The Lost Lesson of July 2007

We have it on supreme authority — stocks are not in a bubble.

Bubbles peak as lingering fear flees and investors finally make it over that wall of worry.

But it’s eight years into the second-longest bull market in history. And many investors are leery as ever.

Maybe more so.

Until “mom and pop” investors re-enter the markets, all is peace.

CNBC’s Michael Santoli:

The reluctance of retail investors to buy stocks as the Dow hits new highs suggests that the rally has further to run. Just be ready to grab your coat once Mom and Pop show up at the party. That’s a sure sign it’s time to go.

Santoli cites one wizened analyst:

One reason we remain cyclically positive on the broad market is that retail investors still have not participated… It is doubtful that the equity market would cyclically peak before the retail-investor enthusiasm for stocks had reached a more fevered pitch.

Today’s reassuring anxiety clashes with the delirium that doomed the last bull market in 2007–08… when every last Thomas, Richard and Harold was scooping stocks with gusto.

You recall, don’t you? The frenzy?

Now, we confess, dear reader… we just yanked your leg.

We didn’t pluck the aforesaid quotes from today’s presses…

They bear date of July 23, 2007 — just 2½ months before the global financial crisis began.

It was the cover story in Barron’s.

If true… maybe the 2007 markets weren’t quite as euphoric as time and memory have led us all to imagine…

Maybe investors never truly scaled that wall of worry…

And maybe bull markets don’t necessarily “die on euphoria,” to borrow from Sir John Templeton.

That is, Barron’s gives the facts accurately.

And many analysts today croon the same pleasant melody as Barron’s in July 2007.

Worry not, they say. The stock market is not yet a bubble. Fear remains the dominant note. “Mom and Pop” remain sidelined with their cash and their Treasuries.

Once their fear yields to the sirens of greed, then you’ll have your signal.

Just as Barron’s said in 2007.

Bank of America Merrill Lynch equity strategist Savita Subramanian typifies prevailing wisdom:

Our work continues to suggest upside risk to stocks, driven by the simple fact that we have yet to witness euphoria on stocks.

(Granted, “euphoria” seems a fair description of stocks trading at record highs.)

Bloomberg laughs off worries because this bull market “has been derided as fake, doomed and history’s most-hated.”

All bad news is therefore good news.

Bad news keeps fear in its saddle… euphoria in its cage… and the bull in charge…

Trump might be impeached? Good, good.

Stocks are as overvalued as they were before the 1929 crash, you say? Even better.

North Korea’s testing missiles again? I’ll drink to that. And kindly make it a double.

Besides, even if markets do take an occasional fright, a pullback can be healthy — and equal to any hell it raises.

It shakes out weak hands… and offers another chance to “buy the dip.”

Who can argue, really?

Cassandras have cried impending doom for years and years (surely not us!).

Yet stocks perch at record heights today.

As Jim Rickards reminds us:

Bubbles can last far longer than the critics expect. Alan Greenspan famously called the stock market a bubble in 1996 in his “irrational exuberance” speech. He was right, but he was also three years early.

Early, that is. But still right.

And as that 2007 Barron’s piece suggests, sometimes the cleverest fellows in the room can be too clever by half.

Maybe the bubble bursts before euphoria takes hold and before “mom and pop” investors return.

Maybe pessimism has ironically lulled Mr. and Mrs. Contrarian into a false security.

And maybe a crash is closer than they think.

It’s often said that bubbles burst when least expected.

The smart set doesn’t expect it right now… and for the same reasons it didn’t in July 2007.

So maybe it really is time to worry…


Brian Maher
Managing Editor, The Daily Reckoning

The Daily Reckoning