Sometime in the future there will be commentary about the early 21st century, say the year 2020. It will be similar as the way we look at Yale economist Irving Fisher writing in the New York Times on October 16, 1929: “Stock prices have reached what looks like a permanently high plateau.” Eight days later the stock market began a four-day crash on what became known as Black Thursday.
There will not be a single quote cited that would be way more fun. But the look-back analysis will be that most conventional and traditional stock market wisdom died peacefully on a bed of broker dreams of wealth.
All stock market analysis and predictions are always 100 percent accurate. They fail only because a little something was missing from the analysis, like one loose lug nut that attaches the wheel to a car’s axle.
What Economist Fisher failed to account for was this. It is not necessarily a good idea to borrow from a bank to buy stocks. It is a terrible idea to use the $10 you borrowed from the bank as collateral to borrow more money from your stockbroker to buy $100 worth of shares. A small decrease in the stock price—which of course Fisher never thought could happen—collapsed the entire 1929 house of cards.
The 1987 US stock market crashed after a 175 percent increase in the previous five years. No one considered that the computer programs that were doing a large amount of the trading would just continue to sell and sell when prices dropped more than “normal.” In a similar situation, humans take a toilet break or call a friend to take time to assess the situation. That is why markets now have “circuit breakers.”
The 2000 dot-com bubble crash saw the Nasdaq go up 400 percent, only to fall from its peak in 2002, giving up all its gains during the bubble. It proved that companies that were losing on every single online sale strangely could not make a profit on higher volume. They just lost more money. The analysis was that they needed more time. Time and the stock market wait for no man.
Indian author Amit Trivedi wrote in Riding The Roller Coaster, “In a bull market, everyone becomes an expert. In a bear market, everyone becomes wise.” The first part is true; the second part is not true.
Jeremy Grantham is a legend as the co-founder/chief investment strategist of Grantham, Mayo, & van Otterloo that had $18 billion under management. He is a “value-investor.” His $7.5 billion GMO Benchmark-Free Allocation Fund went “short” in June and has since lost $2 billion. In fact, his value investing portfolio is down from $18 billion in 2015 to the current $6.6 billion.
Grantham’s analysis has generally never been wrong. Except, global interest rates have generally never been lower. Canada has never seen its debt-to-GDP ratio increase by 70 percent in nine months. The global central banks have never pumped into the system an amount equal to 0.5 percent of the total global GDP every month.
Sometimes the bear eats you; sometimes you eat the bear. Wrong. The stock market bear or bull will always eat you if you fight it. Buy when prices are going up. Sell when prices are going down. And if former Fed Chair Janet Yellen becomes the next US Treasury secretary, expect more money-creating “stimulus.” But mostly for the market, not the actual economy.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.