Below is a complete transcript of entries from the live blog event Authers Notes on Anatomy of the Bear in the order they were originally posted.

03/03 10:35 ET

Welcome to Authers Notes, our Bloomberg book club. Today, senior markets editor John Authers will lead a conversation about Russell Napiers cult classic from 2005, Anatomy of the Bear: Lessons From Wall Streets Four Great Bottoms.

This event will start on Tuesday, March 3, at 11:30 a.m. New York time. Join us then as John discusses the book with his guests.

Andrew Dunn TOPLive Editor

03/03 11:31 ET

Professor Napier, who joins us today, is author of The Solid Ground investment report for institutional investors and co-founder of the investment research portal ERIC -- a business he now co-owns with D.C. Thomson.

Russell has worked in the investment business for 30 years and has been advising global institutional investors on asset allocation since 1995. Russell is founder and course director of The Practical History of Financial Markets course, part of the Edinburgh Business School MBA.

A director of the Mid Wynd International Investment Trust, he is a member of the Investment advisory committees of Cerno Capital and Kennox Asset Management.

Andrew Dunn TOPLive Editor

03/03 11:32 ET

In 2014, Russell founded the charitable venture The Library of Mistakes a business and financial history library in Edinburgh that now has branches in India and Switzerland.

Russell has degrees in law from Queens University Belfast and Magdalene College Cambridge. He is a Fellow of the CFA Society of the U.K. and is an honorary professor at both Heriot-Watt University and the University of Stirling. When not engaged in the activities above Russell reads too much financial history, is a keen fly fisherman and grows his own organic vegetables.

Andrew Dunn TOPLive Editor

03/03 11:33 ET

Napiers Anatomy of the Bear, for those who have not had the chance to read it during the excitement of the last few weeks, is a cult classic work of investment history. He spent two years in the archives to see exactly what people were talking about, and what news they were reading, in the weeks around the bottom of the four great bear markets of the 20th century -- in 1921, 1932, 1949 and 1982.

His conclusions were that deflationary pressure helps to force bear markets, in combination with overvaluation of stocks. The bottom comes not in catharsis and revulsion, but rather when all hope has been lost and apathy reigns.

John Authers Senior Editor

03/03 11:33 ET

The first edition of Anatomy of the Bear accurately told readers not to trust the rally that followed the bursting of the dot com bubble, and warned that another sell-off lay ahead. That was proved right. Subsequent editions said that March 2009 was not a bear market bottom to match the four covered in the market, and many now argue that he has been proved wrong on this.

I saw the book on the desks of many a fund manager during the years before and after the crisis. With markets now in their scariest state since 2008-09, it is a great time to return to it.

John Authers Senior Editor

03/03 11:35 ET

Greetings, Russell. The first question we were planning to ask was a simple one, from Cross-Asset reporter Sara Ponczek:

Where do we stand now? Is there a period thats most comparable to our current situation?

After the events of the last few hours, I suppose by that we now mean: Is there a period remotely comparable to one where the Federal Reserve has made an emergency cut of 50bps, bringing 10-year Treasury yields to an all-time low, barely two weeks after the S&P 500 hit an all-time high?

Lets start by trying to locate exactly where we are, and what long-term effect the Feds action might have.

John Authers Senior Editor

03/03 11:35 ET

There is one dramatic period that looks like this -- October 1929. Clearly, the decline in the stock market on that famous day was much bigger than what we have seen in the past 10 days, but the Fed cut the day of the big deadline.

Despite that very large decline in the equity bear market, they were still at very high PE ratios when that cut came.

Russell Napier Author, Anatomy of the Bear

03/03 11:38 ET

That raises one big question: The Fed has been greatly criticized for its policies between 1929 and 1932, and it started with rates considerably higher.

What should the Fed do now to avoid a similar outcome? (For asset prices, or for the economy).

John Authers Senior Editor

03/03 11:44 ET

The book suggests that it is deflation that destroys equity valuations as it pushes cash flows and asset prices lower and, thus the risk of equity eradication rises.

Bernanke famously gave a concise speech on November 2002 on what the Fed could and should do. They have not been through all that playbook yet, but essentially they need to boost the growth in broad money -- and this is something that have failed to do with their extraordinary monetary policy.

Things are much worse elsewhere, especially in Europe, where they have got to the situation that Bernanke warned a central bank should never get to: zero interest rates and falling inflation or deflation.

I would recommend freeing up banks to buy a lot more securities and thus create money this way. However, outside the U.S. they will probably be more tempted by helicopter money.

Russell Napier Author, Anatomy of the Bear

03/03 11:46 ET

Its still only a couple of weeks since the S&P 500 hit a new high, and that leads to this question from old friend Dec Mullarkey of SLC Management in Boston:

Lofty valuations alone have generally been a poor market timing indicator. It seems you also need investor euphoria to really drive a bull market.

During the last twelve S&P 500 bull markets, returns leading up to the peak were, on average, 58% over the prior two years and 25% over the prior year. Suggesting bull markets end with a bang and not a whimper.

Do most investors get captured by momentum that in turn fuels the overshoot and downturn? Or is this some aggressive price discovery where investors keep pushing until they eventually find the break point?

Or, put briefly, was the buying we saw in February the final melt-up to a bear market top?

John Authers Senior Editor

03/03 11:48 ET

There are two ways valuations can fall -- driven by inflation and higher interest rates or driven by deflation.

The book points out that some of our bear markets last a very long time indeed, such as 1901-1921 and 1968-1982. These market valuations declined primarily because inflation and interest rates went higher and it was difficult to stop that, even over many cycles.

However, all ended with the risk of deflation as the central bankers got over-aggressive against inflation. The key outlier was 1929, when we went straight to deflation without first going through a long bear market associated with the battle against inflation.

Today, it is very clearly a deflationary shock we face, so valuations can fall very quickly. This happened in 1921, 1932, 1949 and even in 1982 given the U.S. banks were in crisis.

Deflation brings valuations down, full stop, but to stress: Things are much much worse in Europe where valuations are a lot lower.

Russell Napier Author, Anatomy of the Bear

03/03 11:51 ET

Following on the theme of cognitive dissonance, as bond yields hit record lows just after stocks hit record highs, we have this question from Tamas Vojnits, former chief economist of OTP Bank in Budapest:

I dont think, and indeed portfolio theory suggests, that one can evaluate asset class valuations separately, reduced to only one asset class.

For a long time now, rising equity values have been supported by declining and very low long term yields (negative real yields).

Is it possible that we have two equilibriums, one described by ultra low risk free rates coupled with high equity valuations and another with normal interest rates coupled with much lower equity market valuations?

Fundamentals aside, is it possible that we cannot get from one (the first) equilibrium to the other (the latter) without a major equity market disruption and therefore we are stuck at a sub-optimal equilibrium?

John Authers Senior Editor

03/03 11:54 ET

Can we reconcile record low interest rates with economic growth but more importantly stable household and corporate cash flows and asset prices?

Clearly, this is something the equity market has reconciled itself to and with some justification based on the past 10 years of lower long-term bond yields but decent growth and corporate earnings.

However, it is highly unlikely that the two can ultimately be reconciled, even in an age when the long-term bond yield is depressed by central bank actions. The book covers how technological innovation often creates the illusion that the new economy can be a combination of high growth and record low interest rates. It has never lasted, and all the major high valuations coincided with such a belief.

As discussed, the money and credit analysis this time suggests that the dissonance is believing that bond yields go ever lower but growth does not. So for me its a deflation shock with valuations falling quickly. However, history shows the dissonance can be that the technology is not as deflationary as the market thinks, and inflation -- often assisted by monetary policy -- erupts.

In that case valuations for equities fall much more slowly.

Russell Napier Author, Anatomy of the Bear

03/03 11:54 ET

Im sure everyone is aware by now, but just to reiterate, the Federal Reserve just cut rates by 50bps this morning in an emergency move.

It was the first of the sort since 2008. Ten-year Treasury yields are now trading at 1.03% with the two-year yielding 74bps.

Pretty amazing.

Sarah Ponczek Cross Asset Reporter

03/03 11:55 ET

Even if this is a bear market rally, cant investors enjoy and profit off of it?

Whats the best way to go about that, while still being prepared for pressure that will push equities to levels associated with the bear market bottoms of 1921, 1932, 1949 and 1982, as you see it?

Sarah Ponczek Cross Asset Reporter

03/03 12:01 ET

I was lucky enough to call the bottom of the equity market in 1Q 2009, even though I still do not think that was a great bear market bottom -- valuations were too high. What I looked at on that occasion was: commodity prices, TIPS-indicated inflation, the copper price and corporate bond spreads. If the Fed is successfully staving off deflation, we would expect that to be reflected in these indicators. They were lead indicators at our great bottoms and also in 2009.

So that might be the basis for trading equities but to stress: The key deflationary forces in the world are far from U.S. Shores, and the ability of the Fed to pivot the world on one interest rate move has to be in doubt.

I noted that after the emergency rate cut, copper is still down. Watch those indicators, but fundamentally equity valuations are high and this prospect is for deflation -- a dangerous time to trade equities for a bull market rally.

Russell Napier Author, Anatomy of the Bear

03/03 12:02 ET

(Incidentally Sarah, pretty amazing is how Lady Diana responded when asked what her first impressions of Prince Charles were, at the press conference where they announced their engagement.

So much going on this morning and I suddenly get an echo of a news event from my British youth....)

John Authers Senior Editor

03/03 12:02 ET

Russell mentioned that copper is still down today, even after that emergency rate cut. And not only is that true, copper prices have been falling precipitously ever since mid-2018. See for yourself:

Sarah Ponczek Cross Asset Reporter

03/03 12:03 ET

Lets move to the question of valuation. Reader Gordon Graham raises an issue that has been very controversial in recent years:

What does Russell think of the cyclically adjusted price earnings multiple (CAPE)?

For context, Yale Universitys Robert Shiller famously used the CAPE in 1999 to predict the bursting of the dot-com bubble, while Russells first edition of Anatomy used CAPE valuations to show that another big fall in share prices lay ahead.

In the years since, CAPE has continued to show that the market is too expensive, yet the S&P 500 keeps rising. Is there something wrong with the indicator (which compares prices to a 10-year average of real earnings), or with Tobins q, which compares prices to the replacement value of a companys assets?

Graham handily provides this link to a page on Andrew Smitherss website, which shows the latest measures of CAPE and q.

John Authers Senior Editor

03/03 12:07 ET

There is nothing wrong with CAPE and q as indicators of value, but we have lived in really exceptional times.

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