Aftermath

Barry Ritholtz recently posted this chart showing the duration of bull and bear cycles in the stock market over the past century. One of the reasons this chart interests me is the way it demonstrates the danger created by the aftermath of bull markets and particularly speculative bubbles. The latter part of the bear market during the early 1900's was marked by World War I. The epic bubble that ended in the stock market crash of 1929 led to the Great Depression and World War II; the Dow Jones average did not regain its 1929 high until the mid 1950's (a repeat of that experience would result in the Nasdaq not revisiting its high of six years ago until the year 2025). When the postwar bull market ended, the Vietnam War started. The stock market crash in 1987 didn't lead to an extended bear market in stocks, but it was followed by a severe recession and the 1991 Gulf War. And we know what happened after the 90's bubble popped: 9/11, Afghanistan, Iraq, presumably Iran, and probably more after that.

I could write for hours about this---and this post is admittedly a bit simplistic--- but the basic truism is that when bubbles pop, bad things tend to happen beyond just the immediate consequences. Extraordinary policy responses lead to subsequent "echo" bubbles and further imbalances, foreign boogymen and scapegoats distract the electorate from political, fiscal and monetary failures, real enemies try to take advantage of perceived post-bubble weakness, and politicians realize that "war is good" because the concurrent increase in government spending stimulates the economy. In the case of a synchronized global crash, which occurred during the Great Depression that preceded World War II, this dynamic is exponentially more dangerous as many nations desperately take the same route.

This is why preventing or short-circuiting speculative bubbles is so important. It’s also why---despite his retirement in a few weeks---Alan Greenspan’s legacy won’t be complete for years to come as the aftermath of the multiple bubbles he's sired continues to play out.

Something tells me this won’t be a featured topic during these upcoming speeches.