U.S. recession officially began in December of 2007, says the National Bureau for Economic Research. The S&P 500 fell nearly 9% in New York trading and all thirty Dow components were down. Manufacturing in the U.S. hit a 26-year low. China’s factories are slowing, too, which is bad news for Aussie stocks.

If you looked up into the sky last night, though, on your way home from a night-cap of, say, Jack Daniel’s and coke at the Windsor Castle pub off Dandenong road, you would have seen the stars smiling down on you. Jupiter, Venus, and a crescent moon got together and a little laugh at Earth’s expense. You can see a fuller-size image here.


The gods, however, do not appear to be smiling on world financial markets as 2008 comes to a close. In late November we showed you a chart comparing this bear market to the ’29 bear, the tech crash, and the oil crisis bear of 1973-1974. Now comes another chart from analyst Doug Short.


As you can see, the decline of the S&P this many days into the bear is second only to the Nasdaq crash in 2000. But the really important observation Short makes is that “it’s far too soon to know” how bad this bear is going to be because it’s still so young, historically speaking. Short says its early days for the bear. Is he right?

There’s an argument to be made that the bear market actually began in 2000. It rallied from 2003 to 2007. Then, when the U.S. housing bubble burst, it precipitated the global credit crisis and the bear reasserted himself.

But dating the precise beginning of the bear market is probably just an academic exercise, a little like back-dating the beginning of the American recession. It’s like telling a man he’s terminally ill, after he’s been wearing the dirt tuxedo for six months.

The only sense in which the chronology of the bear matters is when you try to determine its affect on the real economy. When falling stock prices turn into rising unemployment, then you see an even steeper fall in consumer spending, corporate profits, and right back to the beginning in more falling stock prices. You get lower highs and lower lows to go with your volatility.

Take Macquarie Group (ASX:MQG) as a quick example. It was a $97 stock in May of 2007, a few weeks before Bearn Stearns got into trouble with two of its subprime funds. Since then the Millionaire Factory is down 70%. Profits are down. After throwing a Gothic Christmas party in Sydney over the weekend, the Group began cutting off heads this week. Up to 10% of the global workforce could be pink slipped.

If it doesn’t feel like the First World Depression yet (WD1)just give it time (that’s time you have to prepare). The effects of falling stock prices will begin to make themselves felt not just in recession, but much higher unemployment. You now have Europe, Japan, and the U.S. all in recession. Producers aren’t producing and buyers ain’t buying.

As the slowdown grinds on in 2009, we reckon it sets the stage for the inflationary crack up of the U.S. dollar mid- to late next year. Why? The bleak manufacturing data in the U.S.-the ISM reading of 36.2 was the lowest level since 1982 and a 2.7% contraction from the previous month-points to a much larger long-term trend.

This trend is absolutely crucial to understand. It’s the gradual replacement of a real productive economy with an economy based on unsustainable consumption through phoney money. The only way to keep the system from collapsing is to print more money. The Fed is getting set to do that. But first..

To put what we mean in pictures, take a look at the average weekly earnings of non-government workers in the United States since 1973 (below). Please note that though we’re using U.S. wage figures and the U.S. employment market, we think this trend of deindustrialisation in the U.S. is mimicked in the other English-speaking economies of the world like Australia and the U.K.

And please note we chose 1973 for a specific reason. That’s the year the world of pegged exchange rates really ended and a world of free-floating exchange rates set in. Bretton Woods was dead. Nixon had ended gold convertibility in 1971 (trying to pay for guns and butter with Johnson’s Great Society and Vietnam). But the trends you are seeing advance today really took shape when the Bretton Woods system gave up the ghost in 1973 and the world embraced paper money and manipulation of the money supply as a way to control people.


The first real effect you see is the fall in real private weekly wages in America. They peaked at $334/week in October of 1972. They’ve been lower ever since. The fall in real wages is a result of the globalisation of labour markets AND the general rate of inflation since the value of the U.S. dollar was cut loose from gold.

But the fall in wages is only part of the story. The other part is the loss of five million manufacturing jobs. You can see a big decline in manufacturing with the recession/bear market of 1973-4. Then a recovery, as domestic demand picked up an oil prices fell. But the recession in the first two years of Ronald Reagan’s first term hit U.S. manufacturing hard.


While most of the rest of the world pegged its currency to the dollar, U.S. manufacturing jobs held more or less constant until 2000, when George Bush took office. But by then, the effects of the NAFTA agreement signed in 1995 and Robert Rubin’s strategy to boost the capital account at the expense of the current account (Wall Street over Detroit, finance over production, asset appreciation over saving), started to show up in major structural changes to America’s labour market.

It hasn’t been the same since, and Americans are poorer, in real terms, for it. The only reason average weekly earnings are higher is the increase in the total number of financial jobs in the American economy and the average hourly and weekly earnings associated with those jobs. You have a small percentage of people at the top of the job market making big money. Everyone else, not so much. The same could be said for Australia.

Both nominal increases (in financial jobs and average wages in those jobs) are the direct consequences of a massive credit boom. And that is really the story since 1973. The Federal Reserve system and U.S. economic policy gradually sent high-paying jobs from industries that made things overseas.

They replaced them with a smaller number of high-paying jobs on Wall Street. And for those that couldn’t get a job day trading, you could make up the difference between your declining real wage and your rising cost of living with debt and credit. Savings was out. Debt was the prudence.

That entire economic arrangement, indeed that entire way of life, is coming to an end. The Fed will try to prolong it with conventional interest rate policy, which Ben Bernanke said yesterday was “feasible.” He could lower interest rates again.

But Bernanke also tipped his hand for 2009. He’s got other tricks up his sleeve. He said the Fed could buy, “longer-term Treasury or agency securities on the open market in substantial quantities…This approach might influence the yields on these securities, thus helping to spur aggregate demand.”

What’s that now? It’s not exactly “quantitative easing” Japan-style. But by increasing the amount of reserves in the banking system (buying Treasuries and GSE bonds) the Fed hopes to lower rates in the U.S. and increase money supply. It had some luck with this last week, to our surprise, by buying a huge chunk of GSE bonds. Ten-year rates moved down, and so did mortgage rates, which are linked with U.S. ten-year rates.

So, you see, that is what’s coming. You’re going to get a vast expansion of the U.S. money supply through unconventional means, or by any means necessary. Malcolm Ben. The justification for that move will be rising unemployment, which precedes a fall in aggregate demand. People don’t spend when they don’t have jobs. They do get cranky, though, and demand that somebody do something about all the problems.

More money is on the way, then. It should arrive sometime in 2009. Stock prices may grind down to their 2003 lows between now and then. Investors are sceptical that the Fed and the RBA and other central banks are able to effectively respond to this global crisis. As well they should be. More on the global return to feudalism via fiat money tomorrow.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

Leave a Reply

3 Comments on "Bear Market Actually Began in 2000"

Notify of
Sort by:   newest | oldest | most voted
Coffee Addict
The loser nations will be the former savers. Others on this forum, like me have been saying for about 12 months now that Ben always intended to inflate (and devfate)the US debt away. Does infation actually cancel out the impact of asset devaluation? I’m very unsure about it. It may have the desired result on CPI indicies but thats about all I think. And what about the (in my view planned) devaluation of the USD during 2009 (in my view a 30% target would be reasonable). It would sort out some of the current balance of trade issues with China… Read more »

Interesting mega bear graph. Would it not be fair to say though, that the S&P 12 months ago was not really as ‘overvalued’ as were the other three markets at the time of their collapse???



Hi, its fastidious piece of writing about media print, we all
be familiar with media is a fantastic source of facts.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to