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On
Wednesday (October 17th 2000) the Dow Plunged more than 421 points in the
first half hour of trade. The Big Board went into free fall from the opening
bell, as CNBC reporters repeatedly stressed that small investors should not
be panicked into selling in this market.
The
vast majority of inexperienced investors time their market participation
poorly. Record numbers of small investors have been tempted into borrowing to
buy stocks at high and inflated prices, investors have been conditioned into
riding out the waves.
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Over
the last few years investors have been conditioned into riding out the
waves. They have been told to hold on as "the market will spring back
and go on to new highs", which admittedly to date it has done. People
have been encouraged to buy on the dips as "these prices are a buying
opportunity and will seem like bargains when the market comes back".
This
October's fall on Wall Street was prompted by continuing earnings warnings,
consistently high oil prices and higher than expected inflation figures in
the US.
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WAITING
FOR THE MARGIN CALL
Margin
Debt on stocks is now at record levels. Record numbers of small investors
have been tempted into borrowing to buy stocks at high and inflated prices.
As the price of the stock falls below the margin level, calls go out to the
leveraged investor. Just as transpired in 1929, if the investor defaults, and
cant make the margin payment, the shares are sold out from beneath him,
creating further selling pressure. The more selling pressure, the lower the
share price falls, in-turn leading to more margin calls, causing a debt
induced selling spiral, which, in the past has been followed by investor
panic.
REMEMBER
1998
Commentators
of this recent sell off on Wall Street reminded us that we have seen this
kind of market correction before; "remember 1998", failing to tell
their viewers the differences between 1998 and today. In 98 there was not the
same number of big cap stocks in trouble. For example in 1998, IBM held up throughout
the sell off. INTEL never lost anything like it did this time.
A
collapse in an already over valued stock market was averted in 1998 by the
lowering of interest rates by the Federal Reserve, further boosting money
supply available to buy stocks. In the rising energy cost and inflationary
environment of today, this option will not be available to the Fed.
THE
SETTLEMENT PROCESS
Again
CNBC stated the positive side of the day was the massive volumes of shares
traded, signaling that a possible bottom had been reached.
In
the Crash of 1987, the real crisis was not so much the evaporation of paper
profits, but the inability of the financial system to settle all the trades
because of the exceptionally large volumes involved. Many clearing houses and
banks were unable to meet reserve requirements, leaving the entire financial
system in potential gridlock.
LOSING
YOUR SHIRT
As
history clearly demonstrates, the vast majority of inexperienced investors
time their market participation poorly, getting in at or near the top (in the
midst of the mania), and then ride it all the way to the bottom before
selling.
I
first spoke to Franklin Sanders in 1997 while shooting the documentary
Millennium Money. When we spoke about the dangers of this market phenomenon
he said; " We are talking about individuals here, not institutions.
These people are not seasoned investors, and by seasoned investors I mean
people that have lived through all the delusions of a bull market and gone
all the way to the bottom. You can read about it but until you have
experienced it, until you have seen your own self-delusion; you see the
market top and all the technical evidence is there, but you keep holding on, you
say; no I think its going to come back, its got to come back. The reason that
happens is you start with this set of ideas in your mind and its very
difficult to change those. It is even more difficult when all your self
interest is wrapped up in this set of ideas; all your treasure is wrapped up
in the stock market. How can you admit you have been wrong, and meanwhile the
market just keeps going down and further down.
hat's
another reason this market is so dangerous now. Look at the social change we have
been talking about, we are a people now that are motivated by greed. When
people look at their IRA's (pension funds) and they have gone down to half,
or a third of what they were, they are going to be mad, and they are going to
come out with fire in their eyes looking for a scapegoat."
AGAINST
THE CROWD
Historically
precious metals have been contra-cyclic with Wall Street. The last big bear
market in stocks was in 1973 - 1974. From the market high in early 1973 to
the low of late 1974, the Dow and S&P 500 lost nearly half of their
value, while the high tech "Nifty Fifties" tumbled more than 60%.
Apart from a brief period in 1976, it took 10 years, up to 1983, for the Dow
to reach its 1973 highs. In the same period, of early 1973 to late 1974, gold
gained in excess of 150%, while, between early 1973 and the market high of
1980, the precious metal gained an amazing 1200%, a nice return for the few
who had bought at the bottom and sold near the top.
SUMMARY
Today we are living in fast changing and volatile times. Leaving aside the
dramatic and disturbing social changes in the West in recent years, Middle
East tensions are increasing, oil prices continue to soar, the inflation
genie is again out of the bag and stocks are the most overvalued they have been
in all of history. Meanwhile gold and silver are the cheapest they have been
in twenty years.
Philip
Judge
Anglo Far-East Company
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