Saturday, October 11, 2008

The Great Bear Market Plunge of 2008

click to enlarge chart

The chart shows how various benchmarks and asset classes have fared over the past week and past 52 weeks of the Bear Market. You will note that the only sectors to show gains are Gold and $USD (cash). There has been virtually no safe haven in this Bear Market.

This Bear Market is not typical. It is ravenous for capital. This downturn is not solely due to the natural ebb and flow of the business cycle and earnings. This Bear is due to misjudging of risk and the resultant systemic failure of our financial system.

The global financial system is being forced to rapidly de-leverage. We are now witnessing a negative feedback loop. This cycle is operating in reverse from normal, producing a cascading failure that is destroying the global capital base at a furious pace.

Less capital means a destruction of demand for all assets which leads to deflation. The global asset bubble has burst. Asset deflation has now manifested itself as the GREAT BEAR MARKET PLUNGE of 2008.

For the past several years, "buy and hold" has not been a profitable strategy. As of this week, we have now seen the last 5 years of gains wiped out on the major indices. Even worse, if you had bought the S&P 500 index 10 years ago, you would be faced with a negative 11% total return.

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