Posted by Davy on April 12th, 2009 in Book Reviews
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In dedication to today’s awesome bear, I continue my Blogging the Bears series. Other parts in the series:

• Part 1 contains my bullet point summary of the book and the 1921 bear market.
• Part 2 details the 1929 – 1932 bear market.
• Part 3 describes the 1949 post-WWII bear bottom.
• Part 4 summarizes the 1982 market decline.

1982 Bear Market

Many investors would be surprised to see the 1982 bear market take precedence over the well-known 1973-74 bear. From a nominal standpoint, the 1982 lows were well above the lows reached in 1974. But the latter half of the 70′s saw rampant inflation, the second OPEC oil shock, the appointment of Paul Volcker as Fed chairman and the rise of gold to record prices. Eventually, Volcker would raise short-term rates to over 14% and tame inflation but by the bottom in 1982, stocks were back to August 1906 levels once adjusted for inflation.

The 1982 bear differed markedly from the 1921, 1929-32, & 1949 bears in several important ways:

• The US dollar no longer had any connection to gold and was a free-floating currency.
• During the latter half of the 20th century, stocks as an asset class were elevated by investors. Retail investors began moving into equities en masse via mutual funds while institutional investors like pension funds and insurance companies began to increase their equities allocation.
• Increased interest in stocks would lead to a revaluation of stocks. As such, this roughly 50-year window would be the only time since the founding of the NYSE in 1792 that the yield on stocks failed to exceed the yield on bonds (this condition has since reversed during the course of our current bear market).
• All four major bears share the same catalyst: a major disturbance in the general price level. Unlike the other three bears, the 1982 bear was presaged by inflation, not deflation.

As with the other reviews, I must reiterate that readers would be well-served to read this book for themselves. My summaries are wholly inadequate, despite reviewing the book in four parts. A few more observations from the author which held across all four bear markets:

• Certain sectors maintained a prominent position across all 4 markets and despite the major structural changes in the economy from 1921 to 1982. The oil sector, in particular, maintained its importance through the decades and exited the 1932, 1949 and 1982 bear markets as the largest capitalized market sector.
• Perhaps related to the first point, the Dow Theory generally gave accurate buy signals at the bottom. Dow theorists aren’t homogeneous so there are different interpretations but for the most part, the theory is designed to track the economy. Despite Wall Street’s insistence in finding the next new thing, following the nuts and bolts of the economy held throughout the century.
• In all cases, equities were the last to rebound, trailing government and corporate bonds. Furthermore, in major bear markets, stocks fail to live up to their reputation as leading indicators and rebound at the same time as the economy.

This concludes my review of Russell Napier’s Anatomy of the Bear. I can’t recommend this book highly enough. The conclusion itself (which I have not reviewed) is worth the price of the book, especially if you had read it before the current bear as he eerily called this bear back in 2005, complete with the markers we’re now seeing — major price disturbance, 50-60% minimum drops in stocks, etc.