Has the stock market bottomed yet?

I wish I knew that answer. The truth is that nobody does. However, I have a hunch that we aren't there yet. Not even close. I don't believe for a second that the government's actions in attempting to arrest systemic failure to our financial system over the last week is going to mark the bottom of anything. Accept me free markets! Expect many more sucker rallies before we hit the ultimate bottom.

I spent some time this weekend rereading parts of 'Devil Take the Hindmost' by Edward Chancellor. Its a history of some of the greatest bubbles in financial history. I was particularly interested in the period preceding the the stock market crash in Oct 29, 1929 and it's aftermath. It was eerily shocking to read how similar the current period is in terms of excessive use of leverage, credit expansion and lack of government oversight of the markets.

For those thinking that the worst might be over for stock market losses please consider the following; on Oct 29, 1929 the Dow was at 260. When it finally bottomed in the summer of 1932 it stood at 41.88! Along the way there were many rallies. Some that sent the Dow up as much as 50%. Please keep this in mind as we consider the market;s reaction to all of this government emergency intervention!

Why the pessimism? For starters, I think we have seen the bursting of the credit bubble that was over 20 years in the making. it's silly to think that we can flush all of that excess out in less than 1 or two years. The housing bubble of the past 4 years was the height of what I like to call the 'vig economy'. As interest rates stayed too low for too long they were met by increased leverage and securitization. There is lots of reasons and blame to pass around for this. Everyone on Wallstreet got their piece of the pie. Mainstreet didn't complain because they thought they were getting rich off of the appreciation of their homes.

It was all an illusion. As the rest of the world was investing in their infrastructure and industry; we spent borrowed money on handbags, flat screens and anything else we could find at the mall. The music has now stopped and we are the ones on our collective keisters!

In Keynes's 1936 book 'The General Theory of Employment, Interest and money' he famously wrote:

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done."

If that doesn't sound like a warning about derivatives and securization associated with the housing boom I don't know what does. Like I said, it's the 'vig economy.'

So when will the market bottom? Not for a long time. How will we know when we are there? I'm waiting for the day when one tells someone that they want to buy a house for an investment and they look at you like you are crazy. The same type of crazy that they looked at one two years ago if you told them that you thought housing was likely to go down in price.