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Are We at the Bottom? This Guy Knows the Answer...
By Dr. Steve Sjuggerud
What's the bottom look like? Is the worst over?
The smart thing to do is to check with the guy who literally wrote the book on it... Russell Napier.
Napier diligently studied the great bear markets of the last 100 years. Then in 2005, he published
Anatomy of The Bear: Lessons from Wall Street's Four Great Bottoms. In it, he showed readers which indicators said the bottom was here.
Napier currently teaches the course "A Practical History of the Financial Markets" through the Edinburgh Business School. But he's not just an academic... When he was the Asian strategist for CLSA (a major Asia-focused brokerage and investment group), he ranked No. 1 for Asian investment strategy in all the industry polls.
In his book, Napier called exactly what would happen in this bear market... though nobody listened at the time:
Equities will have to fall below their fair value, and the likely catalyst for this will be a bout of deflation... There will have to be a bear market in bonds and a recession. Before the bear market is over the DJIA is likely to decline by at least 60%... This bear market will likely come to an end sometime after 2009...
Back in 2005, none of the above had happened yet. But what about today?
Are equities below fair value? Yes. Have we seen a bout of deflation? Yes. Is there a bear market in bonds? Yes – the worst ever in everything but government bonds. Are we in a recession? Yes.
Finally, has the Dow Jones declined by at least 60%? No... but 14,000 to 8,000 is a heck of a fall.
Just about all the things Napier mentioned – things that hadn't happened in 2005 – have happened now. So where does he think we're headed from here?
Many of Napier's indicators of a bottom look good now... He found that corporate bonds bottom first, then stocks bottom, then the price of copper bottoms. Well, corporate bonds bottomed in October. Then stocks bottomed in November. And copper bottomed in December.
It looks like all our ducks are in a row. The signs are good the bottom is here, right now. The worst of the recession could be behind us, and we could see a great rise in stocks.
I wish I could end this note with that hopeful picture... Unfortunately, Napier's recent writings are not so hopeful. He believes a huge rally is almost here... But he thinks the ultimate lows in stocks are farther ahead of us, after a big fall in the U.S. dollar and U.S. government bonds.
If Napier is right, the federal debts the U.S. government will create today with its new spending programs will ultimately crush the U.S. dollar and government bond prices. The ensuing inflation will bring stocks down, too.
Napier's book, Anatomy of the Bear, isn't quite "beach" reading. But if you want to understand what happened in the four major bear markets of the last 100 years, and compare it to where we are today, it's probably the best book out there. If you're interested, check it out.
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