Great Depression 2.0

So... how's this Bubble Bursting working out for everyone?

I guess I finally got the answer to my question, "How is the stock market going to discount a disastrous economic event that'll take years to play out?"

Answer? Slowly at first, then all at once.

DJIA, 5yr

Or for a longer term view of The Pain:

DJIA, 10 yr

So this weeks little meltdown has put us on a negative 10 year return on the DJIA.

And I don't want to say much this week, cuz I figure events are speaking for themselves, but on the hyper-long term basis, this week, is the first time in a long, long time that the DJIA has fallen to PARITY with its L/T trend.

DJIA, 80 yr

Here's a 80 YEAR chart of the DJIA, with a best-fit logarithmic estimate. Those 2 big humps on the right are of course, the 2 great bubbles of our lifetimes, The NASDAQ & RE Bubbles.

You'll also notice that when NASDAQ cracked, it never really returned to trend.

And it has been above trend every single day since Mar 24, 1995. Until Wednesday.

The regression estimate for Wednesday is 9,390, and we closed at 9,258.

This may be easier to see in a log chart:

DJIA, 80 yr logarithmic

That far right convergence of actual vs estimate doesn't appear to quite meet, but believe me, it does.

Note that this time period includes all sorts of crazy things, from nuking the Japs, to putting man on the moon, WWII, WWI, and essentially the entire modern transportation & electronics era.

It is tough to put some sort of parallel on today's events given the past. But it does look like we are experiencing a Super Wave correction similar to The Great Depression or The Great Malaise of the 1970's.

Strating with the less wrenching meltdown of the 1970's, we see that after a Super Wave up that essentially began in the decades after The Great Depression

I guess we can say The Official Start of The Great Malaise began on July 10, 1969. The DJIA crossed below the L/T least squares estimate of 856.18, and closed at 847.79.

This put to an end an unbroken string of above-trend closes which began on Sept 13, 1954 at DJIA 351.10.

So when did the prior below-trend string start? On May 10, 1940 at DJIA 144.77.

I guess the point here is that what we've seen the past 30 years actually HAS happened, in some measure, before. Calamity following euphoria following calamity... The beat rolls on.

The other point is that this is NOT a short term phenomenon. These long waves take an adult lifetime.

The post Great Depression low of 41.22 was hit on Jul 8, 1932.

A monster rally ended on Mar 10, 1937 at 194.40, or +372%.

New lows were set on Apr 28, 1942 at 92.92, or down 52.2%.

The coming mega-wave carried through to Jan 18, 1966, when the Dow settled at 994.20, or stunning +970%.

But we then paid for it with a pounding that carried us to 577.60 on the Dow, on Dec 6, 1974.

Here begins our modern comparison of the Super Wave Modern Age DJIA Bull Market.

And if you look close and IGNORE the huge, but relatively short live burst from 1932 to 1937, and use the Great Depression low of 41.22 as a starting point, and the near 1,000 top in 1966 as a top, you see this mega wave had a bottom-to-top gain of exactly +2,300%.

A Super Wave up that took 34 years.

Then we had possibly the worst bear market in modern history that took us down 42%, ending 8 years after it started. This is the Dec 6, 1974 low.

Here is the interesting part: We had a super wave higher from Depression lows of +2,300% which took 34 years, right? Extrapolate the 1974 lows forward +2,300% and 34 years and you get...

Yes. Highs in the 13,862 area in 2008. Not perfect. But eery as hell.

Our long wave recent (post 2000) "Opportunity Cost" top was hit July 19, 2007 at 14,000 even.

We have subsequently fallen 40% from this Super Wave Mega-Top.

So where do we go from here? Well, the mathematical nature of a least-squares regression is that the L/T machinations of the market, both positive & negative, will net to zero. And the subsequent negatives will cancel out the prior positives.

On this count, we are in dire straights. Look at the 90th percentile confidence limits:

80 yr DJIA, +/- 1.5 STD's

In point of fact, we have NEVER been as overvalued as we were on Jan 14, 2000 at DJIA 11,722.98 on an opportunity cost basis (excepting the brief Euphoria of pre Great Depression). THAT was the maximum CASH OUT selling point. The only time we've been close to that overvalued was when the DJIA was crashing towards Great Depression lows.

DO NOT believe the banter that we can't go incredibly lower from here. We can, we will. Here is a view of only the difference between actual DJIA closes & least squares estimates:

DJIA, 80 yr Diff

A short explanation: This is the log of the DJIA close minus the log of the least squares expected value. So at 0, the market is at "fair value" based on long term regression. "+.5" is actually e^.5 - 1, or 64%, above fair value. "-.5" is similarly 39% below fair value. It's no coincidence that (1 + .64) * (1 -.39) = 1.0. Both are equidistant from fair value logarithmically.

You can see that the 2000 top was a selling opportunity of a lifetime comparable to the 1982 bottom was a buying opportunity. Unfortunately these Long Wave moves are just that: Long. They have staying power. This won't end soon.

The Good News? We will probably hit nominal lows soon. That lower band stands at DJIA 5,190 today. I will state right now, that I would go all in at that point. That would mark an almost incomparable nominal low buying point in our lifetimes.

The Bad News? Although nominal lows were hit in late 1974, REAL LOWS were not left behind until late 1982, about 8 years later. There were severe rallies in the meantime, and subsequent falls. Note: REAL LOWS rarely coincide with NOMINAL LOWS. Same for HIGHS. Our recent REAL HIGH was in 2000, the nominal high was late last year. The REAL LOW of The 1970's Malaise was set in 1982, while the NOMINAL low was set in late 1974.

That said, if you do get the chance to buy stocks in the 5,000's, I would DO IT. But I would also consider the next decade a trading range market, and you should sell after significant rallies. That's doubles off the bottom.

If you buy at mid 5,000's, I would consider a run to 11,000 a good sale.

These gut-wrenching falls bring us closer to The End. Buy stocks in the 5,000's. These will be some of the best values of our lifetimes. They ARE coming. We are closer to a bottom than the top. It is too late to sell. Just hold, and buy on severe downdrafts. Scale in on The Horror.

We are simply at fair value now. We might tread water here, we might implode, who knows. But buying stocks at mid 5,000's is a Dead Lock for the trade of a lifetime. Just make sure you sell near +80-100%. Because REAL LOWS will not occur until 2016. Probably in the 6,000's.

THAT will be the Buy-And-Hold point of a lifetime.