| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
They tantalize wounded investors, who still hold on to the belief system that must ultimately be smashed to smithereensIn thick fog or fast-falling snow, the best of men may go astray for the lack of a faithful needle. Make it a rule, then, an iron rule, of wilderness life, never to leave your bed in the morning without compass, jackknife and waterproof matchbox filled. H. KEPHART ATERFALLS ARE FOR WATCHING, not navigating. Canoeists exit from rivers when the water flow accelerates walarmingly, signaling a coming waterfall, or a series of waterfalls. They portage around the cataracts and resume paddling where the river is navigable. We are living downstream from a financial Triple Waterfall. The defining event of our economy and our capital markets was the spectacular rise and fall of technology and telecom shares. With Nasdaq down as much as 79 percent from its high in March 2000, most investment commentaryand most of Wall Streets sales materialstalks of a burst bubble. Now that the bursting is over, the thinking goes, so is the problem. All thats needed now is an economic recovery to get Nasdaq at least modestly healthy, providing leadership for a new bull market. Not so. Triple Waterfalls arent mere bubbles. They are financial pandemics that take not months, not years, but decades to run their course. An understanding of Triple Waterfall behavior is the most useful basis for sound investment policy formulation for the early decades of the Third Millennium. Triple Waterfall is the term used by some technical analysts to describe the chart pattern of a very special kind of boom/bust event. Most analysts call it bubble-bursting, because the collapse ends a bubble era. But bursting is not what happens in financial markets when a major market excess is expunged. The process is a long drama in the form of a three-act tragedy on the Greek model, as described by Aristotle in his Poetics: A tragedy is the imitation of an action that is serious, and complete in itself . . . with incidents arousing pity and terror, with which to accomplish its purgation of these emotions. . . Tragedy is an imitation of a whole and complete action of some amplitude . . . which has a beginning, a middle, and an end. The beginning of Triple Waterfalls is New Era ebullience, which is swiftly corrupted into hubris, the overweening pride that corrupts the process of analysis and reasoning that operates as a restraint on misconduct. The middle stage is the beginning of the punishment for hubris: two deep stock market plunges, each followed by a rally that fizzles before it can reverse the market drop. The end is a long, remorseless period of punishment and pain. (Forgiveness was not a significant component of Greek religious beliefs. If you enraged Olympians, you had to endure terrible punishment.) The buildup and plunge that make Triple Waterfalls such panoramic market events are driven by the spread of Shared Mistake, an overarching belief system that gradually coalesces among intellectual, business, and political elites. Shared Mistake is one of those blessedly infrequent mass illusions when near unanimity about the markets current and longer-range bullish prospects engulfs Wall Street, industry, the media, and the intellectual elites. The participation of the intellectual eliteswho ordinarily take scant notice of Wall Streetis what distinguishes Shared Mistake from ordinary market froth and folly. When the elites join in, then government is also drawn in as supporter, cheerleader, and even enforcer, and the counterbalancing forces within democracy that promote stability and moderation are eroded. The coziness of Big Business with the Republican administrations of the 1920s was a big factor in the powerful bull market of that time. The coziness of Silicon Valley with the Clinton administration was a big factor in the powerful bull market of our own time. So strong was that relationship that it had a big influence upon changing American policies toward China. Each plunge takes the market to a new low, and the last, killing drop takes yearsusually decadesto complete. Note the three separate cascades of the Nasdaq decline in Chart 2-1, and the two strong, failing rallies. It is a cascading collapse in three stages, and marks the end of an entire era. Its good there have been so few, because they are so catastrophic. What makes them so lethal is their three-part performancethree plunges, interrupted by two rallies. Those rallies are really forms of torture: They tantalize wounded investors, who still hold on to the belief system that must ultimately be smashed to smithereens. During those rallies, investors return to the market and average down, in the vain hope that the good days are about to return and they will be able to recoup. The Triple Waterfall continues until nearly all those who once believed have given up, or moved on, or died. Using Aristotles formula, Act One is composed of the first three stages, Act Two is Stages Four and Five, and Act Three is Stage Six. Note the asymmetry between the length of time of joy and the length of time of agony. Capitalism is Calvinism in action, with the punishment delivered while the sinner yet lives. Its relationship to the religious aspect is that the punishment one faces after death for ones sins covers a much greater time period than the sinning time on Earth. Buying and holding a tech stock for a time period beginning in 1999 and continuing through this decade is a good way to prepare oneself for the pain of Purgatory (which is not a Calvinist concept), if not the torture of Hell (which is). One can end the punishment, of course, by repenting of the sin, selling out, and moving on. What could be called the seven capital C crashes of the past 74 years have collectively had enormous importance in shaping our capital markets and our economy. Politicians, central bankers, and business leaders may claim they shape our economic destinies, but major financial convulsions overwhelm these players. The basic ingredients of these seven events are so similar that investors who understood the earlier manias came unscathed through the later ones. Those who understand all seven will be most likely to prosper in coming years. As Mark Twain observed, History doesnt repeat itself. But it does rhyme. That similarity explains why no strategist who failed to predict Nasdaqs collapse deserves to be taken seriously today. Despite their differences in timing and in asset classes, the tripartite waterfall stock chart patterns are virtually identical: Moreover, the economic impact of these manias lives on for decades. Since 1929, the U.S. economy has lived most of its time in the shadows of previous crashesas we do today. It may well be that only World War II and the Baby Boom were greater influences on capital markets than these financial events. OPTIMISM All markets rise and fall in response to swings in optimism and pessimism. What distinguishes a nascent Triple Waterfall is a sustained growth in optimism about an asset classgrowth that continues to build even as the stock market takes its ordinary ups and downs. Investors gradually begin to discern an underlying pattern of consistency and rising prices that differs from the ordinary bullish/bearish price swings. It is the Start of Something Big. For optimism to take charge in financial markets on a sustained basis, there must first be an era of good feeling. People must feel good about the nations position in the world, about its growth prospects, and about their own economic circumstances. For example, the Roaring Twenties was an era of unprecedented U.S. prosperity. Everyone agreed that World War I was the war to end all wars. The United States had emerged from the war as global industrial leader and creditor to the world. The dollar had supplanted the British pound as the international nongold store of value. Hollywood movies and American pop and jazz music were gaining fans worldwide. U.S. technology was the wonder of the world. Stocks of the leading technology companiesradio, telephone, and automobilewere in vogue. Some of that same sense of American superiority animated the late 1960s buildup of enthusiasm for growth stocksthe belief that the sales and earnings of many leading American companies would grow regardless of the economy. That led in the 1970s to the Nifty Fifty craze, in which a few dozen large-capitalization companies outperformed the stock market month after month, with their price-earnings ratios moving further and further above the earnings multiple for the broad stock market. A new class system had emerged, and companies in the upper class could look with snobbish disdain on the vast number of companies in the lower classes. It was Japans swing from the insecurity and vulnerability of the postwar era to the Japan Inc. arrogance of the 1980s that provided the emotional and intellectual basis for that Triple Waterfalla collapse that continues to this day. In the 1990s the United States, as winner of the Cold War, was the sole global superpower and could provide the umbrella that would mean sustained global peacePax Americana. The Gulf War showed how a quickly formed global military coalition under U.S. leadership and direction could win against an entrenched enemy in a matter of hours, based on the superior technology available to U.S. troops. It was almost a body-bag-less victory, and therefore had the antiseptic bloodlessness of a Luke Skywalker skirmish in Star Wars. President George Bush (the First) exulted in the 100-Hour War, which inaugurated the New World Order, and basked briefly in an 89 percent approval rating. Concurrently, the Internet was the newest global pathway for the export of U.S. pop culture, craved by young people from Moscow to Tehran to Beijing. Inflation had been crushed. The booming economy was generating millions of cool jobsfrom tech and telecom software and hardware design and marketing, to paid activism with a fast-multiplying group of tax-exempt NGOs, to flextime jobs at Starbucks. (That the manufacturing jobs that had been the basis of the U.S. labor movement were melting away was no big deal, because those industries were big polluters, and they were headquartered in declining Midwest cities, not in Silicon Valley, Austin, Raleigh-Durham, Phoenix, Albuquerque, Hollywood, New York, or Boston. Their stocks were considered as uncool as their locations.) Amid such ebullience, the upward slope of the Triple Waterfall pattern begins to form. The stock market rises, led by a group or groups that encapsulate this new optimism. People who bought these stocks early become missionaries for them. Wall Street picks up on the stories and begins hiring more staff to peddle and trade stocks. As pullbacks and profit taking occur, New Era thinking emerges to supply theoretical and intellectual rationales to ratify, stimulate, and legitimate investors gut feelings, unleashing rising levels of optimism and greed. Dissenters challenge these assumptions and justifications, scoffing at valuations and urging investors to take profits in the winning group and to move funds into safer investments. Many take the cautionary advice. They will follow the ensuing run-up with anguish, and most of them will come to regret their cowardice and jump back in at much higher prices. This is the point at which the market moves from mere optimism to something much more powerful. . . FAITH Prior to trusting your life to a bush-made rope, always test it. R. GRAVES Faith moves mountains, as the cheerful old Christian maxim says. Whether or not you believe that statement, you should certainly believe that Faith moves markets. There is a mountain of evidence to support that assertion. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |