COMMENT on "PIG": The professors have bought a gold stock, Barrick Resources, without any prompting from me! (I have not been able to make the last few meetings.) What do they know that I don't know?
I am sure that my book collection is not atypical in this regard. People who cared to write about how they survived the Depression likely were not published, because their experiences were so commonplace. Those books that were published are long out of print and likely have been discarded by all but the largest libraries as hopelessly "out of date".
In other words, the first-hand knowledge of the terrible hardships of the Great Depression is rapidly becoming lost. The great majority of Americans now alive were born after the second world war, and cannot conceive of the harshness of the 1930s; they are likely to dismiss the stories of hardships as irrelevant to their lives. (I barely remember wartime rationing myself.)
Thus, my appeal for help. If you lived through the Depression and have an interesting story you'd like to share with others, I want to hear from you. Similarly, if you are younger but your parents or relatives passed on to you their horror stories of the Depression, please pass them on to me. Bonus points go to anybody who lived in a "Hooverville", or who had a relative jump out a window to his death in the 1929 Crash.
Please e-mail your replies to: nick15@eve.assumption.edu. Thanks.
- /Nick Chase
The Contrarian's View is published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. Material in this publication may be freely quoted provided proper attribution is given to its source. Subscription rate: Free on the Internet through the World-Wide Web service at Assumption College. Using your favorite Web-browsing program, Open URL http://nick.assumption.edu. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! Phone: (508) 757-2881
A quick look at prognostication in the 1930s does not give us much to cheer about. By March of 1930, the economy had slipped into what was perceived as a mild recession, with most "experts" predicting quick recovery; stocks had recovered more than half of what was lost in the Crash, at least as measured by the Dow. The Smoot-Hawley tariff law had not yet been passed. Money was easy, according to contemporary financial writers.
After that, it was all downhill. What went wrong? In hindsight, we can say that money was too tight (generally accepted today, but still arguable), in that the Federal Reserve allowed the money supply to shrink. The imposition of punitive tariffs caused world trade to diminish. Though Herbert Hoover did implement relief programs while waiting for the economy to right itself, his efforts were miniscule when compared with Franklin Roosevelt's.
In my opinion, the seeds of the Great Depression were sown in the overextension of credit in the 1920s, at least, more credit than could be sustained with the monetary system and technology of the time. The late-1920s were not unlike today, in that the prices of many classes of assets were deflating, while excess cash poured into stocks in the fervent belief that everybody could be rich. The 1929 Crash destroyed the dream; it, in turn, caused people to be more cautious with credit, leading to a general unwinding of the credit bubble that had formed since the first World War. It was the end of an era.
Now, just to cheer you up, you should know that in the late 1970s economists, using "modern" theory and computers, and reconstructing economic data from the 1920s and 1930s in contemporary style, went back and took a look at the numbers as they (would have) appeared in early 1930. The result? The data showed that the economy would soon be recovering from the mild recession. There was absolutely no hint of the tragedy that lay ahead.
In other words, sudden deflation and depression are accidents, and are not predictable, at least with the tools currently available.
We need not look to ancient history for proof, for we have the more modern example of Japan. In 1989, it looked like the Japanese were going to take over the world economically; the Nikkei Dow had roared ahead to 39000 and to ridiculous P/Es (after many of the most optimistic pros had already sold out around 30000). The Bank of Japan felt it should dampen the party a bit, before things got so out of hand they crashed of their own weight; certainly, deflation and depression were the furthest things from its mind.... these things are impossible in a modern age.
The BOJ raised interest rates once. That was enough to pop the Japanese credit bubble, which was built mainly on inflated real-estate prices and the cross-holdings of shares of corporations. The Nikkei Dow plunged to around 14000; it has since recovered to around 21000 mainly on the strength of foreign buying, not from domestic demand. No longer is the land around the Imperial Palace worth more than all of California. Their economy has been essentially stagnant for seven years; public-works programs were ineffective in restimulating it; printing more yen cheapened its value on international markets without perking up GDP. In fact, it's not clear that the unwinding of the real-estate bubble is finished; prices may drop further, especially if the rest of the world (and especially the U.S.) tips into recession.
For sure, though, the everybody-can-get-rich-in-the-stock-market dream died a painful death in Japan. Investment trust assets (the equivalent of our mutual funds) are 8% of what they were at the peak in 1989. I wonder what happened to the buy-and-hold-forever crowd?
Though periods of deflation and depression may be unpredictable, we can be assured of two things: (1) That they have occurred throughout history from time to time and likely have not been abolished, though we have not yet seen a worldwide depression after the world went on the rubber-money standard; and (2) If countries around you have tipped into depression, the risk that you will follow them is greater than if they are all on inflationary binges. Today, we see Russia and the former Soviet republics in depression following the collapse of communism, with GDP off 50% (and their standard of living was not that great to begin with). Japan has been teetering on the edge of depression since 1990, with a vicious asset deflation that's still underway. Most of Europe is stagnant, with some countries, such as Sweden, in sharp recessions. Even in the bright spots, the far east and a resurrected Latin America, growth has slowed markedly. This is not an ebullient backdrop against which we can expect to avoid a deflationary accident in our next recession.
One of the indicators I watch to measure the long-term health of the economy is the "money multiplier", the ratio of M-2 to the monetary base. Essentially, it is a measure of how effectively.... or, more accurately, willingly.... the money created by our central bank is put to work in the economy. From a low of 4 in 1932, the ratio rose to 12 in 1987, coinciding roughly with the peak in stocks preceding the 1987 Crash. Since, it has declined to about 8; it currently is about 7.8, where it has been "stuck" for the past two years, in tandem with our anemic economy. In other words, the money multiplier indicates we are still on the disinflationary downslope where a deflationary "accident" is more likely to occur.
As far as I can tell, only two major asset areas have bucked the deflationary trend in the U.S..... stocks, and debt. (Maybe also, to some extent, the art market.) How much debt is "too much" for the system to bear? We'll probably not know that answer until after the fact, but a few things appear certain. First, entering a recession with a heavy debt load is likely to make the recession more severe. Second, when our goverment enters a recession with a heavy debt load, its ability to soften the hurt of the recession is much diminished. Third, a person's debt load can appear much more crushing after all of one's stock-market profits have disappeared in a crash.
Let's look at that last point in more detail. Joe and Jane Workalot, their 1.8 children, two dogs and a cat own a home worth $142,000, but because they bought it in the late 1980s for $188,400 and they still have a $136,320 balance on their mortgages, they don't have much equity in it. Their two cars are financed, of course; their value is about equal to the finance company's interest in them. The older child will be a freshman in college in the fall of 1997. But actually, the Workalots are better off than most families, because Joe has $108,000 (paper value) in his employers' 401(k) plan, about 60% more than the cash contributed to it, thanks to the soaring stock market; and Jane has $46,400 (paper value) in her mutual-fund IRA. There is also a few thousand dollars in a bank savings account.
Comes the Crash. Comes the period following the Crash.... and stocks do not rebound as expected. Joe Workalot's 401(k) is now worth $53,600, less than the cash put into it. Jane's IRA is in one of those hotshot small-company aggressive-growth mutual funds, and it's now worth $12,100. (She thinks it should be called an aggressive-shrink mutual fund!)
The Workalots can see that their stock-market assets have not delivered those lovely returns hinted at by the prospecti; in fact, they would have been better off keeping all of their money in the bank. But the money they owe has not disappeared; it looms larger than ever. Furthermore, with the economy in recession, Jane may lose her job; the layoffs have already begun at the social-services organization where she is a counselor. Also, financial aid and student loans are much harder to come by in the recessionary environment, and loans are more expensive when they can be obtained; Joe may have to borrow from (what's left of) his 401(k) to put the kid through school. What's going to be left for us to retire on?, Jane wonders. In short, the Workalots' debt burden looked quite manageable when things were on the upswing; but when the going got rough, it was suffocating them.
Nobody can say for sure when a debt load is "too much". In 1929 and 1930, I think it became "too much" with the death of a dream, the dream that you can borrow your way to prosperity, and that everybody can become rich in the stock market. In 1929, too many people believed in the dream, and the deflation and depression occurred (I think) because of the crushing blow the stock market crash dealt to the dreams of of millions, even if they were not in the stock market themselves.... and this led to an unwinding of the credit bubble. Today, not only do too many people believe in the dream, but they almost all have a direct stake in the stock market. A crash, driving stocks to "fair value" and taking them down by more than half, would certainly crush a lot of dreams, especially retirement dreams.... and, God knows, we certainly have a credit bubble, every bit as big as the stock-market bubble, ready for the pinprick.
Perhaps it will happen this time. Perhaps we will go through another cycle or two of bubble and recession before the dream is crushed; but I do know, that in the current disinflationary environment, with random depressions and near-depressions in assorted countries throughout the world, that one should never assume that a deflation and depression can "never happen"; and more pointedly, that they could not happen soon.
This is not to say that equal treatment for women is not a good thing, but rather that their now being forced to work so their families can maintain a decent standard of living has been sold as a "great leap forward" in these "modern times."
New Federalist offers statistics to back up their claim of declining purchasing power in our "good" economy:
"In 1967, it required 35 weeks of an average worker's weekly paycheck to purchase a new car (including financing costs); today, it requires 58 paychecks. That is, today's worker must work 23 weeks more, or 65.7 percent longer, to acquire a new car. Therefore, in physical terms, it costs 65.7 percent more to buy the car.
"In 1967, it required 399 weeks of an average worker's weekly paycheck to purchase a new home (including financing costs); today it requires 877 paychecks. That is, a worker must work 478 weeks, or 119.7 percent longer, to acquire a new home. Therefore, in physical terms, it costs 119.7 percent more to buy the home."
- Brian Redman
....in the 35 years since John F. Kennedy was elected president the S&P 500 has risen by an average of just over 7 percent a year, or around half the rate it's gone up since Clinton was elected.... if over the entire eight years of the Clinton administration, the market were to end up rising by its long-term rate of 7 percent per year, then on election day, 2000, the S&P 500 will be 741. For reference, it's around 737 now. Oops. - Matthew M. Stichnoth
What has surprised me is the extent to which the big-cap stocks took off right after the election, certainly more than is justified by having a "status quo" government, and especially with new money now flowing into mutual funds at about half the rate of last spring. In fact, the broad market looks considerably weaker than the big-cap stocks, and the over-the-counter market looks positively anemic, having made essentially no progress since last May except for the big-caps that make up the NASDAQ index. So, the lesser amount of new money arriving is being concentrated by the money managers in the big-cap stocks, apparently on the theory that the momentum-chasing success story of yesterday will prove to be tomorrow's success story, too.
You might ask if there is a parallel to this period. Well, there are always parallels.... such as the summer of 1929.... but we need not return to ancient history, only to the months preceding the 1987 Crash, to see a resemblance. If, like half of today's shareowners, you are a latecomer to stocks because you jumped in when the Dow was already overpriced above 4000, and the 1987 Crash is virtually unknown to you, let me refresh your memory.
In the spring of 1987, when most stocks peaked, it was thought the Japanese (obviously intent in taking over the world) buying would never cease. But it did taper off, as did the flow of new money into mutual funds, during the summer, although this did not prevent the Dow from tacking on another 15% before it finally peaked out in late-August 1987. The reason the Dow kept going, in my opinion, was that the new money still arriving wound up in the hands of money managers extracting profits from derivatives arbitrage (that is, "program trading") and "protecting" their gains with "portfolio insurance".
In my opinion, the same sort of thing is going on today. Though the fact is not widely advertised, "portfolio insurance" has returned, and "program trading" has been with us continuously, though supposedly "tamed" by trading collars. Good profits from derivatives can always be made if stocks (which make up the averages used by the derivatives traders) rise quickly enough.
In November 1986, when The Contrarian's View was only five months old, I described the techniques used:
....you need to see how the computers make money for their masters. The machines are programmed to profit from the difference between the current level of stock prices as represented by, say, the Standard and Poor's index for 500 stocks, and the S&P 500 futures index on the commodities exchange. For example, if the S&P were at 253, and the future for "delivery" in three months were 256, the computer would:
a) Use 10% of the available funds to sell the future at 256;
Over the next three months, the three-point premium of the futures in relation to the stocks would dwindle away as the futures expiration day approached. On expiration day, assume that the S&P 500 and the futures are both at 232; the computer sells the stocks and closes out the futures position. The computer has thus
b) Use 90% of the money to buy the stocks which make up the S&P 500 at 253, in a dollar amount equal to the futures sold.
* lost on the stocks...................... 21 points
* gained on the futures................... 24 points
----------
NET GAIN is: 3 points
....or about 1.2% on the entire transaction (before expenses). If the computer can do this only four times per year, the annual yield will be:
Yield on S&P 500 stocks................... 3.28%
Yield on futures premium capture.......... 4.80%
----------
TOTAL YIELD: 8.08%
or about 3% more than the yield on T-bills, for what is essentially a riskless transaction. Since the major expense is the care and feeding of the computer system, which is minimal when compared with the profits that can be made, you can see why "program trading" has become so popular.
Investor sentiment.... whether the market will rise or fall over the near term.... is most quickly (whether rightly or wrongly) reflected in the futures index. If investors suddenly turn bearish, the index can, and will, quickly move to a discount to the current value of the S&P 500.Naturally, the computers are programmed to take advantage of this! After all, why wait until expiration day to close out the position, when it can be closed out immediately at an even greater profit? The funds can then be put into interest-bearing T-bills to await the next profitable arbitrage opportunity.
And this is precisely what happened in mid-September [1986], when the market nosedived, with the Dow Jones Industrials average shedding 120 points in two days. The futures indexes moved to a discount (probably because portfolio managers were "insuring" their holdings against a decline by selling the futures), and the arbitrageurs' computers sold stocks and bought futures to close out their hedges. Note that the computers don't care at what prices the stocks are sold and the futures are bought; as long as the futures index continues to trade at a discount to the index itself, the hedge can be closed out at a substantial profit.
Even though the volatility of this computer-directed trading can be frightening, you can see that it does place nearly absolute limits on the extremes the market averages can reach. It's almost inconceivable the yield on the S&P 500 would ever exceed the yield on T-bills, for the arbitrageurs would quickly move to profit from the higher yield at less risk, and competition would force the S&P yield lower. (With T-bills at 5.25%, that's about DJI 1200 for an "absolute" bottom.) Similarly, it's highly unlikely that stocks would rise so high that the S&P yield, plus the yield from capturing the futures premium, would be less than the T-bill rate....
....One of the disadvantages, though.... in fact, the big disadvantage....of "program trading" is that it doesn't leave much room for error. Suppose, just suppose, that interest rates don't gradually rise, but instead there is some sort of crisis.... in the scramble for funds, short-term rates would rise rapidly.
Let's assume the mini-crisis raises rates about three-fourths of a percent from, say, 5.25 to 6%. Suddenly stocks, which have been trading around the 1870 average, face a DJI 1425 minimum instead of the previous 1625.... 200 points lower!
Portfolio managers, being generally intelligent souls and forseeing an imminent decline in the prices of stocks, start selling index futures like crazy to "insure" their holdings against a decline. The futures quickly move to a discount.... a deep discount.... to the actual stock prices, and the computers in turn go crazy, dumping stocks and buying the futures the portfolio managers are selling, to mop up the fat profits from their arbitraged holdings. The bearishness and pessimism become so pervasive that stocks undershoot the "likely" minimum of DJI 1425, and head toward the "absolute" minimum of DJI 1060. The worst day sees the DJI decline more than 200 points; it's off 350 points for the week, 550 points (30%) in three weeks.
The selling panic drives down stock prices well below reasonable levels (as determined by the earnings and asset values of the underlying companies). But the computers aren't programmed to be reasonable; they're merely programmed to make money. The public, however, is quite reasonably horrified by the stock market crash; responding to the public's hue and cry, the regulators quite reasonably blame the crash on "program trading", and act by suspending trading in stock index futures.
Now the trading houses are really in a fix, because they can't close out the profitable (futures) side of their hedges. What was formerly a risk-free investment is now fraught with peril, and the arbitrageurs dump their remaining stocks before they suffer any more losses.
When the dust finally settles, the stock market has declined more than 40%, the public is in a deep funk over its instant loss of wealth, and a recession is under way....
Though today the numbers quoted for the averages seem pathetically small, the techniques have not changed much, except for the imposition of trading collars. The collars would seem to have reduced risk; in fact, they have increased it, by increasing the possibility of illiquid positions in a market that's closed.... the "meltdown" I have been anticipating since May 1995. But for the moment, as long as the rate of increase in the big-cap averages allows frequent turnover of the arbitrage positions.... and hefty profits... the blue-chip stocks will continue to rise in a derivatives-induced feeding frenzy to who-knows-what level.
Interestingly enough, before the 1987 Crash there was a warning of the damage the computers could cause, in September of 1986 as related above. We had a similar, and similarly widely-ignored, warning in July 1996 which clearly demonstrated the swiftness with which derivatives-triggered selling could drive the market down.... and which gave clear evidence that the trading games present in 1987 are still with us today.
Because there is no indication that interest rates will rise (and thus no chance of a crash, supposedly) the program-trading arbitrage appears to be risk-free. In 1987, weakness in the dollar and deliberate upward pressure on interest rates by the Federal Reserve cut the attractiveness of program trading and, ultimately, precipitated the Crash. But today's stock market is, literally, off the charts. I've never seen anything like it in my lifetime and, I'm sure, if my father were still alive he'd say that he'd never seen anything like it in his lifetime either (and he was born in 1908).
I think the Federal Reserve has given up. It does not want to repeat the mistake of the Bank of Japan in 1989, so it has, in my opinion, adopted a "hands-off" attitude (or maybe even a "keep them afloat" attitude) toward stocks. That way, when the feeding frenzy finally succumbs from exhaustion, people (in theory) can blame only themselves, not any government institution. Ultimately, though, I think the time will come when people will perceive the Fed's laissez-faire attitude to the stock market of the mid-1990s as erroneous as its "mistake" of allowing the money supply to shrink during the 1930s.
In 1987, when the Crash arrived and the hot air escaped from the market balloon, stocks quickly fell to their "fair value" of around 1750, a 36% decline from the peak. Today's "fair value" is still around Dow 3100, where it's been for almost two years now, 53% lower than recent peaks. (The bigger they are, the harder they fall.)
This is the season of good cheer and all that, so a crash is unlikely in December, though the month could be a downer. But in January 1997, once we are past the "small-stock effect", the bullishness in small-cap stocks that usually marks the beginning of the month, we could see some serious selling, with the meltdown arriving a few weeks later.
The trigger for a crash is usually an economic shift. The furthest-leading indicators of the economy are currently signalling that a recession will be upon us by the end of 1997 (maybe earlier). December of 1996 will see the release of the first CPI inflation figure affected by last spring's surge in energy prices, so it likely will be ugly, with a similarly ugly figure to follow in January. Renewed weakness has returned to the dollar. Now, the Fed may not want to raise interest rates to prick a stock-market bubble, but it will raise interest rates if it appears that inflation is about to take off again.... and like Japan in 1989 (or us in 1987), once short-term rates start to climb, the bull-market show will be over.
A political shift could trigger a crash. Ken Starr is still out there, tracking down corruption in Arkansas and malfeasance in the White House, and he no doubt will have something to report some day soon. The timing is unpredictable, but by Murphy's Law, the political and economic bad news could arrive together.
But of course, none of this will matter to the novices, for stocks always go up over the long term, right? And everybody will be able to switch out of their stock funds and into money-market funds with plenty of warning before the bear market arrives, right?
As I watch the bubble grow bigger and bigger, I ask myself, just what do people think they're buying with their money? Why do people who are so very careful with their household expenses, who clip food coupons and comparison-shop for appliances, keep throwing their money into this "black box" called the stock market without knowing anything about what they're buying other than it apparently goes up in value forever? Well, I'm not lemming material, so I guess I'll just never understand.
A. "Phoenix" -real portfolio, begun on October 1, 1995.
Original cost: $ 8,090.45
Present value: $ 7,359.32
Increase: $ -731.13 [-9.04%]
Yield: $ 311.53 [3.87%]
The performance of this portfolio and its predecessors ("Hedger's Delight", "Present and Future Income", "Crapshooter's Folly") from January 1987 to the present is +3.15%, for a compound annual rate of return of 0.31%.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
COMMENT on "PIG": The professors have bought a gold stock, Barrick Resources, without any prompting from me! (I have not been able to make the last few meetings.) What do they know that I don't know?
C. Fidelity IRA - real portfolio, includes commissions:
SUMMARY - IRA:
Original (1983-86) cost: $ 8,326.19
Present value: $18,002.93
Increase: $ 9,676.74 [116.22%]
Current yield: $ 226.05 [1.03%]
The performance of this portfolio (including its predecessors) from January 1, 1987 to the present is +64.15%, for a compound annual rate of return of 5.14%.
D. CREF Pension plan; I switch between indexed stock/bond/money funds:
Date Sold Bought
13Mar92 stock @ 56.65 MM @ 13.41
29Apr92 MM @ 13.48 bond @ 31.19
19Jun92 bond @ 32.14 MM @ 13.55
29Jun92 MM @ 13.57 stock @ 56.74
24Jul92 stock @ 56.76 MM @ 13.61
29Oct92 MM @ 13.72 stock @ 58.61
23Dec92 stock @ 61.48 MM @ 13.78
16Jan95 MM @ 14.83 equity-index @ 26.44
20Jan95 eq-index @ 26.19 MM @ 14.84
Values, 27Nov96: stock, 110.58; MM, 16.42
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993: 3.08%; 1994: 4.07%; 1995: 4.80%
Gain, January 1 through September 30, 1996: 3.93% (5.28% annual rate)
Total gain since January 1, 1988 (8.75 years): 142.81%
Compound annual rate of return: 10.67% (My long-term target: in excess of 15%)
Gain shown excludes the impact of additional monthly cash contributions.
Buying CREF stock on January 1, 1988 and holding it gained 227.69%, for a compound annual rate of return of 14.53%.
COMMENT on "Timer's Trend" : Solidly bullish.... but who cares? Extreme danger at these levels!
{, } = "Timer's Trend" (4% and 10% exponential) SELL ({) or BUY (}) signal
=============================TIMER'S TREND===========================
Tue 30 Jul 96 . #I . | 5481.93 | .- *
Wed 31 Jul 96 . & . | 5528.91 |-.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 1 Aug 96 . | . # | 5594.75 +~.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 2 Aug 96 . | . # | 5679.83 | +.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 5 Aug 96 . | #. | 5674.28 | + *
Tue 6 Aug 96 . | #. | 5696.11 | .+ *
Wed 7 Aug 96 . | .# }| 5718.67 | . + *
Thu 8 Aug 96 . | # | 5713.49 | .+ *
Fri 9 Aug 96 . | # | 5681.31 | + *
Mon 12 Aug 96 . | .# | 5704.98 | .+ *
Tue 13 Aug 96 . #| . [| 5647.28 | + *
Wed 14 Aug 96 . | .# ]| 5666.88 | + *
Thu 15 Aug 96 . | .# | 5665.78 | + *
Fri 16 Aug 96 . | . # | 5689.45 | .+ *
Mon 19 Aug 96 . | . # | 5699.44 | .+ *
Tue 20 Aug 96 . | .# | 5721.26 | . + *
Wed 21 Aug 96 . | #. | 5689.82 | . + *
Thu 22 Aug 96 . | . # | 5733.47 |~.~ +~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 23 Aug 96 . | #. | 5722.74 | .+ *
Mon 26 Aug 96 . |# . | 5693.89 | .+ *
Tue 27 Aug 96 . | . # | 5711.27 | .+ *
Wed 28 Aug 96 . | # | 5712.38 | .+ *
Thu 29 Aug 96 . #| . | 5647.65 | + *
Fri 30 Aug 96 .# I . | 5616.21 *| +.~~~~~~~~~~~~~~~~~~~~~~~~~~
Tue 3 Sep 96 . & . {| 5648.39 |+. *
Wed 4 Sep 96 . | # }| 5656.90 + . *
Thu 5 Sep 96 . #I . {| 5606.96 |-. *
Fri 6 Sep 96 . | .# }| 5659.86 + . *
Mon 9 Sep 96 . | . # | 5733.84 |~ +~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 10 Sep 96 . | .# | 5727.18 | .+ *
Wed 11 Sep 96 . | .# | 5754.92 | .+ *
Thu 12 Sep 96 . | . # | 5771.94 | . + *
Fri 13 Sep 96 . | . # | 5838.52 |~.~~ +~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 16 Sep 96 . | . # | 5889.20 |~.~~ +~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 17 Sep 96 . | # | 5888.83 | . + *
Wed 18 Sep 96 . | #. | 5877.36 | . + *
Thu 19 Sep 96 . | # | 5867.74 | . + *
Fri 20 sep 96 . | . # | 5888.46 | .+ *
Mon 23 Sep 96 . | #. | 5894.74 | .+ *
Tue 24 Sep 96 . | .# | 5874.03 | .+ *
Wed 25 Sep 96 . | # | 5877.36 | .+ *
Thu 26 Sep 96 . | .# | 5868.85 | .+ *
Fri 27 Sep 96 . | # | 5872.92 | .+ *
Mon 30 Sep 96 . | . # | 5882.17 | .+ *
Tue 1 Oct 96 . | .# | 5904.90 | .+ *
Wed 2 Oct 96 . | . # | 5933.97 | . + *
Wed 2 Oct 96 . | . # | 5933.97 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 3 Oct 96 . | .# | 5932.85 | . + *
Fri 4 Oct 96 . | . # | 5992.86 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 7 Oct 96 . | . # | 5979.81 | . + *
Tue 8 Oct 96 . | # | 5966.77 | . + *
Wed 9 Oct 96 . |# . | 5930.62 | . + *
Thu 10 Oct 96 . | #. | 5921.67 | .+ *
Fri 11 Oct 96 . | . # | 5969.38 | .+ *
Mon 14 Oct 96 . | . # | 6010.00 | .+ *
Tue 15 Oct 96 . | # | 6004.78 | .+ *
Wed 16 Oct 96 . | # | 6020.81 | .+ *
Thu 17 Oct 96 . | . # | 6059.20 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 18 Oct 96 . | . # | 6094.23 | . + *
Mon 21 Oct 96 . | # | 6090.87 | .+ *
Tue 22 Oct 96 . |# . | 6061.80 | .+ *
Wed 23 Oct 96 . |# . | 6036.46 | .+ *
Thu 24 Oct 96 . I# . | 5992.48 | + *
Fri 25 Oct 96 . I #. | 6007.02 |+. *
Mon 28 Oct 96 . I# . | 5972.73 |+. *
Tue 29 Oct 96 . I # | 6007.02 |+. *
Wed 30 Oct 96 . I #. | 5993.23 |+. *
Thu 31 Oct 96 . | # | 6029.38 | + *
Fri 1 Nov 96 . | # | 6021.93 | + *
Mon 4 Nov 96 . | # | 6041.68 | + *
Tue 5 Nov 96 . | . # | 6081.18 | .+ *
Wed 6 Nov 96 . | . # | 6177.71 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 7 Nov 96 . | . # | 6206.04 | . + *
Fri 8 Nov 96 . | . # | 6219.82 | . + *
Mon 11 Nov 96 . | . # | 6255.60 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 12 Nov 96 . | .# | 6266.04 | . + *
Wed 13 Nov 96 . | .# | 6274.24 | . + *
Thu 14 Nov 96 . | . # | 6313.00 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 15 Nov 96 . | . # | 6348.03 | . + *
Mon 18 Nov 96 . | .# | 6346.91 | . + *
Tue 19 Nov 96 . | . # | 6397.60 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 20 Nov 96 . | . # | 6430.02 | . + *
Thu 21 Nov 96 . | # | 6418.47 | . + *
Fri 22 Nov 96 . | . # | 6471.76 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 25 Nov 96 . | . # | 6547.79 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 26 Nov 96 . | .# | 6528.41 | . + *
Wed 27 Nov 96 . | .# | 6499.34 | . + *
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[, ] = 4% exponential change unconfirmed by 10% exponential (not a signal).
@ = market overbought or oversold. I or & (on baseline) = 10% exponential SELL.
Currently, most of the market "gurus" for whom I have any respect.... those who (unlike the current crop of money managers) have experienced both bull and bear markets, and have a good track record in calling market turns... are urging that their subscribers tread with caution; many, if not most, of the warning signals they follow are flashing bright red. But, like the people who could not see that the emperor had no clothes, the public and the money managers caught up in the current stock-market bubble cannot see that they are inside a bubble. (They will, after it pops!) It is when the "experts" are cautious but your junk mail overflows with "hot", can't-lose investment offers that the "contrary opinion" indicator clearly signals a peak in stock prices.... and that is happening right now.
As for the nature of the oncoming bear: I think it is likely to be a "washout" bear market, like that of 1969-1970, with a V-shaped bottom on very heavy volume. I think the first down wave will begin within the first very few days of 1994, as rising interest rates and the new, higher tax (and tax witholding) brackets deal a double blow. The first few months of selling in the blue chips will look quite ordinary by bear-market standards, but the carnage in most of the hot IPOs that came to market in the last two years will be enormous. When the Dow dips below 3200, most of the people who escaped from CDs into stocks during the last three years will find their accounts underwater, and they will start getting nervous. Below 3000 on the Dow, the novices will begin to panic, and the market will swoop downward to 2200 or lower on a wave of desperate selling as the latecomers bail out at any price. This bear market will unfold rather quickly, because the overhanging supply of stocks (which suddenly nobody will want) from the binge of new-issues offerings is so enormous. The bear could be over by July.... but more likely by the end of the year.... with the major averages off by about 40%, and low-cap stocks down by 75% to 90%. [Note: The V-bear did not occur in 1994; stocks did not drop enough to "trigger" it. Expect it next year.]
We have now progressed far enough into the 1990s to discredit virtually every gloom-and-doom prediction ever published, from Robert Prechter's "Grand Supercycle" to Ravi Batra's "Great Depression of 1990" to Harry Figgie's "Bankruptcy 1995". But in my opinion, it is now that we are entering what I consider to be the dangerous period, when a slight misstep could cause things to come unglued. So far, we are in the third-year of a so-called "economic recovery" which I believe the term "contained depression" more accurately describes.... "depression" because there is a surplus of labor and a dearth of credit characteristic of depressions, and "contained" because the Federal Reserve is printing money and Congress is running $360 billion budget deficits in an effort to make all those bad debts whole again. (In fairness, the middle of the country is doing better than the coasts in this "recovery"; finally, even here in Worcester, the financial backwater of America, after 4-1/2 long years we can see the clouds of recession lifting.... can California be far behind?) I think we should entertain at least the possibility that the soon-to-arrive bear market, which will essentially wipe out the profits, if not some of the principal, of the baby-boomers' retirement plans.... will trigger a sudden, sharp decline in consumer confidence and therefore in consumers' spending plans, abort the current recovery and tip us back into recession. An accident in the derivatives market, or some ugly political event, could then tip our weakened economy into an "uncontained depression".... one in which the government's power to reflate is greatly diminished. While I think such an occurrence is more likely later in the 1990s.... around 1997 or 1998.... we should be on the alert for the heightened risk of it happening sooner.