Ten Bear Market Phases, Current Edition

In a bull market, everyone ignores the greed and fraud that running rampant. No one wants to take away the spiked punch, even after it is perfectly clear that everyone is drunk. The party continues long after any reasonable person might have expected the party to end. Eventually the party goers all pass out on the floor and the pool of greater fools exhausts itself.

In a bear market, there are more distinct, readily observable phases.

Ten Bear Market Phases

1. A huge buy-the-dip mentality sets in during the initial decline. Most partygoers cannot fathom that party has ended.
2. Moderate concern sets in when buy the dip stops working.
3. Initial panic.
4. Numerous bottom calls are made, all wrong.
5. Search for the guilty.
6. Punishment of the innocent.
7. More panic.
8. Lawsuits fly.
9. Regulatory power is given to those most responsible for spiking the punch bowl.
10. Congress gets in the act and makes things worse

Steps 4-10 are repetitive, may overlap, and may occur in any order during repetition. Certainly there have been numerous bottom calls for months now, but each rally has failed.

Search For The Guilty

In regards to number 5 it is ironic that Sheila Bair, FDIC chairman, is blaming bloggers for bank problems instead of herself. Please see FDIC Chairman Sheila Bair Is Out Of Control for more on how and why the FDIC is partly responsible for the bank mess we are in.

Regulatory Power Grab

Number 9 is in strict accordance with the Fed Uncertainty Principle.

Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Congress Makes Things Worse

Congress already passed a $150 billion "stimulus package" that failed. Now there are plans for another. More importantly, House passes housing bill after Bush says he will sign it.

The House on Wednesday approved far-reaching government assistance for the housing market, including broad authority for the Treasury Department to protect the nation's two largest mortgage finance companies and an aggressive plan to help troubled borrowers avoid foreclosure by refinancing their mortgages.

"We are at a time of considerable turmoil in the private financial markets, and that is a traditional time when government support is needed and called upon," said Thomas Stanton, an author and expert on the mortgage financing industry.

Thomas Stanton is preaching socialist claptrap. Government support is not needed and is in fact the problem. There never should have been government sponsorship of GSEs in the first place. Which leads us to. ...

Punishment Of The Innocent

Taxpayers are on the hook. The Fed has already assumed a $29.5 billion responsibility in the take-under of Bear Stearns by JPMorgan (JPM). Now the Congressional Budget Office says Fannie, Freddie Rescue May Cost $25 Billion.

Rest assured the Fannie bailout will be $200 billion (if not far more), after Congress is done meddling.

Innocent taxpayers who sat this bubble out now are on the hook for hundreds of billions of dollars to bail out the drunken party goers. Losses are socialized. Profits go to the already wealthy. Sadly, this is how our corrupt system works.

Lawsuits Fly

In the last few days there has been a pair of ridiculous lawsuits that are no doubt a waste of time and money for all involved. The two lawsuits I am talking about are "San Diego sues Bank of America to halt foreclosures" and "Los Angeles Sues MBIA, Ambac, Others Over Bond Insurance".

Short Squeeze Over?

There was a stunning reversal in the stock market today. Financials were solidly in the red. Fannie Mae and Freddie Mac gapped up again, but both failed in spectacular fashion.

Here is a snapshot of some of the stocks on my screen. It was a sea of red. (Click on chart for sharper image.)


 

It's too early to say if this was the end of the short squeeze, but as of now, Fannie Mae (FNM) and Freddie Mac (FRE) appear poised to fall now that they have to depend on genuine buying interest rather than bureaucratic meddling in the not-so-free markets.

 

Comments

[oldgoldbug]

Well done.
Long term support at 10800+ on Indu makes an attractive entry point but fraught with risk.

[sunburned]

I keep reading all you gloom and doomers, but for the life of me, I haven't come across anyone who has mentioned the obvious.

First, somebody sold the houses to the present occupants that are now facing foreclosed and obviously at a good price. They presumeably still have the money/credit and have the ability to do something stimulative with it. You know the old velocity of money trick.

Second, all the folks that are walking away from their mortgages have to live somewhere. So if supply and demand holds shouldn't rents be bolstered significantly by demand for rental housing? If that is true, shouldn't these increased rents form a base under the housing market?

There is so much psychology involved here-as usual. What our economy needs-and what it hasn't had for a very long time - are leaders who espouse greatness, ambition, and positivenes rather than the folks who think that the only way to stay in power is to use the fear factor.

[Whidbey]

Interesting analysis of the decline, but I think you miss the damage done to the psychological welfare of those participants who did not understand the game. They are the innocents who believe the world is free of flaws, flees and thieves. They are the gullible investors who have been told buy/hold is a test of virility and manliness. The shock of finding out they have been had is very destructive. Few of them return to the market, or if do return it is largely indexes. This is the hidden cost of screwing investors.

[pokernut]

sunburned, you are very naive and ill informed. Your comments are just plain stupid. Nearly half the homes being sold are foreclosures. Anyone who bought a house since 2005 is clearly underwater. Many condos and homes are for rent. There is a glut of inventory.

[4VaTech]

Can the Housing Bill be stopped?? How??

[4VaTech]

Can the Housing Bill be stopped?? How? What can we do?

[droskoph]

Mish,

You are 1000% spot on. The Federal Reserve has overseen each and every bubble and debased the currency to near toliet tissue status. They have facilitated the migration of wealth away from the middle class through the nefarious tax of inflation and somehow deserve a promotion? Few get what's truly at stake by destroying our currency. The chasm twixt ultra rich and everyone else has never been wider and the veneer of civility may well be tested if the inflation genie ravages what's left of the "everyone else" population. Either they will "stop the presses" and allow deflation or hyperinflate America out of contention.

[Muzie]

Sunburned: "They presumeably still have the money/credit and have the ability to do something stimulative with it. You know the old velocity of money trick."

That's a weak argument. The previous sellers will need a place to stay as well, as you said, and in most cases they will have put down gains in an upgraded home, which today translates into a greater monetary loss. Aka let's say your house is worth 100k and doubles. You sell it for 200k and decide to move in a 300k house, keeping your mortgage the same. Then housing crashes 30%, say, so the house is worth 240k. In this case you now owe 240k instead of 100k. No wealth was created, you just owe way more on the mortgage, which actually makes it less likely you'll spend on other sectors of the economy.

Saying rents must put a bottom to housing prices doesn't hold water either because rents have long decoupled from housing prices during the housing bubble in many areas. In large cities prices have come up so much that even a 50% drop will not make the properties cash flow positive.

Credit checks are mandatory from most landlords - and foreclosure wrecks credit. People in foreclosure will have more difficulty finding good rentals as most landlords will be weary of renting to them. They've already renegued on their agreement with the bank - why wouldn't they do the same with their landowner? Most people in this situation will have to cut back on their lifestyle and rent lower-quality housing stock as a result. There may be upward pressure on cheaper rentals but the housing prices are certainly not based on a meaningful ratio with respect to cheap rentals right now.

[debtacid]

11. Congress gets in the act and makes things worse
12. Congress gets in the act and makes things worse
13. Congress gets in the act and makes things worse
...

[nova]

Michael Shedlock,

Thank you for a good article.

It is an election year, and politicians like to keep things "nice". This housing bill will make the present bad situation much worse.

I read that people with an annual income below $10,000 were getting $1,000,000-mortgages. Poor souls. How cruel to force these poor people out of their mansions. The society must help them keeping these mansions and also providing money for servants and gardeners, etc.,

It reminds me a bank-robber being caught with a $1M-loot and convicted to pay back $100K out off his loot.

In any case, we are living in a great country.

[John Egan]

'sunburned'... As a landlord and ex-professional property manager, I wouldn't rent to someone who just lost their home unless they have an iron-clad agreement with the lender to not come after them for the balance, and their income is good and protected. The fact they are on the market and looking to rent is not a guarantee that anyone will rent to them.

- They may owe a big balance and when they have to pay up, as a landlord, I become their personal lender when they stop paying. Baaad policy!

- Often times people that have suffered a financial setback become unpleasant to deal with, as their problems are imposed on other people around them. Baaad policy!

jegan ;-)

[REBEL]

Face it folks: we are going to be screwed as the federal government will default to it's, (not so secret), policy of socializing all bank losses - that means we taxpayers bail out the banks and foreclosed-on home buyers and the banks will continue taking stupid risks because the federales will use FORCE if they must to take taxpayer money to give to the banks. My prognosis is the DEPRESSION will last 5 years IF the market is left alone to cleanse
itself. If the government "Helps" the market cleanse itself, the cleansing will take 10 years - minimum.

[mythoughts]

Well written atricle. I tried to short WM last week but was informed by my broker that I wasn't allowed to short that stock due to govenment restrictions. What law gives the right to restrict what I want to buy or sell on the open markets. Debtacid you are right on.

[EE]

I bought puts on WB & MER no problem! For assets that will rise and protect from inflation get physical silver!

[Vikram]

Mish:

I find your analysis interesting, since it often highlights the negatives which are often ignored. But the spin you put on the numbers is nothing but scare mongering, bordering on the line of unethical conduct.

A few months earlier, you had a blog post about AAA rated bonds having large defaults and suggested that it was a Titanic about to sink. What you failed to mention was that the market was already treating those bonds as junk they were already trading at anything between 20-50c/dollar. For people who trade them their AAA rating was meaningless.

The current post has a link which claims:
". Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back."

Your inference is that all the loans made out by banks are bad loans and the financial system is on the verge of collapse. This is nothing but scare-mongering.


A vast majority (at least 90%) of Americans pay their mortgage on time. Commercial real estate, in spite of the prognostics of doom, is holding up reasonably well. Further real-estate, even a depressed market has an intrinsic value: the replacement value. People will continue to need homes and the collateral in place is not worthless. Even in the places hit with the biggest defaults, the liquidation value of homes is rarely if ever below 50% of the high water mark; more often than not homes sell at 60-80% of the high water mark. And not all the defaulting homes have zero equity; nor were all bought at the peak of the market. And by the way, the best run bank will go insolvent, if there is a run on the bank and everyone withdraws their deposits.

REBEL: I disagree with you on government intervention.The banking system can tolerate large losses as long as their magnitude is known; what it can tolerate is uncertainty about losses which leads to irrational and illiquid markets. We need a RTC redux to buy and hold properties at their liquidation values and then sell them once the market recovers (inflation will help that happen sooner than you think). It is easy to talk about tax-payer money being misused but if you consider all the ways our politicians spend our taxes, a housing bailout is going to be universally useful in propping up the US economy and our financial system. The cost of inaction when measured across all metrics (fear/uncertainty crippling lending, weaker dollar, higher commodity prices and inflation, falling paper asset pricing, lower economic growth and higher unemployment) is going to be a lot more than what backstop which the Federal government puts to put a floor on the housing mess. Remember unlike much of other government spending, the government is getting real assets with real utility out of this spending, and helping almost everyone in the US.

[lonie]

Mish , good article . Most all for a year have been mostly correct .

I am one of the innocents that pay thru taxes at a 20 to 25 % rate for all the malarky going on . When the SOBs finally get all my money , then the bastards can take care of me also as by that time i will need teeth, health care and some chow and a place to sleep.
Sounds as though half the comments are straight out of Marx socialism hand book .

I think the next proper event would be ,for people such as i , to march on Washington and Wall Street with buckets of tar and bags of feathers and put them to good use.

[Did U ThinkThe PonziSchemeWould Last?]

Mish=clarity!

Bravo. Thanks again for the ongoing insight and commentary.

[sbenard]

Did anyone see the total government interventions they gave yesterday on CNBC for the amount THUS FAR since the credit crisis began last August? It includes all the bail-outs, term auction facilities, discount windows, loan guarantees, etc., etc.,

The total for one year:

$1.43 TRILLION (yes, with a "t")

[secmaven]

Taxpayers to bear 1.43 trillion? With unemployment rising and politicians promising tax holidays to greater and greater numbers of people it will be more deficits that finances the 1.43 trillion. And when US government debt is not marketable to foreigners the Federal Reserve will monetize the debt. Query, are the reported sales and redemptions of debt by foreigners accurate or is the Fed already keeping a second set of books?

[xsuddensam]

Vikram:

"We need a RTC redux to buy and hold properties at their liquidation values and then sell them once the market recovers"

Here we go again! Do you have any idea who benefited from the Resolution Trust Corporation (RTC) in the aftermath of the S&L collapse? I'll tell you; people with money who bought prime real estate for pennies on the dollar. The RTC benefited the rich and only the rich.

Aren't you sick of the rich getting richer on the backs of hard working people who are being brutalized by the corruption in the financial system.

Incidentally, John McCain (one of the "Keating 5") should have joined his friend Charles Keating in jail in the aftermath of the S&L scandal.

[InvestmentScientist]

Surely Congress is getting into the acts ( to make things worse). Does that portend the end of a bear market?

In any case, here is my research on the duration of bear markets:

investmentscientist.co.../