Every Bear Market Has a Surprise

“People in this country don’t realize how bad things can be,” said Richard Russell on Saturday night.

“I lived through the Great Depression. I remember people standing in bread lines. It was hard to get a job, any job, back then. But now, you see the restaurants are still full. People are still spending money. They may be worried and they may be beginning to save, but there’s no sense of urgency. And there’s a rally on Wall Street. You know, every bear market produces a rally. You can expect the market to retrace its steps by one- to two-thirds.

“And every bear market has a surprise. I think the surprise is that this is going to be a lot worse than people expect.”

Richard Russell is 84. He’s been writing his investment newsletter, Dow Theory Letters, for 50 years. This weekend a group of his admirers, including your editor, came together to say thanks.

There are a lot of people with opinions on the economy and the stock market. You can hardly turn on your computer without getting dozens of them. But there are not many opinions with the depth of experience and knowledge behind them as those of Richard Russell. He’s been studying “the language of the markets” for more than half a century. Though no one ever fully masters the language of the market, Richard can at least carry on a conversation with it.

“The primary trend is down,” says he. In the end, he continues, no matter what Obama and Bernanke do, the primary trend will have its way. The bear market will continue until it “has fully expressed itself.”

What does that mean? We don’t know…and no one else does either. But if this market has something to say, it’s probably something it’s wanted to get off its mind for a long time. And our guess is it’s not a message that people are going to want to hear.

Richard is probably right. After so many years of watching markets, he’s developed an instinct for what is really going on. This is going to be worse than people expect, he says. Because despite all the whining and bellyaching in the press, most people still do not expect the worst. Over the last quarter century, they’ve learned to look for bottoms…and buy. Every time it looked like real trouble was coming, the Fed cut rates…and soon, it was off to the races again. Now, they’re afraid of missing this opportunity for another boom.

But Richard is old enough to be able to look back much further than a quarter of a century. He’s seen the Great Depression…WWII…the bear market and stagflation of the ’70s. He knows that sometimes it pays to be extra cautious. “Cash and gold,” says Richard, are the only investments you should be holding now; we’re a long way from the bottom.

One of the reasons we think that is because so many people are looking for the bottom. “Individual Investors Pile Into Citi,” says a headline from last week.

“The old Wall Street adage about the dangers of catching a falling knife doesn’t seem to be scaring individual investors away from Citigroup Inc.

“Some discount-brokerage firms report a surge of individual, or retail, investors buying shares of Citigroup during the past five months, amid the New York bank’s stock-price slide.”

These investors think they see an opportunity. What we see is a trap.

The Dow rose again on Friday. Apparently, this is the rally we’ve expected since November. It could take the Dow back to 10,000 or so – before collapsing on the heads of naïve investors.

Remember, this is a depression, not a recession. And thanks to determined government action, it is on its way to becoming a Great Depression. In a depression, you can’t revive the old economy. It needs structural change – eliminating the mistakes of the previous bubble period – and building new businesses with new ways of doing things. “Creative Destruction” Schumpeter called it. Things that don’t work need to be destroyed…so that things that do work can make use of the capital more efficiently.

“What would you do if you were suddenly in a position of power in the United States?” asked one of crowd at Saturday night’s dinner.

“Nothing,” replied Richard. “I’d do nothing. I’d let it happen. I’d let the bear market do its work.”

Amen, brother.

More news from Addison and Ian in Baltimore:

“Another industry built on credit-fueled consumption, and thus, likely to get leveled during the great deleveraging, is looking a little gluttonous right about now,” writes Addison in today’s issue of The 5 Min. Forecast.

“U.S. restaurant expansion over the past 20 years has vastly outpaced population growth.”

“Since 1990, the number of bars and restaurants in the U.S. has grown 49%, to over 537,000. The American population has grown only 23% in that period,” Addison continues.

“Growth in the restaurant industry has even outpaced the U.S.’s appetite for squandering money. According to the National Restaurant Association, in 1985 Americans spent around 40 cents of every “food dollar” in restaurants. Today, we’re closer to 48 cents on the dollar, a 20% bump.

“Back in the 1950’s, the average Joe spent just 25 cents of his ‘food dollar’ in restaurants. If we’re to return to anything even resembling a post-Depression, post-War, way of life… tens of thousands of restaurants will go under.”

Each weekday, Ian and Addison bring readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And back to Bill with more thoughts:

Many old friends were at Saturday’s dinner. Analysts, writers, opinion mongers, subscribers. One fellow said he had been reading Richard Russell for the last 30 years.

“I figured I probably paid Richard more than $60,000 in subscription fees over that period,” he explained. “But it was the best investment I ever made. He helped me turn a few bucks into $30 million.”

“Well, what do YOU think?” asked a local reporter, interviewing your editor at the Richard Russell dinner.

“I agree with Richard,” we explained. “Let the free market do its work.”

“But aren’t you afraid that the banking system will collapse and that millions of people will be out of work?” came the follow-up question. “Are you saying that the government shouldn’t even try to make sure that doesn’t happen?”

“Maybe the government should make sure there are enough parking places. It should probably make sure the grass is cut at Arlington Cemetery. But there’s no way it can do a better job of getting people what they want than they will do themselves. Even in a depression.

“Here’s our new motto at Markets and Money. You’re going to be the first to report it in the press. And when historians finally get around to discovering our oeuvre, they’re going to credit your paper as the first to publish it. Are you ready?
Here it is:

“The free market rarely takes you where you wanted to go…but it always takes you where you ought to be.

“There…we think that pretty much says it all, no?”

Rick Rule was there too. Rick provides finance capital to the mining sector – among other things. We asked him what he thought of the recent run-up in stock prices.

“I’m a lender, mostly. And as a lender, I’m primarily interested in the credit quality of the people I lend to. Am I lending now? No.”

Rick explains that stock prices in the mining sector are, generally, too high. Investors are betting that they go higher. That’s a bet a speculator may want to make, but not a lender. And it’s that kind of speculation that got people in trouble in the first place. Homeowners bet that their houses would go up in price. So did their lenders…and their lender’s lenders. They were so sure they were going to make speculative gains they forgot to pay attention to the quality of their credits.

But a rally is underway…and our guess it will destroy both the bulls and the bears.

The bulls will buy stocks believing that we have another bull market on our hands. After having lost 50% of their money since 2007, they’ll lose another 20%-30% when this rally collapses.

The bears, meanwhile, are convinced that there is worse to come. They think the stimulus spending programs will cause inflation. So they’re buying gold and commodity stocks – sure that when inflation comes, it will cause mining and oil stocks to soar. Maybe it will – eventually. But the first big move will probably be down. They, too, will lose big.

That could be the big surprise of this depression. It will kill the stock market bulls when the bear market rally collapses…then it will kill the stock market bears when the mining and commodity stocks collapse…and finally, it will wipe out the middle-class savers when inflation increases and the dollar collapses.

Until tomorrow,

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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6 Comments on "Every Bear Market Has a Surprise"

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All will be well if one holds gold, I have that on good authority.

Jim Cairns to oversee Australia’s broadband rollout

Speaking of “the language of the markets”; I hate the word “ON”. I hate how typical media outlets always use those lousy half-assed, part-truth-part-distraction phrases such as “X is up on Y” or “A is down on B”. Lame, Lame! LAME!! Too lame to actually commit to writing “Y caused X” or “B caused A” – but love to imply it, as if they know something. But then those pontificating morons don’t actually know what causes what, and might get their pants sued off if they actually tried to speak some sense. Keep up the good work DR and don’t… Read more »
Greg Atkinson

Nice manipulation of the chart there..I wonder if you could squeeze 16 years into any less space on the x axis? How about you plot ATM usage as well…I mean some people are really looking anywhere for gloom these days :) So your point is more Americans eat out…yes..so?


I agree Greg. But the thing I take from the graph is just that this period was a time of extravagance. I think the full-service restaurant thing is indicative of people having too much money to spend.

If people are short on cash, they tend to eat cheaper meals at home.

Not sure how the fast-food restaurants figure in that though, and not even sure if that supports or refutes what I said.

Greg Atkinson

Pete, the data could also be a reflection of the rise of single person households, longer working hours, change in social habits, change in diet etc. I am just getting a bit weary now of every upwards trend being used to indicate the collapse of the world :)
I notice they also neglect to include the number of salary earners as this is just as applicable as the head of population. (i.e if you have more people working then it seems logical that more people hit the town)


Yes you seem to be right there Greg. This is a correlation that does not imply causality.

Some of us are pretty keen to jump on the statistical bandwagon.

Whilst I agree with your analysis, I still believe that the 2000’s were a time of extravagance, however this is not so easily proven statistically :)

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