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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: AllansAlias who wrote (42788)	3/12/2000 7:18:00 PM
From: Haim R. Branisteanu	Read Replies (2) \| Respond to of 99985

History shows paths to market crashes, but lessons seem forgotten LARRY ELLIOTT THE GUARDIAN, LONDON In the spring of 1720, when all of London was clamoring for shares in the South Sea company, Sir Isaac Newton was asked what he thought about the market. "I can calculate the motions of the heavenly bodies, but not the madness of the market," the scientist is said to have replied. Newton should have heeded his own wise words. Having sold his stock in the company at 7,000 pounds sterling, he later bought back more at 20,000 pounds sterling at the top of the boom and went down for the count with other speculators when the crash came. Little has changed in the intervening 280 years. Common to every bubble is the ingrained belief that this time things will be different, that the rise in the price of an asset is rooted this time in sound common sense rather than recklessness, stupidity and greed. Take the crash of 1929. In Devil Take the Hindmost, Edward Chancellor records how Wall Street's elite convinced themselves that the rules of economics had been rewritten and that the market could support ever-higher share prices. John Moody, founder of the credit agency that bears his name, intoned in 1927 that "no one can examine the panorama of business and finance in America during the past half-dozen years without realizing that we are living in a new era." And Yale economist Irving Fisher declared a few weeks before the October crash that stock prices had reached a "permanently high plateau." Why was this? Simple, he said. The creation of the Federal Reserve in 1913 had abolished the business cycle, and technological breakthroughs had created a "new economy" that was much more profitable than the old. As share prices continued their heady rise, traditional methods of stock market valuations were abandoned. It did not matter that many start-up companies of the late 1920s were not making any money; what counted was that some day they surely would. So share prices were justified by discounted future earnings. Investors mortgaged themselves to the hilt to buy stocks in exotic companies from brokerages houses, which proliferated in the 1920s. One analyst warned that "factories will shut ... men will be thrown out of work ... the vicious circle will get into full swing and the result will be a serious business depression" unless sounder minds were brought to bear. He was, of course, ridiculed by market experts.