A Bull Market in Hubris
by Addison Wiggin
The Daily Reckoningposted August 31, 2002
[The crowd] is not prepared to admit that anything can come between its desire and the realization of its desire... while the notion of impossibility disappears for the individual.
Gustave Le Bon, The Crowd
"In the late 1990s," writes Strategic Investment contributor, Dr. Marc Faber, "companies were able to book huge profits gains simply because few people cared how companies achieved these profits."
"The investment community - caught in a whirlwind of speculation and blinded by the bullish comments of business leaders, analysts, and Mr. Greenspan - was prepared to ignore all kinds of accounting gimmicks, stock buybacks financed with debt, dangerously speculative investment positions, and even blatant fraud in order to boost profits."
As long as stocks were rising, nobody really cared.
In San Francisco a few weeks back about 180 Agorans - readers, writers, analysts and editors alike - convened for our annual Wealth Symposium. For my part, I expressed these thoughts, or ones similar to them, early Saturday morning between sips of coffee. I reprint them here mostly for your amusement, but also to express a degree of disbelief at the level of hubris still running amok in the investment markets, in the world of politics, and throughout American society.
Since Enron - the 'beginning of the end' in the eyes of the mainstream financial media - Congress, the president, analysts, newsletter editors, soccer moms, even dipsomaniacal soothsayers on the streets of Paris, have been largely focusing on - and blaming - CEOs and accounting fraud for market woes. But "the true commanding problem of the US economy and the stock market," suggests Dr. Kurt Richebacher, "is not the accounting fraud but an effectively miserable profit performance that aroused the fraud [in the first place]."
An incredulous DR reader wrote to us recently to ask: "Given the fact that the markets have plummeted... now that [even USAToday] is bearish... shouldn't the Daily Reckoning turn 'bullish'?" The question suggests that bullishness would now be the truly 'contrarian' position to take.
But the fact is, even after two years... we here at the Daily Reckoning HQ are inclined to believe that we haven't even begun to see the bearishness that is yet to come. All things get corrected, we're wont to say. Nature has a way of seeing to it.
Even as recently as two years ago the "peace dividend," the "Triumph of the West" and Dow 36,000 were on everyone's lips. Nobody was willing to admit that the success of the "new era" was anything but real. Only a handful of cranks suggested otherwise.
If you "didn't get it," they said, then you just "didn't get it."
And it wasn't just Americans... foreigners bought into Pax Americana like tourists on the first day of annual summer sales here in Paris - that is, in a passionate rush with arms flailing, hoping to score the deal of a lifetime. Foreign direct investments in the US markets at the end of 2001 totaled more than $3 trillion. "But looking at their miserable return," says Dr. Richebacher, "it was a gigantic malinvestment."
In 1997, earnings from foreign direct investments amounted to $43 billion dollars. These peaked in 2000 at $69 billion, collapsing in 2001 to $37 billion. Rather than the 20% year over year growth they were looking for... the rate of return was a little over 2%...
"Considering the miserable corporate profits, a weakening dollar, the uncertainties about a US economic recovery and the accounting scandals, it is implausible that foreigners will add more dollar denominated to their portfolios. Nobody can be so stupid," says Dr. Richebacher.
"Yet the record suggests [and recent rallies prove] that at almost every point some people will be prepared to bet that the stock market or the dollar has bottomed out."
But what's really going on? Rather than Pax Americana... or endless prosperity... we have the War on Terror... an impending invasion of Iraq... and a potential multi-year bear market. Where did the New Era go?
"Internationally," writes Bill Buckler of the Privateer, "the Bush Administration has managed to place the U.S.A. in a next to entirely isolated position. Nobody, except Great Britain and Australia, is siding with the U.S... If a war with Iraq now does take place, the U.S. will have to wage it on its own, with some British military help.
"Such a self-made global political isolation is exceptional. It is now vastly beyond anything the former communist bloc could have ever dreamt about imposing. The Bush regime has managed to accomplish it in six months."
"If President Bush goes to war in the Middle East, it is for the purpose of internal U.S. distraction. Iraq is a small country bled white by a tyrant, and it is far, far away."
A distraction? What could we possibly need a distraction from?
As the Austrian economists - people like Dr.Richebacher and Sean Corrigan, our man-on-the-scene in London - are so fond of reminding us... following the '29 crash there was a 17-year bear market, followed by a 20-year bull market, followed by a 17-year bear market, followed by our most recent 18-year bull market. Dave Skarica, editor of a newsletter called Addicted to Profits, recently traced the cycles all the way back to 1815. With the exception of a few shorter cycles of 8 and 5 years for both bull and bear markets, the cycles generally last in the 17-20 year range.
Of course, we have no idea what the future holds. But we're not afraid to take a guess. We've had a bear market for 2 years... is it likely that it will end by next year? The year after? Or will we need a major distraction to cut the cycle short?
Certainly not out of the realm of the possible, is it?
After the excesses of this last boom we expect we've got a few years yet of negative returns. And the greatest excess of the bubble yet to get corrected is that of the bull market in hubris that grew so large in the 90s... but correct, we suspect, it will.
Regards,
Addison Wiggin
The Daily ReckoningAddison Wiggin is the Managing Editor of The Daily Reckoning, a daily e-mail offering "erudite," "witty," and "sensible" commentary on the day's stock news. Click here to sign up for a free subscription.
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