CYCLICAL VS. LINEAR THINKING
...this is a nice opine on the very subject & key concept that "some" of us have been trying to drive home of late.
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DANGERS FROM LINEAR THINKING
Robert B. Gordon
04 Aug 2001
Most people understand and accept natural cycles when they are measured in days, weeks and months. But they fail miserably to appreciate the much longer natural and man-made cycles that come along at infrequent intervals to cause world wide physical and economic devastation. Everything in our universe is in a birth, growth and death cycle. We have weather cycles, demographic cycles, business cycles etc. We also have profound, deeply seated social and emotional cycles, all interacting to effect virtually everything we do. Unfortunately, the record shows that people in every walk of life usually think of extrapolating whatever is current along a straight line into the future. That may work for a few months but can be deadly when extended to several decades.
We are not discussing problems of our uneducated masses, for this myopia extends to all levels of education and power. The ability of our leading economists to predict the next recession has been reported to be only half as good as tossing a coin. Recently we have been treated in the media to the quotations that Yale Professor Irvin Fischer uttered just before the 1929 crash. His claims of a "new era" of profitability and a "high plateau" of stock prices are just as fresh and applicable today. They sound just like Alan Greenspan's claims for the computer enhancement of productivity in our "new era" of the '90s.
The history of civilization tells us that bad things do happen. Empires and dynasties have risen, flourished and disappeared. There are usually warnings in advance, e.g. the biblical destruction of Sodom and Gomorrah or Noah's great flood. Very few in the crowd jeering the construction of the Ark took heed and escaped. We have a beautiful repeat of this lesson in the years leading up to the March 2000 crash. Bullish sentiment in Wall Street reach the point where all bearish comments were stifled. When the crash came, there was not a single bearish voice to sound an alarm.
How many unthinking people in this country have lost homes to fires and floods and then rebuilt again on the same foundations, ignoring the possibility of another occurrence? Of course some very unwise government insurance policies have played a large role. Unfortunately, the large number of natural disasters have been accompanied over the centuries by a series of major man-made disasters. The resulting stories of human folly have been recorded and might have served as a useful warning if they had been read.
In Holland, in the 1630's, the entire country was drawn by human greed into an enormous Tulip Bulb mania where people mortgaged their homes to buy a single bulb. In London from 1720-22, there was a huge Ponzi scheme, called the South Sea Bubble, which entrapped the King of England, the Mayor of London and Sir Isaac Newton, all of whom lost heavily. Every company on the London exchange went broke in this disaster. In 1929 before the Great Crash, Winston Churchill was visiting New York and was immediately swept up in the final market mania, reportedly losing 20,000 gold pounds.
Most people, as individual thinkers, can make at least some preliminary assessment of threats to their personal safety and livelihood. But history teaches, that when individuals join a crowd of others in a common fear or greed situation, they lose all ability to think independently. This is why the world has always had manias and why now , with the advantages of superior communication, the entire U.S. with help from abroad has grown the world's greatest ever mania - so big that it is actually 3 manias joined into one.
The Great New Era of the late 1990's revolved around the Internet which has now taken its place among dozens of earlier New Eras involving canals, railroads, telephones, autos, television etc. As in all previous cases, the Internet stocks roared to a peak and fell as the bubble was pierced. Losses this time are in the trillions of dollars but the full collapse may, according to objective experts, have much further to go.
The 20th century saw the two greatest stock manias up to that time (1) the 1929 crash and 10 year Great Depression and (2) the 1989 Japanese crash, still on going after 12 years with the market down from 39,000 Yen to less than 12,000. But the U.S. crash that started in March 2000 has opened a bigger and much more difficult problem. Like all previous manias, history tells us that "the bigger the boom the greater the fall." The data of all completed manias shows that prices at the final bottom were below the starting level. This fact should give food for thought to those who are currently looking for the bottom. History shows that, when it comes, it will be some years away and thousands of points lower.
As an investor for 61 years and, very active in the Go-Go 1960s and the 1973-74 bear market, I have experienced the after effects of what we now know was a very minor mania. When this one bottoms, Wall St. will be a disaster area and no one will be interested in buying stocks or funds.
The entire World is now involved as a result of a decade-long explosion of corporate and personal debts. Low interest rates and easy credit fueled a massive corporate capital spending boom in Europe and the U.S. It also fueled a huge real estate boom including everything from baseball parks and golf courses to residential homes both large and small. We expect to see many derelict building skeletons in our major cities when this bear is over.
Although the correction of the stock bubble has begun, there is yet little sign of a slowdown in residential real estate construction and mortgage refinancing. But as we know, nothing grows to the sky and a serious economic contraction lies just ahead. Eventually this mania will go into the history book and sometime later in this century, a new mania will form when memories of this one have grown very dim.
Our leaders in Washington and Wall Street must accept full responsibility for the creation of this gigantic bubble. They must learn to permit small market corrections to occur periodically so that the really big ones do not happen. For this to occur, they must learn from the past and promote small cycles each decade rather than killer cycles twice a century.
Will Americans and the citizens of other countries learn to avoid linear thinking and adopt a cyclical point of view? It's a good question but can only be answered by the youngest readers of this piece some 50 to 70 years from now.
Robert B. Gordon
Sun City West AZ
rgordon145@aol.com
August 4, 2001
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