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Hubris is often present on the market as we approach the long-term market peaks. The story is full of examples of this kind of pride as we have already approached the highest peaks of the market.
Now, before you get into the mortgage of your home to reduce the market, keep in mind that we are just starting to see the pride that I expected to build then as we get closer to the top of the market, which I hope in a few years. But, I think we have to start to realize, because the parade seems to begin.
For those who know their stock market history, you know that "connoisseurs" were absolutely certain of the impossibility of a stock market crash just before the market collapsed and led us into the Great Depression. Let me show you some examples:
"We will not have more crashes in our time."
That's what John Maynard Keynes said in 1927, two years before the stock market crash that led to the Great Depression.
"Stock prices have reached what looks like a permanently high plateau.I do not think there will be soon, if ever, a breakout of 50 or 60 points from current levels, as they have." I had expected to see the stock market much higher in a few months.
This was said on October 17, 1929, a few weeks before the big crash, by Dr. Irving Fisher, professor of economics at Yale University. Mr. Fisher was one of the leading American economists of his time.
"I can not help but have a dissenting voice to say that we live in a paradise for fools, and that the prosperity of this country must necessarily diminish and disappear in the near future."
– H. H. Simmons, President of the New York Stock Exchange, January 12, 1928
"There will be no interruption of our permanent prosperity."
– Myron E. Forbes, President of Pierce Arrow Motor Car Co., January 12, 1928
And, these are just some of the popular quotes of their time. And besides, did anyone know about the Pierce Arrow Car Company? You do not have it? Well, that's because they went bankrupt during the Great Depression. But I keep away from the subject.
Now let's see how the tanks line up in our current parade of hybris.
Recently, National Economic Council director Larry Kudlow said on television, "The recession is so far away that I can not see it."
Last year, Janet Yellen, Fed Chairman, said the banking system was "much stronger" because of Fed supervision and rising capital levels. She then continued with what I believe will be a historic statement. Yellen also predicted that, because of the measures taken by the Fed, another financial crisis is unlikely "in our lifetime". Some of you may have pointed out that Ms. Yellen was approaching herrd birthday, she said in "our" life.
What is simply amazing is the same Janet Yellen who said the following after the financial collapse we experienced in 2008-09:
"Despite extensive research on financial market statistics and weighty statements about financial stability, we simply have not understood some of the most dangerous systemic threats. During that time, things went so well for so long that the common belief was that nothing could go wrong. . . We still had the mirage of a system that we thought invulnerable to shocks, a Maginot financial line that, in our opinion, could not be broken. We now know that this feeling of invincibility was only pride.
What is causing such amnesia in the markets? Well, it would seem that the euphoria generated by high stock market prices has a ripple effect even at the highest levels of the professional ladder.
In 1996, Robert Olson published a study in the Financial Analysts Journal in which he studied the effects of livestock on the predictions of fundamental "expert" analysts on corporate profits. After studying 4000 estimates of corporate profits, he came to the following conclusion:
"The profit forecasts of the experts show a positive bias and a disappointing precision. These deficiencies are usually attributed to a combination of incomplete knowledge, incompetence and / or misrepresentation. "
Olson's article suggests that "the human desire for consensus leads to herd behavior among benefit forecasters," as the flock is still searching for the current trend to continue unabated and indefinitely.
Let's see some more tanks in this current parade.
I now see comments like this in my public articles:
"I think my goal of 4000 in 2019 and 5000 in 2020 is MUCH too cautious right now. I think we can see the S & P approaching 100,000 by 2029, or 5 doubles in 10 years. "
Last week, a CNBC interview with Chamath Palihapitiya, a venture capitalist I had never heard of before this interview, was doing the trick, echoing Ms. Yellen's statement above:
"The chances that there is a recession in any western country of the world are almost impossible now …"
Yes, my friends, the tanks were built and the parade started. The belief that central banks are invincible and powerful to control the business cycle has become intense and ubiquitous. This has certainly led to a feeling of invincibility of the stock market. Do you really think that the result will be different from that of the story?
As the wisely stated George Santayana, "those who do not remember the past are doomed to repeat it".
I have often quoted Professor Hernan Cortes Douglas (former Luksic Fellow at Harvard University, former Deputy Research Officer at the World Bank and former Senior Economist at the IMF), but it is certainly worth it to repeat it:
"Financial markets never collapse when the situation is bad. In fact, it is quite the opposite that is true. Before contractions begin, macroeconomic flows always look good. This is why the vast majority of economists still claim that the economy is in excellent health just before sinking. Despite these failures, despite the almost exact repetition of these failures, economists have continued to study the same macroeconomic fundamentals to find clues for the future. If the conventional macroeconomic approach is useless even retrospectively, if it can not explain or understand a result when we know what it is, is it a prayer to do so when the goal is to Evaluate the future? "
Although you may feel free to watch the parade for the next few years, as they are often very entertaining, please do not become a participant. The story suggests that it would not be beneficial for your financial health.
You see, the amnesia that seems to have afflicted those I mentioned above allows them to ignore the fact that we have experienced a significant market decline of at least 20% at during the last 30 years. I pointed out the Fed's inability to prevent these declines in this previous article: The Fed has lost control.
And, if you still believe in the Fed's ability to stem the negative sentiment of the market, I'd like to leave you with one last quote from Irving Fisher, one of the best economists of his time, and who has been completely surprised by the beginning of the Great Depression:
"The Federal Reserve system, from February to December 1931, increased the issue of Federal Reserve notes by 80%. These problems were due to bank failures which necessitated increased use of cash. Yet after a wave of bank failures. . . both banks and their depositors began to engage in fierce competition that more than outweighed the Federal Reserve's new note issues. "
Irving Fisher, Booms and Lows, 1932
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