A couple of great questions came in on the Seeking Alpha version of this morning’s post about run-of-the-mill bear markets and I thought it would be useful to post the questions here and how I answered them.

Why do you think we won’t have a decline similar to what we had in ‘00-’03, which was a lot more than 30%?

Markets cut in half every so often; the great depression, the mid 1970’s; the start of this decade and I also know there was a depression in the 1870’s but do not know what the market did then, there was also a bank panic in 1907 that lead to a 37% decline that year. If you notice you see the gaps in time ranging from 22 years on up.

I believe the reason for this is that the market “can’t” cut in half so soon after doing so as a matter of perception/sentiment. You get a reasonable bit of generational turnover after 20 years or so. I put can’t in quotation marks because certainly anything is theoretically possible.

The one thing that does make this bear different from previous is the derivatives situation…gives the current situation the potential to be worse than the average bear.

I debated Michael Panzner in a point counter point type of thing on derivatives two or three years ago in the WSJ Online. The thing for me that makes a derivatives-led meltdown unlikely is that they are not all derivatives of the same instrument. They are derivatives of hundreds or maybe thousands of different underlying instruments.

An ABX derivative probably has very little to do with some sort of currency swap to hedge an Uridashi bond.

Last 5 posts by Roger Nusbaum

• Process Drilldown - October 23rd, 2009
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• A Little Followup From This Morning - October 8th, 2009
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• The Big Picture for the Week of October 4, 2009 - October 3rd, 2009