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Stock Ideas Investors Daily Edge The World is in a Panic
Stock Ideas Investors Daily Edge The World is in a Panic 
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| The World is in a Panic |
| Saturday, 25 October 2008 | ||||||||
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Understanding social mood is extremely important when you're an investor, because the stock market itself is nothing more than a gauge of social mood. Check out this chart of the Dow… Chart courtesy of http://bigpicture.typepad.com The red coincides with a bear market while the green is a bull market. Now, when you're looking to gauge social mood, you want to look for the outliers. In other words, the extreme market moves. We see the exuberance of the roaring 20's because in eight years, the market moved sharply higher. This irrational optimism was then countered with irrational pessimism as the crash of 1929 showed the world what the next ten years in depression would be like. Then World War II helped manufacturing in America, starting the market on a 20-year bullish run. The 70's traded flat as stagflation hit the economy (if you dig deeper, you'll see the two recessions that happened during that time). Here's the thing though… From 1920 to 1929, the Dow Jones moved from 63.90 to 381.17. That's a 496 percent increase in about nine years. Or a whopping 55 percent per year average growth. It was a time when America wanted to forget about the horrid war that had just finished. Soldiers came back to America ready to make steaks and babies. Automation was taking over factories, pushing production prices down. Wealth was spreading. Credit was abundant. New technologies like the radio, movies, and cars were becoming ever more popular. People were dancing, doing drugs, and women were breaking the mold. From Wikipedia… "These young, rebellious, middle-class women, labeled ‘flappers' by older generations, did away with the corset and donned slinky knee-length dresses, which exposed their legs and arms. The hairstyle of the decade was a chin-length bob, of which there were several popular variations. Make-up, which until the 1920s was not typically accepted in American society because of its association with prostitutes, became for the first time extremely popular."
Now let's look at 1982 to 2007. The Dow Jones moved from 776.92 to 14164.53. That's a 1,723 percent increase in a span of 25 years – an average of 69 percent per year! America had just undergone one of the worst inflationary episodes of its history. Reagan got into office, promising to give hope to Americans. Credit became more abundant, the cell phone and internet both changed life as we know it. Computers hit the mainstream (allowing huge increases in productivity). The proliferation of off shoring made products cheaper. And the entry of China into the WTO allowed a flood of cheap goods to come to America. Kids started turning into adults quicker. Women wore less clothing and men started pampering themselves more like women (you know, a "metro sexual"). Drugs proliferated, taxes dropped, and homeownership soared to record levels. Just like the 20's, optimism was abundant and this lead society to new ways of thinking that simply weren't present before. Just looking at a chart of that time frame will show you just how excited and optimistic people were. You could practically feel the optimism. Really, the Dow Jones was like a perfect picture of public mood at the time. And if you look at a chart from 1982 to 2007, you'd feel the same thing… just more powerfully. This proves that the stock market is an indicator for public mood and perception. Along those same lines… If 55 percent average growth in the 20's was unsustainable, that means what we saw over the past 25 years was the biggest red flag in the universe. So it shouldn't be shocking that we are now encountering the biggest financial crisis since the late 20's. What happened then is happening now. Unemployment moved higher, consumer credit imploded, the government made huge market interventions, we saw a massive housing bust, more regulation was enacted, and huge spending programs were implemented. That was the depression, but it sounds like today, right? Furthermore, the uncertainty and panic in the air during the 20's is present today. People are freaking out. They are angry. They want the government to do something, but the government can only do so much. The banks can't trust each other. They know that their pricing their bad assets with fantasy figures. They know that everyone's running out of cash. And they can't be sure that they'll get paid tomorrow. It's starting to get to the point where the market is lacking trust in the government and the Fed (that's something we've always felt, but not the market in general). The market has remained volatile. On Friday, futures were locked limit-down in the pre-market (where the market stops trading because losses are so large). We're in troubled times for sure. And there's no easy way to get out of it. We have 25 years of optimism left to unwind. No matter what anyone tells you, we're probably going to see the market trade in a range for the next two years. Once the economy begins to improve, the market will react. As always, stay short and you should prosper. Stay free, Charles
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