Or - "This Time It's DIFFERENT!" For many years, various official and not so official surveys have been done of U.S. stock market investors. One of the more popular questions has been to ask investors how much they expect the markets to go up in the following year.
Between 1995 and 2000, the answer to this question was always the same: More than 20%. By the late 1990s, the vast majority of U.S. investors, most of whom had not been in the markets in 1995, were confident that these annual 20% gains would continue FOREVER. It is truly astounding how little need people see to be conversent with history, and how easily they slough off what little historical knowledge they DO have in the face of a rampantly rising market.
The fact is, of course, that between 1995 and 1999, U.S. markets as measured by the Dow DID rise at a 20% plus annual clip. It didn't happen in 2000, nor is it happening this year. But we have seen surveys done in the last two months which clearly show that most investors STILL anticipate annual gains of 10-12% - again in PERPETUITY!
Let's examine this proposition:
If you go back to the year 1900, the Dow had NEVER enjoyed more than TWO straight years of 20% plus gains until the FIVE straight years of 20% plus gains of 1995-1999. Now, let's take the nadir of the Dow after the crash of 1929. That bottom point was about 42 (give or take half a point), in the summer of 1932.
Let's see what would have happened to the Dow if it had enjoyed annual gains of 10% (half the annual gains in perpetuity expected by most investors during the 1990s boom) in every year since 1932.
On this basis, the Dow would have reached the 1000 level in early 1966. It would have reached 5000 in 1983, 10000 in 1990, 20000 in 1997, and 30000 right now, in 2001.
Of course, the Dow didn't do that. Since 1932, there have been three bull markets. There was a short one from 1932 to 1936 and two very long ones. These were from 1948 to 1966 and from 1982 to 1999/2000.
The Dow didn't regain its 1936 high until 1948 - 12 years later. The Dow didn't regain its 1966 high until 1982/83 - 16 years later. Oh, and by the way, the Dow didn't regain its 1929 high until 1954 - 25 years later!.
The message should be clear. Buy at a "top" - 1929, 1936, 1966 or 1999/2000 - and it takes a LONG time to break even. The bigger the "top", the longer it takes. If you doubt that, ask yourself whether you can now envisage ANY circumstance that would propel the NASDAQ back to the 5048 high it hit in March 2000. On ALL historical records, given the extent of the bubble, if you are a baby boomer, we would say that your chances of seeing it again in your lifetime are no better than 50/50.
Of course, that is said under the infamous economist "ceteris parabus" (other things being equal) criterion. If the U.S. Dollar crashes and (nominal) prices explode, then stock indexes might get back up in a hurry. It won't do anyone much good though, if they are facing a $US 50 cup of coffee.
What makes the present predicament of U.S. investors even more surprising is that they have had the example of the effects of a bubble right in front of their eyes for more than a decade. All they have to do is look at Japan. It is a sad thing, but true, that each generation seems to have to re-learn the lessons of it predecessors. Or, in the famous phrase: "Those who are ignorant of history are doomed to repeat it."
With U.S. markets now beginning to fall in earnest, the "lesson" is about to begin.
The term "bubble" is a useful one in financial analysis, referring as it does to any market which has seen prices blown up to disproportionate levels. But, in this context, what is the opposite of a "bubble"? We don't know of a convenient word to use, but if one wants to describe the present $US Gold "price", that is what we are seeing. How about an "elbbub"? Kinda catchy - don't you think?
A "bubble" has nowhere to go but DOWN. An "elbbub" has nowhere to go but UP.
Here is another piece of history. But this one doesn't just go back to 1932. It goes back to a time when history consisted of tales passed down from father to son, with no recourse to the printed word. Whenever a financial system is in deep trouble, Gold provides an INFALLIBLE means of preserving wealth.
For some time now, we have been seeing the evidence of this unbroken historical truth. Ever since the Nasdaq topped last year, Gold has provided a better means of preserving wealth than has almost any stock market anywhere in the world. Since the $US topped out in July this year, Gold has outstripped even the Dollar as a means of preserving capital.
But what Gold has not YET done, notably in $US terms, is provide a means of INCREASING wealth. In $US terms, Gold has been "flat". And, since investors, notably U.S. investors, are still "conditioned" to look at increasing their wealth rather than merely maintaining it, Gold has not yet been embraced by them.
This is hardly surprising, given the fact that Gold has not provided a 20% plus annual increase in $US terms since 1993, long before most present investors began to take an interest in the stock markets.
The latest knell of the approaching debacle in the "paper" markets was the quantum leap in U.S. (August) unemployment announced on September 7 - up 0.4% to 4.9% - its highest level in four years. Misplaced "confidence" in the future comes from ignorance about the past. Such confidence is fragile, and always breaks eventually. The break is getting close now. Stay tuned.
