The Bottom of This Bear

Common wisdom is, a bear market normally hits its bottom 6 months before the economy moves out of its recession. Now, let's try to find the time frame for the bottom of this bear based on this assumption.

The last two recessions, especially the one in 2000, were short lived and shadow. It did not cause too much pain at all. But don't expect this time would be the same. Just like the financial crisis has so much domino effect, this recession should be prolonged and deep and could cause a lot of pain to all American Joes.

First of all, with the large money injection from the Fed and other central banks, the credit market seems to start to relax a bit. For instance, the commercial paper flow is improving quite a bit. This does not imply that the financial crisis is over. But it does give us a hint that, the flood of money might start to work its way. However, that does not mean that, the economic trouble will be over. As a matter of fact, it's not even started yet.

One thing that rings a bell to me is that, some of the major credit card issuers start to raise interest rates and lower credit limit on the credit cards. That's a killer for those who rely on their credit card to survive and also, it will bring more credit card debt defaulting as more and more people will fall behine the payment. The end result? Consumer spending will go much further down from here again. What's the domino effect? The corporate earnings and revenues will be hit again and thus, more layoff, and thus less consumer spending....

The way it looks now, the real challenge to Joe the Plumber may just get started. The highly manipulated GDP number has shown a 0.3% shrinkage. Not much, isn't it? Wait until later. Let's look at one of the so called bad recessions after 1929(I do not believe this time around will be as bad as 1929), the 1980-82 recession. It lasted about 2.5 years, that's about 10 quarters of economic cycle. I do feel that, the 2008 recession will last longer than the 1980-82 one due to the fact that, this is the financial crisis of the century. But let's assume that, the coming recssion will be as bad as the 1980-82 one.

The current stock market crash started a year ago, and historically, a recession normally starts six months to a year after a stock crash, ie, the stock market crash always leads a recession. Officially, we are not in a recession yet, but we will be soon. Assuming the reccesion lasts just 10 quarters, this would put the ending of this recession into mid to late 2011.

Of course you can argue that, the 1980-82 recession was so severe because the Fed did not pump money etc. This is just like 6 months ago, you kept believing that, this financial crisis was controllable. I don't buy that argument. Hence, I will stick with this time frame for now and estimate the bottom of this Bear not be reached until early to mid 2011.

Now, let's hope that, by 2011, the Big Bear does not pull the market to 20% of it's top, like I predicted in one of my ealier posts. By the way, that prediction did not come from guessing. On the other hand, You can always choose to be very optimistic to expect this recession will be shadow and quick. That's a good spirit to have.