Written by Lance Roberts, Clarity Financial
— this post authored by Doug Kass
“A bull market is like sex. It feels best just before it ends.” – Warren Buffett
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Today it can be argued that the stock market is as uncritically loved (with the S&P Index at an elevated 2850) as it was unreasonably loathed nearly nine and a half years ago (with the S&P Index at a horrifying 666)
Investors are prone to be bullish at the end of a Bull Market when prices are high and bearish at the bottom of a Bear Market when prices are low – as speculation is a social activity carried on by herds and what I like to call “Group Stink.’
Since the mass of people have most of the money, the crowd is more often than not on the winning team.
However, when the majority is confident in view, are all on the same side of the boat and have fully discounted a profitable future (“first level” v. “second level” thinking) – Mr. Market becomes vulnerable to a surprise as markets become exposed to the unexpected. We may imagine the financial future, but it can never be surely known.
We know the past and the present and, at times (and perhaps too often) we project the familiar out into the unknown. At inflection points, this act of projecting the familiar frequently produces unsatisfactory results.
History teaches us investment lessons but it doesn’t tell us which lessons to apply and when.
As Howard Marks writes,
“The markets are a classroom where lessons are taught every day. The keys to investment success lie in observing and learning.”
I have observed that, at the end of every Bull Market, progress is blurred and becomes fantasy. A new Utopianism dominates financial thinking and the consensus is swayed towards the notion of a long and uninterrupted economic and profit boom – world without risk .
(Who can ever forget Peter Schwarz’s and Peter Leyden’s, Wired Magazine (1997) article, ” The Long Boom: A History of the Future, 1980-2020?)
Markets tend to make opinions. There is a strong inclination and nature to extrapolate as “group stink“ is the favorite market odor. Or as The Divine Ms M regularly writes,
“There is nothing like price to change sentiment.”
We are nearly a decade into an economic recovery and Bull Market. We must look for signposts – both fundamental (as I outline every morning in my Diary) and anecdotal.
Market tops come in all shapes and colors.
Perhaps the first stock market crash (Kipper und Wipper), occurred in 1623. It was caused by fraudulent foreign coins minted in the Holy Roman Empire for the purpose of raising funds at the start of the Thirty Years War.
Fourteen years later it was the Tulip Mania Bubble in the Netherlands during which contracts for bulbs of tulips reached extraordinarily high prices (which suddenly collapsed).
A century later, in The Mississippi Bubble, Banque Royale by John Law stopped payments of its note in exchange for specie and as a result caused an economic collapse in France.
The South Sea Bubble of 1720 affected early European stock markets during the early days of chartered joint stock companies.
Fast forward to The Panic of 1901 which lasted three years and was sparked by the assassination of President McKinley to be followed by a severe drought.
Six years later a panic followed President Roosevelt’s attack on the railroad monopolies (think Alphabet’s Google (GOOGL) and Amazon (AMZN) ).
Over history, and as we have moved towards an increasingly flat and interconnected world, the dominoes of currency have had broad economic and investment ramifications – becoming ever more influential contributors to possible stock market panic in a U.S. dollar debt-denominated world. (See the recent collapse of Russian and Turkish currencies, as an example, of modern day risks).
Consider some other, more recent warning signs in history that produced market tops:
- A failed leveraged buyout of (UAL) led to a stock market plunge in 1989 (undermined future leveraged deals).
- The Russian Debt Crisis in 1998 happened when the ruble was devalued and Russia defaulted on its debt.
- The ill fated Time Warner/AOL combination closed minutes before the Nasdaq top in 2000. (Ultimately the OTC market fell by -81% in the next few years).
- Goldman Sachs’ 2007 Abacus CDO deal preceded the mortgage derivative fiasco that led to the Great Recession.
Maybe this market top, too, will be caused by the unexpected – choreographed by a modern day P. T. Barnum, an ostrobogulous Elon Musk and his sui generis automobile.
“There’s a sucker born every minute.” – P.T. Barnum
