Bear Market Without End


On this day in economic and financial history. ...

Does the market always come back? Investors in the Nikkei 225 are still wondering. On Dec. 29, 1989, the Japanese analog to the Dow Jones Industrial Average , reached an all-time intraday high of 38,957. Two decades later, the Nikkei's value was still 73% below that mark.

The Washington Post reported on the Nikkei's all-time high with classic irrational exuberance. The article paired a graph of the Nikkei 225 from the start of 1988 to the end of 1999 showing a near doubling (from about 24,000 points to over 38,000), with the following quote from Kenji Maeda: "The recent quick rises in share prices made investors impatient and feel obliged to buy so that they won't miss the bus."

It is quite difficult to be fearful when others are greedy, but Dec. 29, 1989, would have been the best time to feel fearful as a Japanese investor. The Japanese market had a major structural weakness, in that only a quarter of its stocks ever traded on the market. The rest were held by various large business concerns, creating a web of interlocking ownership stakes among Japanese zaibatsu, or diverse conglomerates, such as Mitsubishi. By severely restricting the shares on the market, the zaibatsu artificially inflated prices as investors funneled their resources into fewer and fewer available shares. The Nikkei's average P/E soared over 100 in 1989, a parabolic rise in valuation later imitated by the Nasdaq Composite during the dot-com bubble. Then the bullish fever broke, and the Nikkei has never recovered.

The only comparable bear market in global history is the one that afflicted the Dow for 25 years following the Crash of 1929. It seems all but certain that the Nikkei will go on to break that record. When comparing both crashes 22 years after their peaks, one finds the Nikkei remains about 75% lower than it was at its peak, in both real and nominal terms. The Dow, by comparison, had already clawed its way back to a mere 30% loss -- closer to 55%, when adjusted for inflation -- by the 22nd year of its bear doldrums.

To break its bear market within 25 years, the Nikkei would need an annual gain of 94% for two years in a row. That has never happened in the history of the Dow, which had a one-year record gain of 67% in 1933. To break the bear market by the end of its third decade, the Nikkei would still need a 21% annual gain for seven more years. That seems highly unlikely, to put it mildly.

This market may come back given enough time, but it will be too late to save a generation of potential Japanese investors that have watched the Nikkei slide for their entire adult lives.

Glued to the ticker, day one
Wall Street firms have always tried to be on the cutting edge of technology, to better get a leg up on their competitors. Before high-frequency trading there was computer trading. Before that, wire transfers and phone calls. The first real use of technology in a trading sense took place on Dec. 29, 1867, when trader David Groesbeck had first remote telegraph "stock ticker" installed in his office.

Groesbeck rented the ticker for $6 per week, or about $5,000 per year when adjusted for inflation. That's not a bad price when you consider that no other trader had this technological edge, and that modern Bloomberg terminals can cost about $24,000 per year. Two years later, Thomas Edison developed one of the first true stock ticker machines, and by the 1880s more than a thousand stock tickers were installed in Wall Street offices.

Don't mess with Texas
The Republic of Texas -- which included the Lone Star State and parts of several other states -- became part of the United States on Dec. 29, 1845, when President James K. Polk signed the annexation documents. Texas would secede from the Union at the start of the Civil War, owing to its slave-dependent economy, but after the war's end, Texas' economy grew far more diverse. Agriculture and cattle ranching were supplemented, and eventually supplanted, by financial services and oil exploration. The 1901 tapping of Spindletop, Texas' first major oil field, opened the floodgates for American oil production, transforming the state -- and the country -- into a dominant player on the global stage.

Texas' oil production was 836,000 barrels per year at the turn of the century. A year after the Spindletop gusher, the state's annual production soared to 17.5 million barrels. Texaco -- now part of Chevron -- was formed to handle this new discovery. Today, seven of Texas' 10 largest companies are major oil industry players, including ExxonMobil , the world's largest publicly traded oil company, and ConocoPhillips . A century after Spindletop, Texas produced more than 1.4 million barrels of oil every day, or about 534 million barrels per year. That year, Texas' GDP was $1.3 trillion, or just under 10% of the entire nation's GDP.

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