Op-Ed: Blowing the Biggest Bubbles
Editor's note: The following op-ed is from Minyan Ambassador Robert.
The S&P 500 has been in a brutal bear market since setting the all-time high in October 2007. Many are calling the credit bubble the biggest bubble of all time. Although we understand that FDR didn’t know what a derivative was, Japan is still 80+% off the highs set 20 years ago, and Nasdaq is close to its post-bubble lows 9 years later.
It's interesting to compare the bust periods of the 3 greatest bubbles in the last 100 years -- the Great Crash of 1929, the 1989 Nikkei, and the 2000 dot-com bubble -- to the current S&P 500 bust.
Methodology: Day 1 is the date of the closing bubble highs for all 4 markets. All of the market data is indexed to 100 for Day 1.
Key findings:
1. There's a strong statistical correlation between these markets. Nikkei 1989, Nasdaq 2000 and Dow 1929 are 0.86 to 0.89 correlated for the 4-year period after the great top. So far, S&P is creepily close to both Dow 1929 and Nasdaq 2000 trajectories.
2. Intensity of the S&P 2007 drop is very close to Dow 1929 (identical!) and Naz 2000 (4% worse) in the first 355 days from the highs.
3. If we assume the trajectory will continue, we're still roughly 300 to 350 trading days (we're only halfway done) from the ultimate bottom.
4. We could be looking for another 40% to 50% drop from the current levels. 
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5. The rebound will be phenomenal. Dow 1932 went up 250% in a year after setting the bottom. Nikkei 1992 and Nasdaq 2002 went up 43% and 71%, respectively. 
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6. The bust survivors will substantially outperform the market. As an example, below is the dot-com survivors' -- Amazon (AMZN) eBay (EBAY), Cisco Systems (CSCO) and Yahoo (YHOO) -- performance, versus the Nasdaq. 
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my work indicates we are at or around mar 28, 1938.
Former New York Stock Exchange president Richard Whitney is indicted March 10 on embezzlement charges. Now 49, he has taken about $1 million worth of bonds from clients' accounts and pledged them as his collateral for personal bank loans
President Roosevelt asks Congress April 14 to appropriate another $3 billion for relief to stimulate the economy as 5.8 million Americans remain unemployed
Mexico nationalizes her petroleum industry March 18, revoking licenses granted to British and U.S. oil companies to operate in Mexico. Oil is a natural resource that belongs to all the Mexican people, the Cardenas government says;
Federal bank supervisory agencies agree in June to let banks carry high-grade bonds at amortized book value regardless of market prices.
(the last point started a huge rally in june ... hmm, accounting change starts a rally)
(do a search on Rogoff aftermath to find the analysis - can't seem to post the link here)
which calls for the duration of equities peak to trough at around 3.4 years on average.
That puts the bottom roughly somtime between the 4th quarter 2010 and 1st quarter 2011.
Since the severity of this cycle seems to be worse than average, my guess is duration will be longer as well.
Thanks to whoever answers,
George
Can you likewise relate the SP500 Bear of Sept2000-Oct2002? It should be instructive to add that decline to the chart since timing and magnitude at 1 year appear similar to those already charted, but the course thereafter diverges markedly.
Finally, is there any secular Bear precedent to compare?
Loved the bit about the headlines.
Boy, if history doesn't repeat itself, it sure rhymes.
