When is a Bull Market Over? How shall I know the signs? Back to the Future 1987

(Ed. note. This weekend, with rockets zooming in the Middle East and folks wondering if Israel really will go nuclear, and with stocks down big time, I took the time to review some writing from the good old days---at the stock market crash of 1987. This post, written on an old Tandy 1000, was written the week following the Crash of 1987. )

Preparing for a crash always brings to mind the biblical story of the vestal virgins, waiting for the bridegroom to come with their oil lamps....and then the warning....Watch and be frugal so you will be prepared when the time is a hand...The oil lamps are still at St. Vinneys and I wonder whether I should pick up a few.

There are some technical signs that the bull market is coming to a close, and also some social signs that the bull market could collapse. Here they are: Near the end, the elderly will be cashing in their CD's to buy mutual funds. There will be a gambling craze like the tulip craze of centuries ago, with people using scratch tabs and gambling on everything imaginable----even dogs. People will think that their only hope is hitting the jackpot to bail them out of the problems of life.

People will not even have thought of developing their talents through education. As a government, states will concentrate on stealing business from other states rather than encouraging development. People who never created a job will talk on and on about creating jobs. On an individual basis, drugs and other evils will be rampant. Folks who are honest will be laughed at as being foolish and naive.

On a technical basis, the stock market will be selling for a high multiple---30 to 50 times earnings. The normal should be around 15. Stock analysts who have an interest in things going higher will make excuses that these ratios should be prospective.....looking to future earnings....the same arguments that were prevalent in 1929.

There will be a large and growing disparity between the rich and the poor. ( See John Kenneth Galbraith's classic, "The Crash") Because a larger and larger portion of the society is losing purchasing power, it does government little good to stimulate the rich to buy more; After all, one can only buy so many luxury cars? Right? So that you know. For the unemployed, the depression will only be over when you can buy a new car. Not before.

What this means is that prices will come down to meet income, not the other way around. In fact, in the 1920's, the early boom was caused by declining food prices---this was disasterous for farmers who were facing foreclosures left and right. The rest of the society in the 20's felt this was just a farmer problem.

The problem feared will be inflation. The problem to be confronted will be deflation on a grand scale. We will have become a nation of debt and not interest income. Even the very rich will have little interest income. Only the crisis will change this.