Hey everybody welcome back to explain back in five the podcast we take the questions you always want to ask and talk about them in the way That's easy to understand really hosts. I'm Tim. Hey everyone. I'm Kevin So Kevin we're talking about a topic that comes up every couple years in the economic cycle and that is the bear market So let's start with this question Why is it even called a bear market great question start with so the concept is these bears and these bulls right and they're often considered to be kind of opposites And this actually originates from the once popular blood sport where they would have actually bulls and bears fight against each other So how does that explain the terms use in the markets?
Right? So there's actually two popular explanations here the first explanation is that the terms bear and bull market it came from the way Which each animal attacks is kind of prey that is if you imagine a bull will thrust its horns up into the air while a bear Will kind of swipe downwards and these actions were then related metaphorically to the kind of the movement of a stock market if the stock Market is trending up. It's considered a bull market and if the stock market is headed downwards is considered a bear market I see and in these modern days a bear market actually has an official definition. Yes.
Yes There is so when the stock market falls 20% or more from a recent peak That's what makes an official bear market while a smaller decline of more than 10% but still less than 20% has a different definition That's actually called a correction. Okay. I'm glad that we explained that now you said that there were two explanations What is the second explanation for the term bear market? Ah, so the second explanation centers around middleman traders So historically here the middleman in the sale of the bear skins would actually sell skins they had yet to receive Hmm.
So if you think about it, this kind of means that they would speculate on the future purchase price of these set skins Now there is apparently a proverb warning warning that is not that it is not wise to sell the bear skin before one has caught the bear I say if you think about that's what that's what these people were doing, right? Ah, so if these middlemen the bear skin job is I think they were called were selling skins before they had them That means that they wanted prices to be lower in the future once they did have them Exactly exactly these bear skin jobbers were always hoping prices would drop and because they would profit from the difference between the cost price and the selling price So say if I sold a bear skin for a hundred dollars before I even had it But then by the time it arrived, I only needed to pay less a 90 dollars for it Thus I'd be pocketing and I have made ten dollars So these middlemen actually became known as bears sure for the bearskin jobbers and it turns stuck for describing a downturn in the market Very interesting now. Wasn't this type of selling used by many people involved in the early 18th century scandal in England? I believe it was called the South Sea bubble Yes, the South Sea bubble actually gets his name from the South Sea Company founded in 1711 to trade with Spain's colonies in the New World So South Sea stock in that company it became highly desirable when the king became governor of the company and soon stock orders were Enjoying returns of up to 100% Now in 1720 the company assumed most of the British national debt and convinced its investors to give up state annuities for company stock Which was also sold at a very high premium and many of the speculators were selling stock They basically did not own and when the stock price suddenly collapsed the result was a big debacle for the company and a tragedy for many of these investors So the term bear had been used prior to the breaking of the South Sea bubble I already a fair brought bear in the term into widespread use from there on now We've talked about bulls and bears and there's one more animal phrase which is used to describe financial markets sometimes Do you know what I'm thinking about?
Oh, I guess I do I think it's one of my favorite terms So in a bear market sometimes you get prices appearing to rally meaning appearing to go up After a sudden decline and this is something called a dead cat bounce. Mm-hmm If you want to try to imagine that And technically from a technical point I think people sometimes defined as a price increase of five percent or more before prices fall again So the dead cat bounce here is also sometimes known as a suckers rally. Okay, so to close out this episode Maybe we should just finally explain where that phrase actually comes from sure. I'll be it It's a bit morbid It's derived from the idea that even a dead cat will bounce if it falls from a great height And a phrase which it did originally on Wall Street is also popularly applied to any case where its subject experiences a brief resurgence During or following a secret to be a decline.
So some people use it to describe code recovery, too You want something new if you did send us an email We are at ely5 the podcast at gmail.com. We love hearing from you Especially when you have comments for us or suggestions for future episodes as always Thank you to the community on reddit and we will see you all next week