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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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All bullish moves come from the intersection of optimism and greedAll bullish moves come from the intersection of optimism and greed. Triple Waterfalls are special, because they come from profound changes in the nations belief system. They transcend the capital markets. It was Faith that the American economy was so strong and so special, driven by the worlds mightiest corporations, that fueled the stock market in 1927 and 1928; that same faith looked at weakening economies abroad not as something to worry about, but as a sign that the United States was especially blessed. It was a new Faith in the 1960s that some major American companies had found the formula for sustained growth under any and all circumstances that fueled the run-up in what would be known as the Nifty Fifty stocks in the early 1970s. Faith can be a belief in a negative: The 1970s conviction that inflation was an incurable component of modern democratic societies triggered a retreat from conventional investmentssuch as bonds and bank term depositsinto inflation hedges, which included gold, silver, oil, real (particularly farmland), art, and collectibles. That faith reshaped the collective bargaining process, as unions and management assumed that inflation would remain out of control, making the relatively new Cost of Living Adjustments (COLAs) a component of many contract negotiations, and one that was often bitterly contested. If Faith is the driving force of what becomes a new secular religion, financial liquidity is its collection plate. Unless real money supplies (adjusted for inflation) rise, and unless credit becomes successively easier to obtain, investor enthusiasm and quasi-intellectual New Era arguments will not reach the critical mass of a self-sustaining speculative blow-off. This liquidity flow originates with aggressive monetary creation by central banks. A particularly egregious example was the global reflation of 1973-1974, after the Arab oil boycott and a major Russian crop failure triggered a trebling of prices for oil and grains. Western central bankers tried to insulate their populations from soaring prices of foods and fuels, but ended up, as Milton Friedman predicted, spawning sustained inflation. Liquidity surges can also develop from cross-border investment flows as one economy, currency, and stock market acquire particular allure, and global investors rush to get in on the great opportunity. The huge surge in Japanese stocks after the 1987 stock market crash came about because the Bank of Japan succumbed to pressure, particularly from the United States, to refloat the global system. Japan was running a monstrous Current Account surplus with the industrial world, and that success was at risk if a renewed stock market plunge triggered a recession and an upsurge in protectionism. That monetary cornucopia had come at a time when ordinary Japanese people were discovering the stock market as a savings vehicle. They felt supremely confident about the outlook for the shares of the companies in Japan Inc. (as did investors in the rest of the world, who rushed to buy shares in the companies that looked ready to take over the whole world). As more and more people come to share the same belief system, there is rapid growth in corporate mergers, takeovers, and capital investment, spurred by a continuing torrent of investment funds supplied by the investing public. (That rapid growth will become a fevered epidemic in the nextand finalstage of the buildup toward the Triple Waterfalls peak.) Since the outlook appears so wonderful, companies believe they just have to invest all available funds to increase their profits even faster. This is the stage at which the coalescence of enthusiasms and Faith produces a dangerous unanimity called Shared Mistake. At its root, Shared Mistake is honest illusion, not fraud. But it is fostered by a slick horde of Shills & Mountebanks (hereinafter sometimes called simply S&Ms) who gain sudden prominence by promoting the investment concept heavily to the general public. In most cycles, these promoters came from Wall Street; in the Nasdaq boom, many came from the media. They predicted endless profit growth, giving corporate management cover to issue forecasts that might otherwise have been widely regarded as optimistic in the extreme. Prominent academics become S&Ms, writing books about gigantic stock market profits, and speaking for large feesto packed seminars of greedy investors. These differing groups reinforce one anothers enthusiasms and greed, providing endless fodder for retail investors conversion to the secular religion. Major wealth-management organizations begin buying aggressively into the concept, partly under pressure from wealthy old-money clients who are horrified at the rapid multiplication of nouveaux riches. Shared Mistake doesnt just drive the stock market. When the leading elites of Wall Street, business, the academy, and government agree with the leading elites of the media that a New Era has dawned, a new capital investment boom occurs. This becomes an accelerating process, as companies buy up other companies to acquire productive assets more cheaply and quickly than they could build them themselves. This in turn drives up asset values, stimulating more capital investment to deal with the shortage psyche that has begun to engulf society. It will create the seeds of its own destruction through massive overinvestment. FANATICISM This is the stage at which Shared Mistake becomes a near-universal force. It becomes so powerful an influence, and such a ramifying force within society, that it can best be understood by comparison with cults, superstitions, and religious manias. What makes this story resemble a Greek tragedy is the hubris that so permeates societys power structures, creating massive excesses that provoke terrible and prolonged punishment. Whom the gods would destroy, they first make mad. It is hubris to the point of madness that characterizes the Fanaticism stage of Triple Waterfalls, thereby justifying the horrendous punishments that lie ahead. Veteran hikers, campers, and sailors have learned to be wary of longrange weather forecasts. They carry with them foul-weather gear, and they pull ashore and into campsites if telltale cloud and wind changes signal that the official forecasts might be in error. That kind of survival instinct, which most investors have in varying degrees, virtually vanishes in the final up leg of the Triple Waterfall, when Shared Mistake acquires awesome power. This is the stage when all that high-powered central bank money, and all that high-powered Street promotion, and all that high-powered media excitement, and all that high-powered intellectual justification combine to create an unstoppable juggernaut. The Nasdaq Triple Waterfall, being the biggest and worst of them all, supplies many examples of the Fanaticism stage. Dissent is suppressed along Wall Streetlargely through market forces, but sometimes through overt action. Analysts and portfolio strategists who question the prevailing belief system lose out in prestigeand even jobsto those who peddle the New Religion. In one now-famous example, Merrill Lynch recruited Henry Blodget, a youthful Oppenheimer technology analyst who had gained sudden fame by predicting that Amazon would go to $400 a share. He replaced a more cautious analyst. Jeff Bezos, CEO of Amazon.com, was named Person of the Year by Time. Bob Woodward published Maestro, a best-selling book on Alan Greenspan that gave him credit for managing the economy of endless growth fueled by continuous productivity gains from the New Economy. That kind of Fanaticism arising from a monoculture of Shared Mistake characterizes the earlier crashes. In October 1929, Irving Fisher, a prominent academic, published a brilliantly reasoned paper that proved that stocks were not selling at risky prices, because the stock market had many years of strong growth ahead of it. It was greeted with widespread praise and was widely cited by Wall Street Shills & Mountebanks in the weeks after the Great Crash, encouraging shocked investors to believe that this was nothing more than a correction. During the three inflation-hedge Triple Waterfalls (gold, silver, and oil), belief in hard assets at times migrated from the secular to the mystic. Numerous investment advisers predicted prices for gold in the thousands of dollars per ounce range. The falling value of the dollar was talked of in the same breath with accounts of the Weimar hyperinflation. The intellectual roots for the Faith in inflation that moved to Fanaticism about endless inflation came from the Club of Rome, a collection of distinguished leftist intellectual-politicians who began meeting in 1968. These neo-Malthusians were wined and dined on Lucullan scale, after which they would emerge to issue forecasts of global starvation and devastation because of inadequate supplies of food and fuels for a population that would in the future grow even more rapidly than it had since 1950. In fact, the Baby Boom was already over; population growth in the industrial world had begun to decelerate and would turn negative in the next millennium; education of women would lead to declines in fertility rates across much of the Third World. Meanwhile, the Green Revolution, which improved pesticides and fertilizers and advanced farm equipment, would soon create a new kind of permanent food problem: how to control the production gluts, and how to control the endless increases in farm subsidies. Sharp rises in oil prices would inevitably trigger large new production from high-cost areas such as the North Sea. But Shared Mistake ruled out consideration of those realities for many years. Indeed, until the Triple Waterfall collapses in the inflation hedges, the prevailing intellectual climate was of endless shortages and nightmarish disasters. Of such were the nearly unanimous forecasts of oil at $100 a barrel that led to drilling in the Arctic Ocean, billions wasted on shale deposits, overbuilding in refineries, and overconstruction of oil drilling and servicing equipment. Late in the decade, the Hunt brothers tried to corner the world silver market, with the assistance of Saudi investors. According to stories that circulated after the crash, their argument that silver was deeply undervalued after it had already run up from $1 an ounce to $20 was based on an interpretation of a passage in the Old Testament about the relative values of silver and gold. They managed to drive silver to $54 an ounce in 1980, the greatest price gain by far of any of the inflation hedges, before the metal entered its three-stage collapse. Some of the talk was dreamy, some was apocalyptic, but all the talk during the late 1970s was of commodity inflation. The Shah of Iran proclaimed that oil was too valuable a resource to be burned as fuel. The publicity given to the 1973 El Nio that led to widespread crop failures made the new discipline of climatology chic. Among the opportunists who gained large followings were climatologists who predicted the coming of an era of global cooling that would unleash a new Ice Age, which would mean further, exponential increases in oil prices. (Some of these Ice Age experts switched to warning of global warming in the 1980s, when oil stocks were in their Triple Waterfall crash phase.) |
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