The mess we’re in
“Equities become cheap slowly.” That’s the key insight from Russell Napier’s 2005 book Anatomy of the Bear. In it he looks at Wall Street’s four ‘great bottoms’ – in 1921, 1932, 1949 and 1982 – and makes the point that it took the Dow nine years on average to travel from its valuation peaks to its valuation lows on each occasion. Take out the 1929 to 1932 bear market and the average rises to 14 years.
I mention this partly because it puts our own great bear market (since 2000) into perspective (perhaps there isn’t long to go?), but also because it’s a reminder that whether one is talking of equity markets, economies or politics, big changes tend to happen slowly.
Endgames have dramatic incidents woven into them – huge price swings in the case of markets, or the likes of the Libor scandal in the case of unwinding credit bubbles. But these incidents don’t necessarily mark their actual end. Just as the time from peak to trough of the average bear market is over a decade, the end of the credit bubble will play out over decades rather than years.
• Read the full editor’s letter here: The mess we’re in.