The Wall Street Water Torture

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when I was a boy, radio dramas involving American spies going
into Asia sometimes introduced something called the Chinese water
torture. The good guy, or the good guy’s partner, was captured
by the wily orientals. They would try to get him to talk. He wouldn’t.
So, as a last resort, they would tie him down on a bench and place
over his forehead a bucket with a tiny hole in the bottom. Then
they would fill the bucket with water. Drip, drip, drip: the drops
of water would eventually drive him mad. There would be no marks,
no signs of torture. The risk to the torturers was never mentioned:
nut-cases may supply nutty information. The torturers were betting
on his cracking before he went mad.

The Chinese
water torture was great for low-budget movies about World War
II, because the wily orientals — Japanese, of course — could use
the technique on a woman, and the censors would leave it in. Even
today, I cannot mentally recall a scene of this form of torture
without also recalling an image of either Richard Loo or Philip

Without being
rescued, anyone suffering this form of torture was doomed, or
as my generation occasionally put it, didn’t have a Chinaman’s

It’s politically
incorrect today to identify a particular form of torture with
a racial or national group. So, we never see movies with the Chinese
water torture any more, probably because it has been designated
"Chinese" for so long that it has no other name.


In those
World War II movies, we learned that the Japanese had imported
the technique from China. That sounded reasonable to my generation.

Having watched
the Nikkei index since late 1989, I am convinced that the technique
still works. It drives investors mad.

The Nikkei
was just under 39,000 in late 1989. Then it began to fall. Today,
it is in the range of 8500 — about where the Dow Jones Industrial
Average is.

Year after
year, stock brokers have told Japanese investors not only to stay
in the market, but to buy more. The very existence of retail brokerage
houses testifies to faith in the future of any market. For 13
years, "buy and hold and buy some more" has been a suicidal
policy in Japan. Any investor who took the advice of his broker
has lost his wealth. He should have bought boring U.S. T-bills.
Of course, the stock brokers selling into the retail market would
have gone out of the stock business. It would have been better
for the Japanese investor had the entire retail stock brokerage
industry gone bankrupt in 1989.

I would call
the Nikkei-225 the Japanese water torture. Of course, it’s the
reverse process from the movie version: liquidity disappears permanently
into the bucket. It’s more like a blood transfusion. Now I’m imagining
Bela Lugosi. (I had a politically incorrect youth.)

The water
torture is now happening in the West’s stock markets. Like the
Japanese investor in 1992, the American investor thinks, "This
will be over soon." But without a rescue, he will eventually
go mad.

He looks
to Alan Greenspan to rescue him. But this slow-motion movie is
more like a Saturday morning serial in the pre-television days:
"Continued Next Year. . . ."

I located
a chart on the Web that overlays the graph of the S&P 500 since
1992 (blue) and the Nikkei 225 since 1982 (red). There is an amazing
correspondence. The chart then extends the hypothetical graph
of the S&P 500 to 2012.

I assure
you, no Web site was posting this overlay in late 1999 or early
2000. Back then, any suggestion that what happened to the Nikkei
after 1989 could happen to the DOW or the S&P 500 would have
been regarded as the silly dream of some Old Economy crackpot.

We are now
in the early years of the Wall Street water torture. It has only
just begun.


In his Friday
afternoon newsletter, John Mauldin quoted the Grand Old Man of
stock market newsletter-writing, Richard Russell. Russell was
a bull throughout the 1980’s and 1990’s. He is now a bear. Mauldin

It’s the
season when so many analysts participate in a group masochistic
ritual: the annual yearly predictions. Like lemmings, they rush
to the edge and leap. That they are so often wrong does not
seem to deter them from making the same mistake the next year.
And there they differ from lemmings, in that they live to repeat
the act every year.

As we will
see, they often recycle the same mistakes from the previous
year, in the hope that this year it will be right. . . . .

Today we
will look at how well the predictions of mainstream analysts
have done over the past few years: basically they have been
abysmal. Then we explore why they have been so bad. I will also
give you at least two reasons as to why they will be so bad
this coming year.

What piqued
my interest in this topic, aside from the fact that I am gathering
a lot of information to make my own predictions, was a note
from Richard Russell and the arrival of the year-end Business

on Christmas Eve, Russell led off this observation:

in the year 2001 twenty-two u2018expert’ Wall Street analysts from
Louis Rukeyser’s "Wall Street Week" gave their estimates
as to where the Dow would be at the close of the year. The estimates
ranged from 11,400 to 12,300. But the actual Dow close was 10,021.
Not one of the 22 panelists guessed that the Dow would close
under 11,000.

early this year the same twenty-two top analysts gave their
estimates as to where the Dow would close in 2002. The estimates
ranged from 10,750 to 12,100. As of today, the Dow is at 8,460.
Not one of the 22 experts saw the Dow closing below 10,000.

can this be? My answer is that none of these analysts is able
to recognize change. Although we are in a primary bear market,
evidently NONE of these experts understands what this means.
Either that or they are so inculcated with the optimism of the
last 25 years that they are not able to envision an extended,
disastrous bear market."

Then comes
Business Week. We are told that BW "polled some of the
smartest players on Wall Street." They polled 67 analysts.
Only 3 see the Dow going down.


I began warning
subscribers to my paid newsletter, Remnant Review, in February,
2000, that the NASDAQ was looking close to a peak, and that it
would soon crash. I did the same in the March issue. The NASDAQ
peaked in the week that my March issue arrived: 5040.

I warned
throughout 2000 that a general bear market was imminent. In the
November issue, I told my subscribers to short the market. Anyone
who did is up about 100% on his money, and he missed out on the

With this
as background, I think the S&P 500 will be lower one year from
today than it is today. I think year four of the bear market will
walk through the portfolios of ever-trusting investors. I do not
expect a crash. I do not expect price deflation. I do not expect
a depression. But I expect share prices to be lower. Although
the Federal Reserve is pouring credit into the economy, and while
interest rates are low, the market still looks weak: capital spending,
especially. If we can avoid war in Iraq, the market could go higher,
though not boom. But, at this point, the Administration seems
committed to war in Iraq.

The Wall
Street water torture relies on trust and optimism — both deeply
entrenched American characteristics — to pin the victims to the
bench. The drip-drip-drip of the stock indexes will continue.

In the old
movies, there was always a rescue. We never saw the results of
the water torture: a babbling victim who could no longer think
straight. This time, we will.

The rescue
must come soon. Everyone knows what begins in 2011: the baby boomers
of 1946 hit age 65, and they will begin to retire. Well, actually,
this will be in 2012. The government has changed the retirement
date in order to delay the bankruptcy of the Social Security Ponzi
scheme. Those born in 1946 must wait to age 66 to retire.

So we have
a decade for the stock market to rise to such a level that the
retirees can sell their stocks and invest the money in fixed-income
assets, in order to live off the income. They will have to sell
their stocks because dividends are locked into a range below 2%,
and fund management fees are usually above 1%. Meanwhile, a CD
or insured savings account pays 1%. And this income is subject
to the income tax.

We are familiar
with bull markets and bear markets. This is the elephant market,
as in the famous elephant in the living room. Nobody mentions
it except H. Ross Perot’s crazy aunt in the basement.

The rescue
operation is based on the Federal Reserve System’s expansion of
money, which has driven down the overnight bank-to-bank lending
rate, or federal funds rate. The FED has no other significant
tool besides its ability to lower the fed funds rate. Yet the
fact is, this rate today is primarily affected by demand for loans,
not the supply of loans. We know this because the increase in
the adjusted monetary base, which the FED can control, is still
below 8% per annum. This is high — doubling in less than a decade
— but not wildly inflationary.

NEXT YEAR. . . .

In the old
days, the serials ran 12 chapters. This was increased to 15 in
the late 1940’s. If we date Chapter One of the U.S. stock market’s
serial as late 2000, there are 13 chapters, 2000-2012. The baby
boomers will start retiring, and downward pressure on the stock
market will become permanent.

Of course,
the downward pressure will begin earlier than 2012. People will
see where their futures are headed. They will see that the promised
rescues, year after year, aren’t working. They will do what the
Japanese have done: sell in advance of retirement.

One of the
escapes used by script writers was to switch last week’s ending.
For example, a car would go over the cliff. The hero was inside.
We would see it crash into smithereens at the bottom of the cliff.
"Continued Next Week. . . ." The following week, we
would see a replay. The car went off the cliff. But, wonder of
wonders, it would splash into a lake.


I remember
a chapter of "The Masked Marvel" (1943), where the gimmick
was a one-dollar mask. The Marvel wore a gray suit and a Lone
Ranger-type mask. Given the quality of the scripts, the lead actor
must have been grateful. In the history of serials, the Masked
Marvel was the least plausible American hero. He was an insurance
investigator. Actually, there were four of them. Until Chapter
12, we didn’t know which one was the guy who wore the mask. By
then, most of us didn’t care. His enemy was master spy Mura Sakima.
I don’t remember if Sakima ever used the water torture on a victim.
He sure used it on the audience.

At the end
of one week’s chapter, the Masked Marvel was fighting a bad guy
on top of a water tower. It was six or seven stories tall — kind
of like the S&P 500 in early 2000. The bad guy threw him off
the water tower. I remember clearly next week’s segment. He lands
on his feet and walks away.

one of these miraculous escapes took place, a few of us would
boo. That’s where my generation of bears learned how lazy script
writers could keep the hero alive and therefore kept the serial

There is
no question in my mind who the Masked Marvel is today. It’s Alan
Greenspan. Only instead of a Lone Ranger mask, he uses those eyeglasses.
Nobody recognizes him. Who is he, really? We viewers are asked
to guess which actor is the real Masked Marvel: Milton Friedman,
Arthur Laffer, Paul Samuelson, or . . . ?

He can fight
in complete safety on top of any water tower, no matter how high.
Meanwhile, it’s drip, drip, drip for investors. They are already
beginning to hallucinate, yet it’s only Chapter Four of “The Return
of the Masked Marvel.” On December 31, the script writers did
it to us again: “Continued Next Year. . . .”

The fed funds
rate is 1.25%. The Masked Marvel’s rescue of the investor, still
tied to the bench by cords of optimism, had better work soon.
If it doesn’t, then "Continued Next Year. . . ." will
sound less and less plausible. Fewer and fewer ticket sales will

I began to worry about the plausibility of the script when I
looked at the credits at the end of Chapter Three. There were
two names under “screenplay by”: Abby Joseph Cohen and Louis Rukeyser.
When I re-ran the tape for Chapter One, their names were missing.
Two others were credited: Henry Blodgett and Jack Grubman.

It will be interesting to see which script writers are listed
at the end of Chapter Four. We will have to wait another year
to find out.


The Wall
Street water torture is drip, drip, dripping along. The victims
still have high hopes that the rescue will come soon. The experts
say that the stock market’s recovery is just around the corner.
And when they say "just around the corner," they mean
just . . . around . . . the . . . corner! (OK, I’m lifting this
from a comedy short by Robert Benchley, Peter’s humorist father,
in which he was doing a spoof of an optimistic economic forecaster
sometime in the late 1930’s. It was a funny skit because nobody
in the theater audience believed him.)

I wonder:
How can anyone do a spoof of Louis Rukeyser?

It would
be like doing a spoof of Saturday Night Live.

Calling Al

8, 2003

North is the author of Mises
on Money
. Visit
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