2 Bear Markets In 15 Years In Not Enough "Punishment"

Tyler Durden's picture

Bear markets are punishment for over-exuberance and greed, notes ConvergEx's Nick Colas, teaching investors to be more careful next time around. That’s a pretty popular narrative in capital markets, and with two tough bear markets over the past 15 years, Colas suggests you’d think that there’s no way investors would be guilty of blowing bubbles again.  Right?  Well, as Nick explains, if the evidence from actual crime and punishment is any guide, this moral narrative is actually quite wrong.

Via ConvergEx's Nick Colas,

Recidivism – the percent of criminals who are rearrested after a stint in prison - is +40% across the U.S. and over 50% in some states like California. Those ‘Scared Straight’ programs you see on reality TV?  Many criminal psychologists think they do more harm than good, and the data supports that point of view.  So despite lifting equities to unsustainable levels twice in a generation, investors are perfectly capable of doing it again.  Let the punishment fit the crime if this is the case.

The current generation of investors must be the most bubble-conscious market participants since the Dutch realized tulip bulbs weren’t great long term investments back in the 1630s.  We’ve had two difficult bear markets, first from 2000-2003 and again in 2007-2009.  Both lopped off close to 50% from equity values and both had the same root cause: irrational human confidence, first in tech stocks and then house prices.  Justice delayed is justice denied, and investors swiftly paid for their mistakes once the bubbles of their exuberance popped.

Perhaps it is a psychological echo from our country’s Puritan founders, but the notion that bear markets are “Punishment” for the error of our collectively greedy ways is a popular narrative.  The wrongdoer - and let whoever is without sin cast the first stone – must go through his or her punishment before achieving redemption.  Only after that penance is complete can we enjoy the next period of growth and expansion.  The error of our ways may vary.  Excessive enthusiasm for sock puppet mascots and their dot com business models one market cycle, sloppy residential real estate lending the next.  But in the end, we pay for our wrongdoing and move on, hopefully wiser and more cautious.

If this narrative of crime, punishment, and rejuvenation holds, current equity market valuations should be – at worst – accurate representations of future cash flows and discount rates.  They may even still be cheap.  After all, we’ve paid dearly not once, but twice, for terrible errors in judgment over the last 15 years.  Pencils should be sharper, minds clearer, and portfolios more thoughtfully diversified than at any point in the last two decades.  That’s the basic Puritanical structure of sin, penance, and forgiveness.  Wear your scarlet letter, contemplate your moral failings, and live a better life going forward.

The problem with this argument is that it ignores a cold reality of the human experience: punishment is a poor motivator for changes in behavior.   Consider the following points from the world of criminal justice:

In 2011 the Pew Charitable Trusts published an extensive study on recidivism – when people already jailed once for a crime must return to prison, convicted of another serious offense.  The central finding was that more than 43% of all past inmates end up back in jail for another crime within three years of their initial release, despite that the U.S. spends more than $50 billion annually on its prison system.  That is more than the GDP of most of the countries on the planet.


This rate has been fairly constant for several years, at 45.4% for inmates released in 1999 and 43.3% for those released in 2004.  Results vary widely by state.  California has a 59.5% recidivism rate, using samples from 1999-2002 and 2004-2007, while Virginia’s is essentially half that at 28.7% over the same periods.


Technical violations of parole – missed meetings with an officer of the court or social worker, for example, represent 26% of the cases. New crimes are 20%.  Again, results vary by state.  Arkansas has a unique program for parolees that essentially eliminates the chance of breaking parole.  Still, its recidivism rate is 44%.   California’s high rate, as noted, comes primarily from parole violations, and only 14-18% of its repeat offenders are convicted of a new crime.


The evidence shows that declining recidivism on a state level only comes with new programs that explicitly target the problem.  Oregon, with the lowest reported levels at 22.8% in 2004, aggressively manages parolees’ transition plans back into the “Real world” even before they leave prison.  Once out, punishments for breaking parole are gradual rather than an immediate trip back to prison.


How about those “Scared Straight” programs, where juvenile offenders get a stern talking to from seasoned inmates?  Ever since the original film chronicled such an approach to dealing with at-risk teens back in 1978, this has been a popular program in many American states as well as other countries.  Analysis of numerous studies on the efficacy of these programs yields a not-so startling conclusion: “the intervention on average is more harmful to juveniles than doing nothing.”  One review of a Scared Straight program in California’s notorious San Quentin prison concluded: “it was clear that the San Quentin Squires Program did not reduce delinquency overall.”  Even then, the program is still running to this day.

The bottom line is that punishment alone is not enough to change behavior.  Doing time in America is no joke.  Sentences are more severe than most other democracies, and conditions are generally tough at best and horrific at worst.  Despite all this, the chances that someone who goes through this experience and commits another crime is essentially 50-50.  And that’s a pretty sticky number, as the history shows.  To shift the balance states have to fundamentally change their approach, as the Oregon experience highlights.

As far as how these insights should inform our perspective on investor behavior, the conclusions are counterintuitive but hard to dismiss.  No, two bear markets in 15 years is not enough ‘Punishment’ to deter future ill-considered speculation.  In the vernacular of the U.S. penal system, investors are actually working on their “Third strike” – the much harsher set of penalties for repeat offenders.  At the moment, we actually aren’t too concerned that equity markets are actually in a bubble phase.  Earnings are decent, there is just enough economic growth to hold out some hope for acceleration, and valuations are fair.  Not cheap, mind you, but not insane as long as corporate managers keep costs in line.  So let’s keep our appointments with our parole officer and stay out of trouble.  Another trip back to the big house doesn’t help anyone.

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PlusTic's picture

When the first HFT douche jumps from a window onto Madison Ave (Virtu), It'll be a very fine day!

exi1ed0ne's picture

Investors are chasing returns.  There is some other entity pushing them into risk so you don't lose your shirt to inflation. . . can't put my finger. . .on it. . . FED!

Vampyroteuthis infernalis's picture

I have a simple answer to this problem. Make the markets transparent and fair. Ban the HFTs and big boys running the show. Setup rules like if you buy stock, one has to wait a day to sell it. Publish immediately the records of those who bought and sold stock. Market bubbles would become less of a nuisance.

SKY85hawk's picture

NEW rules take forever to pass. 

I suggest we tie our Votes to politicians that reinstate the rules that worked well for Main-Street America. 

1- GAAP accounting without pro-form Putziness;

2- Mark-to-Market rules for all;

3- Glass-Stegall to hold incompetent investors/TRADERS accountable for their "mistakes";

4- Teach your kids how to trade Inverse ETFs through a ROTH IRA.

I assume you grownups know this, already.

Have a nice life!

q99x2's picture

Helllllloooohhhhh. The FEDs computer software doesn't have emotions.


Yellen has seen and has fewer balls than Bernanke.

KenShabby's picture

"The current generation of investors must be the most bubble-conscious market participants since..." 

Not the people I know. They are all suckers for the "wealth effect" and they don't even know it. 

I just laugh now.

SheepDog-One's picture

Exactly, I've got family members who were wiped out in the last market speculation bust, now they're just saying their last 'guy' was wrong, but now they've got this new 'guy' who is putting them into all the right stuff and they'll soon be super rich and have their own lavish lifestyle reality TV show....fuck no one ever learns jack shit.

Cursive's picture

Uhhhh.  Hello?  Everybody knows that if everybody's talking about a bubble, then there can't be a bubble. /sarc


But, seriously, this line:

At the moment, we actually aren’t too concerned that equity markets are actually in a bubble phase.  Earnings are decent, there is just enough economic growth to hold out some hope for acceleration, and valuations are fair.

Lost all credibility right there.

El Vaquero's picture

Two things about prison in the US:


1)  If you want to hang around other criminals, learn about what they did get away with in the past and how they got caught (for those that actually are guilty,) prison is the place to go.  Prison could be thought of as a school for criminals, complete with indocternation.


2) Once a felon gets out of jail, it is very hard for that felon to find legitamite employment.  So, what do you think they're going to turn to for a means of making a living?  Yup, crime.  We continue to punish people after their sentence is served by not allowing them to reintigrate.


I'm not suggesting that the problems with our crime and punishment system limited to those two things and thus are simple, but I am bringing them up because I do believe that they are major factors.  Think about similar factors in the financial world.  Who's going to be an honest banker with the Fed and competition that would broker derivatives deals on dead hookers and rehypothicate those derivatives if it could?

Calculus99's picture

Love those hardcore American TV documentaries. I always though those prisons were so tough, then I saw a program on a Russian jail which makes the American one's look like Dinseyland.

Search on Youtube, you'll see what I mean. 

NOZZLE's picture

Priceline to $,1800 and beyond.  I mean what the hell, its just a company whose business model can be mimicked by a couple of pimply faced kids in a dorm room at MIT.  Its not like they are manufacturing a hydraulic excavator or something that actually takes a factory floor, machinery, materials, skilled workers and aftermarket service.

Hey, who took my $556 ShitPotle Challupa? 

disabledvet's picture

the rescidivism rate for bankers still remains a solid 100% though.

that says to me risk control is a lot easier in "bubble management" (insider trading for example) than it is for "a slow grind."

I have no clue why Planet Peon is going hog wild for German Debt. I'd laugh my balls off if the Russians really did invade. Ukraine sticking it to Europe is actually pretty funny.

What were they voting about again?
"California Dreamin'"?

Yen Cross's picture

  When you have a corrupt, thieving, lying, cabal of politicians, and a bunch of jack booted meat heads for LEO there's not much incentive to follow the law, or report crimes.

greggh99's picture

" 2 Bear Markets In 15 Years In Not Enough "Punishment" "

"In Not Enough" should be "Is Not Enough". Nonsensical typo and grammar mistakes in the headlines also. Forget about editing. Does anyone from ZH even read the site? It's gotten to the point where the sloppiness of the mistakes is making me cringe.

Greenie's picture

"2 Bear Markets in 15 Years Is not Enough Punishment"

Unless Mr Yellin doesn't gets busy and start moar printing, it wiill soon read" 3 Bear Markets in 15 years is Not Enough Punishment"


Dollarmedes's picture

The first strike was overturned by the "temporary insanity" defense.

The second strike was overturned by a sympathetic jury.

It's getting harder to come up with new excuses.

SheepDog-One's picture

For fucks sake....no one ever learns any lesson! You can pump and dump the sheeple herd as much as you like and they're right back on board buying into the next shearing cycle.

DOGGONE's picture

The way to avoid learning is to avoid teaching. Teaching is avoided by keeping historical truth out of sight. I mean these histories:

Radical Marijuana's picture

We should stop using false fundamental dichotomies, and their related impossible ideals, to understand these problems, and then propose their "solutions." We should be using unitary mechanisms, and then propose resolutions of the situations in terms of those unitary mechanisms. We are profoundly wrong to use the language of the biggest bullies' about any and all social issues, although it is understandable why we have been driven towards our society being almost totally dominated by the biggest bullies' bullshit social stories regarding everything. The human mind naturally gravitates towards dichotomization, as the basic ways that we tend to understand everything. However, instead of assisting us to overcome those erroneous over-simplifications, our school systems and mass media work hard to try to reinforce understanding the world in those mistaken ways.

Governments ARE the biggest form of organized crime, controlled by the best organized gangs of criminals. Furthermore, that must necessarily be the case, because human realities are ALWAYS systems of organized lies, operating robberies. However, instead of understanding that, those who dominate those systems promote their view as the absolute truth. The basic problem is that there are NO fundamental dichotomies between people. Thus, the false dichotomies between crime and legality are based on the biggest and best organized criminals being able to legalize their own lies, and back those up with legalized violence.

Within that context, there is barely going to be the slightest traces of genuine truth or justice, because there is no systematically sane way to perceive or discuss what is actually happening. The source of truth and justice is the conservation of energy, as that manifests through general energy systems. However, our society is almost totally dominated by the biggest bullies' bullshit language, that splits the world of legalized lies, backed by legalized violence, off from all other forms of basically the same things. In that context, this kind of article promotes the typical kinds of superficial psychological explanations for events, and merely extrapolates those from the world of convicted criminals into the world of unconvicted criminals. There is too little in that kind of language that penetrates sufficiently into perceiving the evolutionary ecologies which selected for, or against, the various frequencies of those psychological traits. Moreover, there is nothing that goes to the heart of the ways that general energy systems are necessarily based upon the principle of the conservation of energy, in order to be intelligible.

The swings from bear to bull markets are fundamentally driven by the abilities of those who have the legal power to make the public "money" supply out of nothing as debts. They have every incentive to do that as much as they possibly can. When the bulls run, then the fundamentally fraudulent financial accounting system has its throttle opened up. However, the bears crouch when that has overshot, as it always does, and the ability to make new "money" out of nothing is restricted. Meanwhile, those with the most insider knowledge and power to make the public "money" supply out of nothing as debts are those who have the best chance to ride the bulls up, and then crouch with the bears back down, over and over. Those markets are actually the result of the best organized gangs of criminals controlling the governments, in order to regulate the events for their own benefit, in the short-term, as much as possible. However, most of those who practically perceive that then tend to return to proposing "solutions" based on the same old impossible ideals, which in turn depend upon the same old false fundamental dichotomies.

Since as above, so below, and as within, so without, the lower level criminals are fractalized expressions of the higher level criminals. We are not resolving any of those problems any better, because the same old language, which is the biggest bullies' bullshit, so totally dominates our politics in general, including of course, our political economy. Thus, what is actually happening is a reflection of the fact that the only things which actually exist are different systems of organized lies, operating robberies. In that context, there are a bunch of arbitrary thresholds promoted as the difference between what is "criminal" and what is "legal." However, actually, the "legal" is what is authorized by the biggest and best organized gangs of criminals, while what is "criminal" is what is done by the lesser levels of criminals, who are relatively more incompetent.

None of our political problems are being dealt with in any successful ways. Instead, there is recidivism, with the highest levels of the greatest legalized crimes, done by the biggest banksters, driving all of the other lower level crimes to repeat themselves, in lesser ways. In that context, we continue to be watching the growing grand canyon of scientific progress in many domains, BUT NOT in politics, get bigger and bigger. The basic reason for that is that the entire currently established political system depends upon the triumph of the biggest bullies' bullshit social stories, which depend upon false fundamental dichotomies, and their related impossible ideals. Inside that context, the only opposition tends to be controlled to remain within that same frame of reference, and so, to continue to propose "solutions" based upon impossible ideals, which always backfire badly, and cause the opposite to actually happen in the real world.

Human beings operating systems of lies and robberies is a fractal manifestation, which repeats similar patterns on different levels. As long as there are not enough people who go through the paradigm shifts in the perception of politics to understand that governments are the biggest forms of organized crime, controlled by the best organized gangs of criminals, and that they must necessarily be, then we can never approach any of these political problems regarding crime and punishment in any more scientific ways. Since our civilization is based on a social pyramid system, where those towards the top promote a language that there is somehow a magical division between them, versus those at the bottom, we cannot perceive that society actually operates as a toroidal vortex. Of course, society continues to still be a toroidal vortex, which explains how the failure to prevent the financial crimes at the highest levels drives more crimes at the lower levels.

Tragically, there are currently no good reasons to believe that the advances through profound paradigm shifts in sciences such as physics and biology, to discover the unitary mechanisms there, which then enables better understanding of the technological applications of that knowledge, has a hope in hell of being able to be achieved in the realm of human affairs. Theoretically, it is quite possible to perceive human attitudes and behaviours through applying unitary mechanisms. However, doing that requires revealing that the biggest bullies' bullshit social stories were built on the history of the triumphs of backing up huge lies with lots of violence.

As long as not enough people understand that governments are necessarily the biggest form of organized crime, controlled by the best organized gangs of criminals, then nothing could be done to develop better dynamic equilibria between those systems. As long as the highest levels are runaway financial frauds, constantly enabling the most fraudulent to become more wealthy and more powerful, then there is nothing that could better balance things out for the lower levels.

Unfortunately, the tragic trajectory that we are currently on is for the lack of consciousness, and related lack of compassion, to almost totally dominate our current kind of civilization. Therefore, not only is there an abundance of evidence of runaway social polarization, but also, there is way too much evidence that attitudes of evil deliberate ignorance dominate the overall relationships between human civilization and the surrounding natural world. The utter failure, and indeed, the enforced failures, to understand how human society actually operates, coupled with advances in understanding everything else, such as in physics and biology, is driving human civilization to alienate itself more and more. Overall, human civilization has become almost completely criminal, because it is dominated by the biggest criminals, who get away with asserting that they have the legal right to be the kinds of criminals that they actually are.

Human beings necessarily operate as gangs of robbers in their environment, to the degree that they perceive themselves as separate from their environment. Currently we are trapped within self-amplifying spirals of deviancy, because the highest levels of human criminality are barely restricted by anything within their own systems. Tragically, it currently appears that nothing else than the back-up systems of natural selection can correct the dismal failures of our current systems of artificial selection.

The vast majority of people have been brainwashed by the biggest bullies to believe in their bullshit. Therefore, we are witnessing runaway social polarization, along with even worse destruction of the natural world, because the biggest and best organized gangs of criminals control civilization in ways which are practically unopposed, at least not in any scientifically effective ways.  As this article sadly said, future punishment possibilities are not an effective deterrent. The longer term consequences of continued social polarization and destruction of the natural world are not motivating human civilizations to change. Therefore, it is not an exaggeration to say that our globalized civilization has become an insane asylum, controlled by the most criminally insane inmates.

To begin to change, in any genuinely effective ways, we would have to have enough people go through profound paradigm shifts in the ways that they perceive politics, and therefore, start understanding things using unitary mechanisms, rather than false fundamental dichotomies. Then we might be able to apply realistic ideals, rather than impossible ideals, about how to cope with the current systems of runaway triumphant criminality almost completely controlling what our civilization is actually doing. However, as far as I can now tell, we are going to run out of time too fast to be able to make that possible to achieve?


A little Friday fun Radical Marijuana: Did we run out of time or did Time run out of us?...


"Time is a gypsy caravan, steals away in the night, to leave you stranded in Dreamland."

Anthropocene, the 'time' of humans. They were waking up at the grey traces of Dawn to discover that they were stranded. The early risers were squinting towards the East horizon and could still see the cloud of dust raised by the thundering caravan. Panic set in quickly and they wondered: "should we try to catch up or is it impossible? Some say we should, some say "fuck it, I don't want to miss breakfast and most of us are STILL SLEEPING" Forever dwelled in that moment...

The arguing got louder so more people were woken up and went to listen. The rising Sun made the shadow of the dust cloud fill the space between the Caravan and Humanity. Time ticked away while they argued and what started out as a philisophical debate (should they stay or should they go) turned heated:

"We're all gonna die if Time leaves us here!" "Bullshit!, we're doing fine right here! We've never had it so good!"

"No, we have problems and we need more Time to find solutions." "Bullshit, we can figure it out by ourselves!"


Then someone pointed out that if Humanity did not make a decision now, nobody would ever catch up to the Caravan. A tiny few immediately left to chase Time. The arguing resumed:

"The Caravan has everything we need." "Fuck you. I'm going for breakfast."

The day was getting hot. Most people left the Forum to go get a drink of water. The supply was quickly depleted.

Finally, the spokseman for the 'GO' side said "There is only one way for us to have a hope in hell of catching the Caravan now. We must act as one in order to raise a large enough dust cloud of our own that maybe, just maybe, the Caravan will see it and maybe, just maybe, stop and wait for us to catch up."

As he spoke, the noise from outside the forum grew loud with hysterical screaming. People were killing each other because the water was running out. The Spokesman went out and told the people what he had said inside. He pointed out that those prepared to leave now would likely not succeed but that it was better to try than to remain. Finally he said "pssst, all our tools are in the Caravan" 

Then they put their boots on and got up to walk. The spokesman for the 'Stay' side said "Friends! Allies! Do not be deceived for it is ILLEGAL for you to choose going! If you need water you must work, and work hard, for it! See those around you who have water and see how hard they have murdered "worked" for it! This is the promise of Freedom and We will help you all achieve it! The Caravan is a prison!"

The high noon sun was insanely hot. They RUSHed after the Caravan and when they looked back, the dust-cloud was growing and Humanity became a unified mass.

The sun set and Night fell in Paris. Only John McCain and Liz Wahl remained behind in the romantic city, lonely as the eagle's cry.


Dreamline 1991




drinkin koolaid's picture

Wrong Wrong Again. Zhers will continue to be wrong about Shit and Piss 500 and Nascrap. You guys have been wrong about stocks for years. The secular bear that began in March 2000 ended on 3/6/2009. We are in a secular bull market in stocks - Get over it already. This bull will end someday also, but you're fighting the trend people. I'm as disgusted by this fraudulent bull market as anyone, but I'm in this business to make money, not lose it

Tall Tom's picture

There is a very easy and simple solution which will take the recividism rats to zero (I am going to leave that typo.)


Execute the convicted for minor crimes immediately. Petty theft would be a Death Penalty Offense. So would being a Central Banker or fraudster of any type.


As for the markets...it is the Death Penalty if you do invest unwisely. Bankruptcy is Financial Death.


Is that harsh? By all means yes. Nobody is too big to fail. 


Is this "Christian"? Yes. Jesus forgave the thief on the Cross but did not call His Angels to take him down...to save him from the consequences of his theft.


It is not punishment but a removal of the Human Garbage.


Only people who have it in their hearts to steal will think differently.


Execute all of the criminals and allow Financial Institutions to fail.



moneybots's picture

"Colas suggests you’d think that there’s no way investors would be guilty of blowing bubbles again.  Right?"


The S&P tracked QE.  It was the FED blowing a bubble. 

moneybots's picture

"Earnings are decent, there is just enough economic growth to hold out some hope for acceleration, and valuations are fair."


According to who's calculation?  Pro forma can be anything the company wants it to be.  Let's subtract the ongoing financial fraud and see what the fair value truly is.

I was told in early 2001, that Tyco was a mini GE, an 80 dollar stock, thus at 50 or so, it was under valued.  Tyco went to 8.  GE went to below 6 in 2009.

moneybots's picture

"At the moment, we actually aren’t too concerned that equity markets are actually in a bubble phase."


At the top they never are.  "it's different this time."