Inevitable Bear Market

Bear Market Are Inevitable

Its only reasonable to ask why we have bear markets. Many think we should have progressed far enough in social structure, in government guarantees, floors, and protection that we should have no more depressions, recessions, or bear markets. But to so think is to say we have changed human nature and repealed the law of supply and demand and stopped the pendulum that swings from surplus to insufficiency.

Its what Nobel Laureate F.A. Hayek refers to as the special information we all have that causes us to buy or sell at certain prices, but to regard products as too expensive or too cheap at others, which causes shortages or surpluses before the system adjusts. The business cycle simply reflects evolving markets. But, except in limited situations where liquidity is needed to prevent panic spreading, most government intervention is of little help and over the long term usually makes a situation worse. There are always unintended consequences to all government interference in an economy or market.

For hundreds of years, people have been saying, at certain levels of the business cycle, that they were in a new era of permanent prosperity. Even in ancient Rome, they were under the impression they had a fixed state of affairs an affluent society as masters of the world. And, during the 1920s, so convinced was everybody that their new technology had ushered in a New Era that, just weeks before the 1929 crash began a decade-long depression, it was publicly stated that America had entered a permanent plateau of prosperity.

Going To Extremes

Simply put, a bear market in stocks comes about because the prices get too high in relation to their value. This is caused by public enthusiasm that gradually becomes excessive, appraising stocks out of proportion to their true earnings. It is the nature of such things to go to extremes in both directions. So, as a bull market often goes too high, so too does a bear market go too low. The excesses are caused by human emotions.

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