“If at first you don’t succeed, try again. Then, give up. No point in being a damn fool about it.” — W.C. Fields
“It probably established the foundation for a snap back tomorrow morning…”
Thus did Reuters capture the spirit of positive thinking that seems to permeate every molecule of living flesh in and around Wall Street. No matter how bad the news from the TNT sector one day — it will be better tomorrow. Nearly every day, the market opens up.
Optimism is generally a likeable quality. Pessimists undermine morale. But optimists shore it up. Optimists are good people to have at your side when you are trying to do something difficult. But a pessimist makes a better companion when you are trying to do the impossible. He’ll talk you out of it.
The captain of the Titanic was an optimist. Or he just felt lucky that night. Even though he knew there was an iceberg in the water ahead, he also knew that the sea was large and the odds were heavily against his hitting it. So, full speed ahead.
Likewise, the odds of hitting a severe, long-term bear market are remote. Most of the time stocks go up. For the last 18 years they’ve done almost nothing else.
On the other hand, this could be one of the times when something unusual happens. You cannot know for sure. But, perhaps a little caution is in order.
Something unusual happened in the 1920s. The Dow Jones Industrial Index went from a low of 191 in early 1928 to a high of 300 in December. It peaked at 381 in September of the next year. Then, between Oct. 24 and Nov. 13, the Dow lost 36% — about as much as Microsoft shares have lost since last December.
But the economy was strong. Interest rates were generally falling, rather than rising. As Dr. Kurt Richebacher puts it, “the sudden crash of the stock market was taken in stride as a purely financial event.”
People were optimistic. There was no reason not to be. A whole new era was under way — with electric appliances, automobiles, telephones and radio promising huge new gains in productivity, GDP and human comfort.
“In fact,” writes Richebacher, the optimism seemed justified as “stock prices promptly rallied again in December, gaining more than 20% until early April 1930. By then, the `correction’ was considered over. It seemed as though the crash had come and gone without any adverse impact on the economy.” (http://www.dailyreckoning.com/rich_report1/index.cfm)
Unfortunately, it didn’t last. By the second half of 1930 stocks were again falling. A year and a half after the peak of September 1929, stocks finally hit bottom — with the Dow down 90%.
GDP in 1929 grew at the same rate it is said to be growing today — 6%. The economy seemed so robust and solid that people had no reason to think the correction would not soon be over. I’ll repeat the quotation from Schumpeter I gave you last week, describing the period after the market began to fall: “People, for the most part, stood their ground firmly. But that ground itself was about to give way.”
Then as now, the healthy economic growth rate hid a problem. Consumers in ’29, like those of ’99, were on a borrowing and spending binge. Business investment and construction had actually declined between 1926 and 1929. But consumption had increased from $66 billion in ’25 to $79 billion in `29.
The trouble is, you can’t build an enduring prosperity on the foundation of consumer spending. You either consume capital or you invest it. If you have a few extra dollars, you can invest in a tobacco barn…or you can buy a cigar and smoke it. If you choose to light up, you will not be getting richer. Your wealth will have decreased — by one cigar.
A lot of cigars are being consumed in America today. And relatively little is invested in the machinery and businesses that make people richer. A breakdown of U.S. GDP shows, for example, very little increase in fixed capital investment. Investment in business structures — which take a long time to pay off — actually fell from ’98 to ’99.
But is a crash and depression inevitable?
Dr. Richebacher takes up the issue in his April letter. He wonders, specifically, if a bear market/crash/depression is the unavoidable denouement of the Great Bubble drama. If so, and if we are at the climax of the Bubble, then we already know what happens next — more or less. The ship hits the iceberg.
There is, of course, an opposing view — to add a little suspense.
Milton Friedman and his wife argued in their 1963 classic that “the monetary collapse from 1929 to 1933 was not an inevitable consequence of what has gone before. It was the result of the policies followed during those years.”
Dr. Richebacher notes that Friedman’s views “have become standard history and the standard explanation of the Great Depression.”
It is an optimistic view. It holds that the Great Depression was the result of mistakes made by the Federal Reserve — following too tight a monetary policy. That is a mistake, all agree, that will not be made again.
As soon as the crisis was perceived, the Fed of the early `30s moved rapidly to loosen the money supply. But the economy collapsed anyway. Real GDP fell from a benchmark of 104.4 in 1929 down to 74.2 in 1933. Looking at one component, construction for example, we see that total output in the building sector fell from $10 billion in 1927 to less than $2 billion in 1933.
Could the Fed have followed a different course, which would have avoided the collapse? If so, why are the Japanese so unable to see it? And why will our own policy makers fare any better?
More on this to come…
Paris, France April 25, 2000
*** The Nasdaq dropped 4.4% yesterday. Buying the dips has proven less profitable than it used to be. That’s because (need I point out?) dip buying only works in a bull market.
*** If the Nasdaq is not now in a bear market — along with the Dow — it is giving a pretty good imitation.
*** The techs and Nets were down nearly 10% during the day, but the Nasdaq came back to close the session down 160 points.
*** The day’s losses were blamed on MSFT — which lost $68 billion of market cap yesterday. MSFT is suffering from two phenomena. First, PC sales are not as strong as expected. This is called the “nuclear winter” following explosive Y2K spending. Companies bought all the IT they needed last year. Second, MSFT is just too big. It is a victim of the law of large numbers. You can double 2 just by adding 2. But you need to add 2 billion in order to double 2 billion. Elephantine companies cannot sustain high growth rates, and high P/E ratios, for very long.
*** There were 1,267 advancing stocks yesterday…1,671 declining ones. Meanwhile, 22 stocks hit new highs; 59 hit new lows.
*** The above figures suggest that the market continues its bear market pattern of the last two years — most stocks fall on the average day.
*** But the Dow rose 62 points…despite the damage done to MSFT. The Dow has become the “hook” that convinces investors to stay in the market. Not that they need much convincing. The media are still bullish. Says Larry Rice, an investment officer at Josephthal Lyon & Ross, of the Nasdaq action: “It’s healthy because it brings valuations down to the point where you can come in with new money.”
*** That is, of course, just what a bear market does. It lures in as much money as possible. And the financial media can best be seen as the bear’s “useful idiots.” Their job is to keep the fever whipped up — inciting investors to ever more extreme acts of self-sacrifice.
*** “Every study of stock prices is reassuring.” says a recent editorial from the “NY Times,” “Take any reasonably long-term period, and stock investments do just fine.” Japanese investors will be encouraged to hear that. They’ve been waiting 10 years…and Tokyo stock prices are still only half what they were in 1989. Maybe 10 years is not a “reasonably long-term period.”
*** The “Dauntless Dollar Still Defies Gravity,” says the “Financial Times.” Despite a current account deficit larger than at any time since the Lincoln administration, the dollar keeps rising. It seems to be in its own bull market — and similarly vulnerable to economic reality.
*** Amazon traded at 113 on Dec. 9. It’s now below $49. Bezos says he is not worried about the stock — he’s building a business. Maybe so, but it’s a much more modest business than Wall Street formerly believed.
*** Charlie Wolpoff gave me a copy of his study of state tax burdens in America. I was not surprised to find that Maryland is listed among the “Tax Hellhole States” — along with Minnesota, Illinois, Hawaii, Wisconsin, Pennsylvania, New York, Maine, New Jersey and Connecticut. If you’d like a copy of the report, go to http://www.taipanonline.com/htmlcode/twm/staxdr/ *** A friend sent me a photo via Internet of Reno’s storm troopers in action. I thought it was a fake. “Why would they send in armed goons in a nationally televised child custody case? Nobody is that stupid,” I told Elizabeth. Well, I guess I was wrong.
*** The Clinton Administration asked the media to censor the photos — which show SWAT team personnel, outfitted for a Terminator movie, confronting an unarmed family. The “International Herald Tribune” complied with the White House request — showing a happy photo of Elian reunited with his dad on page 1. But the “Figaro” ran the appalling picture right on the cover.
*** Elizabeth read the Old Testament lesson in the little Catholic Church on Easter Sunday. She read in French without a trace of an accent, after having been coached by Henry. I don’t know how she does it. My accent is unmistakable. The ticket clerk at the train station stopped me after I said “bonjour” and began speaking English.
*** I also admire the way Elizabeth has insinuated herself into the local culture. She’s become a pillar of the church community — and she’s not even Catholic. Shhh…