Followup to our discussion of bear market duration and such ... "Similarly, the media (and strategists, too) have calculated the statistic they wanted to find --that the average length of a bear market has already been exceeded by this bear -- and thus have announced with confidence the 'telling' point that this bear market has lasted longer than it should have, and therefore is ripe for coming to an end. Talk about naivete! It's astounding how the singular event of the bubble bursting is being ignored or dismissed. [The emphasis is mine.] This statistical triumph equates run-of-the-mill bear markets which have come along every so often (consider 1984 or 1966, or even 1990) with this particular situation, which is by no means ordinary. Indeed, it is a once-in-a-generation bear, a century-straddling bear. To use an average of average bear markets to 'call' this decline sufficient is more foolish than grasping at straws as one loses one's footing at the edge of a cliff."
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Contrarian Chronicles
Whatever happened to letting the markets work?
There may be a knighthood for Greenspan in stage-managing a bubble, but there's nothing but pain for everyone if we tell lies to each other to keep it going. Plus, a market realist exposes five big myths of a bottom.
By Bill Fleckenstein
The National Zoo in Washington houses pandas, cheetahs and assorted slithering creatures. Pretty soon, it may welcome another species: the scapegoat. This one's trip will be brief, because home is currently the offices of Federal Reserve Chairman Alan Greenspan, just a few Metro stops away. But his fall from grace in the eyes of hurting investors will be immense, from once-infallible master of monetary policy to willful stoker of our stock-market bubble. That the former view still reigns in Footsie Land can be seen by his recent elevation to knighthood. For charity's sake, let's hope the title is not callable.
On a recent morning before the casino opened for business, the S&P futures were up 1%, dragging the other indices along with them. Then a skunk showed up at the garden party, in the form of Best Buy (BBY, news, msgs), which said its results would fall short of expectations and acknowledged that the retail environment had deteriorated in the last four weeks. Now for those who haven't been paying attention, Best Buy sells electronic doodads, something that heretofore the consumer has been buying more or less hand-over-fist. So the company's announcement has broad ramifications for everything in chip land, because if consumer electronics are under pressure, on top of the slowdown everywhere else, there ain't much hope for things to get better.
Back against the Wall Street
Turning to the news, and in the coals-in-their-stock-ing department, a few days prior to this past week's FOMC meeting, The Wall Street Journal ran a really wonderful headline called "Wall Street Wants Feds to Lower Funds Rate." (Only the absence of the subtitle "And Promises to Throw a Temper Tantrum if It Doesn't Get Its Way" stands between it and perfection.) The story therein proceeded with a quote about how if the Fed didn't do something voluntarily, it would be "forced to act by the markets." Sadly, it comes as no great surprise that Wall Street wants the Fed to bail out its positions, just as two weeks ago, the banks called for Brazil's rescue by the International Monetary Fund, which basically amounted to their own rescue.
It seems now that every time something goes sour, somebody wants to be bailed out. After all, that's what the implicit belief behind the doctrine "too big to fail" is, right? If you're big enough and you make enough mistakes, then you can't fail. You have to be bailed out. So that's sort of the rationale behind the big Money Center banks, it seems. Whatever happened to letting the markets work?
Look what the laissez-fairy brought!
Lately, I have been struck by the fact that when the stock market and economy were screaming, everyone seemed to be in favor of laissez-faire capitalism. You know, let the markets work, let's all be capitalists. And now that we're seeing its creative-destruction side -- which is a necessary component to the way capitalism works -- it seems to me that people have listed somewhat toward socialism.
Now they're appealing to the government, rather than letting nature take its course. I believe this is a very bad development. One of the things that make capitalism great is the destructive part of the cycle, because this sows the seeds for the boom. Booms and busts go hand in hand. By the way, Jim Grant does an excellent job of explaining this in his book "The Trouble with Prosperity," and I highly recommend it for any of you who'd like to learn more about the subject.
But back to my rant. The more that the government tries to prevent the cycle from playing out, the longer the process of finishing the work at hand. We had the biggest bubble in the history of the world, and the cleanup will be painful. That's why many of us were so outraged while the bubble was inflating, because we were sure of the pain that was to follow. Well, now the pain is upon us, and people should prepare themselves for a continued bout of difficult economic times and an unprofitable stock market. They should not allow themselves to get sucked in by all the wishful thinking that we see so regularly. The sooner we get on with the adjustment process, the sooner we can come to the end of the adjustment process.
In praise of purge-atory
So I think all the calls for government to save the day are wrongheaded. Perhaps once we let the markets clear, the government can do some things. I would much have preferred to see the markets clear a long time ago, and then the Fed could have gotten busy cutting rates, rather than cutting them before and trying to extend the boom. All we've done is make matters worse. I find the whole thing rather sickening. As I've said all along, I don't want bad things to happen, but bad things were preordained when we had a bubble. And all the meddling by the government and the Fed will only make things worse.
Actually, the minority view of the Fed's incompetence may now be set to encompass Main Street at large. That is suggested by a recent piece in The Washington Post called "Give Greenspan's Fed Its Share of the Blame" by William Greider. Some of the excerpts are just spectacular, so I absolutely must share them.
By now, everyone should have enough background for the article to really hit home. Greider begins:
"With New Economy icons falling all around, the next one may be the Federal Reserve and its hallowed chairman, Alan Greenspan. When anxieties subside and people examine what caused this debacle, they may grasp that the Fed's policies and proclamations are centrally implicated. Notwithstanding his opaque manner, Greenspan became a cheerleader for the financial-market optimism and implicitly ratified its excesses. The chairman failed to take the timely actions that would have instilled more caution in investors, believing as he does that markets can work things out on their own. Well, they have.
"This is exactly what you don't want from a Federal Reserve chairman. Central bankers are not supposed to be either optimistic or popular. They are supposed to be the national scold -- the economic regulators who worry constantly over what might go wrong and impose restraints before public opinion or the markets see any problem. In that sense, the Federal Reserve went off the rails in the bubbling 1990s. Though still celebrated for wise stewardship, the Fed failed its core function as the disinterested governor.
"How does Greenspan feel, for instance, about the mega-conglomerates in banking that he helped midwife, now that Citigroup (C, news, msgs) and J.P. Morgan Chase (JPM, news, msgs) are in the crosshairs of criminal investigations? The Fed chairman personally approved Citigroup's creation even before Congress made it legal by repealing the Glass-Steagall Act. He approved the 'firewalls' that were supposed to prevent the kind of scandalous conflicts of interest recently revealed. And did the Fed's own bank examiners not notice the funny-money lending to Enron?"
Finally, here is Greider's conclusion:
"But Greenspan's second great error was joining the celebration himself. He suggested that rising productivity had opened a glorious new era of ever-upward prosperity. His ebullient remarks sounded very similar to the self-congratulations expressed by the Federal Reserve in the late 1920s. Then and now, the Fed's happy talk excited stock-market plungers, large and small. . . . The point is, the nation pays a terrible price for allowing this cloistered governing institution to evade serious public scrutiny and tougher questioning. Financial markets always matter, but finance is supposed to serve the real economy, not the other way around. Until the Fed's distorted priorities are corrected, the U.S. economy will continue to experience deep troubles."
The debunk hunk
From distortion, it's just a short hop to myth, and that brings me to Justin Mamis' newsletter from a week ago, titled "Bull Markets are All Happily Alike, But Bear Markets are Each Unhappy in Their Own Way." I quote extensively, because I think it's a truly superb discussion of the various fallacies related to people's expectations of a bottom forming in the stock market. As many people know, Mamis has been chronicling the market action for close to 40 years. A keen student of human psychology, he understands how people's need to believe in myths persists, despite headlong encounters with a wall of reality. In the following excerpts, he offers a stunning dose of the latter, to debunk five commonly held myths for why a bottom is in place.
"Five fallacies: the oft-repeated 'amazing' overlay of the decline in the Nasdaq composite to the Dow's decline in 1974 (and occasionally to the decline in the early 1930s). This equates the technology sector in itself to the prosaic bigger-cap stocks in the NYSE -- a comparison less accurate and less useful than comparing apples to oranges, or even Eastern deciduous trees to Western evergreens. A comparison with the decline of the energy stocks from their peak in November 1980 -- when they represented whatever percentage it then was of the S&P 500 . . . comes to mind. In those days, the wild rise in oil stocks had made them approximately as big a percentage of the S&P as techs became during the bubble.
"The current fantasy is that because the Nasdaq composite is down approximately as much as those prior indices had fallen, the overlay automatically equates to 'this is far enough,' thus tempting many barbers (and dentists). This is a particularly dangerous fallacy, because it also fails to take into account the considerable remaining vulnerability of the admittedly small number of tech stocks -- the SOX components, in particular, but also Mercury Interactive (MERQ, news, msgs), Amazon.com (AMZN, news, msgs), Yahoo! (YHOO, news, msgs), Cisco Systems (CSCO, news, msgs) and Dell Computer (DELL, news, msgs) (the 'leaders') that still have room for big percentage declines.
"Similarly, the media (and strategists, too) have calculated the statistic they wanted to find --that the average length of a bear market has already been exceeded by this bear -- and thus have announced with confidence the 'telling' point that this bear market has lasted longer than it should have, and therefore is ripe for coming to an end. Talk about naivete! It's astounding how the singular event of the bubble bursting is being ignored or dismissed. [The emphasis is mine.] This statistical triumph equates run-of-the-mill bear markets which have come along every so often (consider 1984 or 1966, or even 1990) with this particular situation, which is by no means ordinary. Indeed, it is a once-in-a-generation bear, a century-straddling bear. To use an average of average bear markets to 'call' this decline sufficient is more foolish than grasping at straws as one loses one's footing at the edge of a cliff.
"The third 'fallacy' is not so much a fallacy as it is the extreme of self-indulgence. Fellow who should know better said on TV the other day, in defense of monetary policy, and thus earnestly trying to make the point that further Fed easing should be viewed as positive: 'Monetary policy works! . . . There have been only two times when monetary policies didn't work.' Only two! Imagine! He went on casually to cite those two exceptions: 'Japan in the 1990s, and the U.S. in the early 1930s.' How can someone who gets paid to 'think' about the market not hear his own words? That the only two times that monetary policy didn't work happen to be -- and not by accident, of course --the only two times a bubble burst, before this grandest bubble of all popped, splattering the bubble gum all over everyone's face.
"A fourth fallacy has only recently surfaced, but it has rapidly become ubiquitous: the public is being urged to hold on. 'If you get out now, you won't be able to get back in.' Why not? Is there a Wall Street law sort of like a 'wash buy' prohibiting a buy order at any time -- ever -- after selling out? People who get divorces from unhappy marriages are entitled to remarry, aren't they? Or have the 'experts' promulgating this stricture never experienced the one thing the market is guaranteed to do -- that is, it will fluctuate?
"After the 1974 bottom that they are now so devoted to making comparisons about, one had until July 1982 to get back in -- much of the time along the way at better prices, too. And if one waited patiently until the spring of 1982, one would have been able to identify --and thus get back into -- the consumer 'growth' stocks. Why are they talking this way, when we don't even know yet which stocks we would want to get back into? Speaking cynically, it sounds like a Wall Street conspiracy to keep the public 'in,' when one can tell by the slide in Charles Schwab's (SCH, news, msgs) stock that they know better than to stick around.
"The fifth fallacy is the eagerness to believe in volatility. They are trying to turn what looks like volatility, and is measured as volatility (the VIX stuff, which doesn't seem to be consistent enough, anyhow), and quacks like volatility, into some sort of bottom -- when today's apparent 'volatility' is primarily a lack of bids when prices are going down, and an absence of sellers when stocks are rising. If it is swinging at all, it is like giggling middle-aged couples exchanging room keys. Of course, the laws of Wall Street gravity may change, and old fogies may be unable to change with it, but until proven otherwise, all we know is that those major bottom-ending bear cycles that we can see on the charts (1932) or have experienced (1974) have developed via a drying up, an erosion, a whimper -- not on violence."
That eloquent note brings this week's Contrarian Chronicles to a close. I don't usually like to let other people write my column, but these two articles were so grand that I felt I just had to share them.
William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column for TheStreet.com's RealMoney. At time of publication, William Fleckenstein owned none of the equities mentioned in this column. Positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC on MSN Money |
