The markets are supposed to reflect all that is known. Day by day, hour by hour, minute by minute they react to the news, to opinions, and maybe even to the passing planets. In this sense, they are “perfect.” Nobody knows more than they do.
Which is merely to say that the markets are as imbecilic as the majority of stoneheads who invest in them. What is remarkable to us is that so many investors find nothing remarkable about today’s markets. The Dow is still where it has been for several years, while the majority of investors remain steadfastly bullish. According to Investors Intelligence, the majority has been bullish for 158 straight weeks, longer than any stretch since they began keeping track 42 years ago. You’d think they would get tired of being bullish — especially when it doesn’t pay.
If the market is perfect you can never go wrong by buying at the market price. That is, if you decide that a price is too high or too low, you are more likely to be wrong than right — because you will always know less than the market itself — which says the current price is the right one.
Obviously, the whole idea is empty. When an investor buys or sells, he is not really arguing with the current price, he is just guessing about tomorrow’s price. All the current price really tells you is what emotion has a grip on investors right now.
The emotion we see is reckless complacency. Gas prices have doubled. Is that a problem? Nope. The trade deficit has reached 6% of GDP. Is that a problem? Nope. There’s a war in Iraq that looks increasingly un-winnable…financed by borrowing from Asian rivals. Do you see a problem? Nope. American consumers’ earnings have been falling for the last two years, while their debt levels continue to rise. Does that bother anyone? Nope.
No, dear reader, there is nothing to worry about. Yes, debt levels are higher than ever, but this is a new era, in which people can support more debt — permanently. And the trade deficit? It has almost disappeared from the news. We’ve had a growing trade deficit ever since Alan Greenspan first stepped into the Fed. It hasn’t hurt us yet, has it? And what about consumers? Well, they may be earning less, but their houses are still rising. So, they still have money to spend. That’s what the markets are telling us. The markets have much more information than we do. And they say we can relax. The morons!
This seems like a good occasion to recall another new era, the one that came to an end almost as soon as it was first announced.
In 1965, the Dow began the year at 874. It took 17 years — until 1981 — for it to climb one lousy point to 875 at the close of 1981. Famously, Business Week heralded this new era in an article entitled, “The Death of Equities:”
“The U.S. should regard the death of equities as a near-permanent condition. Even if the economic climate could be made right again for equity investment, it would take another massive promotional campaign to bring people back into the market. The range of investment opportunities is so much wider now than in the 1950s that it is unlikely that the experience of two decades ago, when the number of equity investors increased by 250% in 15 years, could be repeated. Nor is it likely that Wall Street would ever again launch such a promotional campaign.” Thus began a great new bull market in equities that lasted until 2000…by which time several new eras had been announced. In these new New Eras, stocks were supposed to go in only one direction: up. In the following five years, the Nasdaq collapsed and the Dow fell; neither has yet recovered.
And now, in today’s New Era, we are supposed to be able to tolerate a much higher level of debt than ever before… indefinitely. That’s what Mr. Market is telling us. It was only eight years ago that the market in credit derivatives began. In 1997, the market volume reached $55 billion. Since then, it has soared to more than $4 trillion.
Only now is the market getting its “first test,” says the Financial Times. Many derivative contracts were based on Delphi corporate bonds. How will the market sort them out now that Delphi has gone bust? We will see in the next few days.
Yesterday, Mr. Market still seemed to smile on this brave new era. We wonder what will happen when he changes his mind.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.
