by Gary North
Back 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 Ahn.
Without being rescued, anyone suffering this form of torture was doomed, or as my generation occasionally put it, didn't have a Chinaman's chance.
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.
THE JAPANESE WATER TORTURE
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.
OPTIMISTIC FORECASTS FROM THE EXPERTS
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 wrote:
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 Week.
Writing on Christmas Eve, Russell led off this observation:
"Early in the year 2001 twenty-two ‘expert' 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.
"Again, 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.
"How 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 collapse.
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.
CONTINUED 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.
Whenever 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 alive.
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 occur.
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 Gore!
January 8, 2003
Copyright © 2003 LewRockwell.com