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To: jach who wrote (31258)	12/26/1998 11:54:00 PM
From: KeepItSimple	Read Replies (2) \| Respond to of 164684

If you only read one post on SI, read this. "In a few months I expect to see the stock market much higher than today." Those words were pronounced by Irving Fisher, America's distinguished and famous economist, Professor of Economics at Yale University, 14 days before Wall Street crashed on Black Tuesday, October 29, 1929. A financial collapse has never happened when things look bad. This is another lesson of history. On the contrary, macroeconomic flows look good before crashes. Before every collapse, economists say the economy is in the best of all worlds. Everything looks rosy, stock markets go up and up, and macroeconomic flows (output, employment, etc.) appear to be improving further and further. This explains why a crash catches most people, especially economists, totally by surprise. The good times are invariably extrapolated linearly into the future. Is it not perceived as senseless by most people in today's euphoria to talk about crash and depression? The political mood is also optimistic. In November 1928, Herbert Hoover was elected President of the United States in a landslide, and his election set off the greatest increase in stock buying to that date. Less than a year after the election, Wall Street crashed. Similarly today, with a Democrat in the White House and Republicans in control of Congress, the perception is that they ensure the continuation of the best of times. As a result, the November 1996 election set off the greatest increase in Wall Street to date. Experience also shows euphoria is rampant before the crash. "This time is different" is euphoria's motto, even though signs of disequilibrium appear, warning of danger ahead. In 1989, for example, price-earnings ratios of Japanese stocks climbed to ridiculous levels as the Nikkei index soared to 39,000. Despite numerous warning signals, many pundits and analysts continued to favor Japanese investments, arguing that Japanese accounting systems were "different" and that central banks now know how to keep an economy depression-proof. "This time is different," was the rallying cry. But, as we now know, the Japanese stock market subsequently collapsed by 60%, and a virulent and protracted recession ensued. Psychologists refer to this phenomenon as "cognitive dissonance," which pertains to the denial of the warning signs, the rationalization of risky decisions, and inaction. We do not want to see, we do not want to know; we rationalize and justify the unjustifiable. Buyers of stocks confidently expect to sell to someone else at an even higher price. If they cannot, they lose. In financial circles, this is called the "Greater Fool Theory." And again history teaches us that this theory makes its grand entrance, time and time again, before a crash. .

To: jach who wrote (31258)	12/26/1998 11:55:00 PM
From: KeepItSimple	Read Replies (2) \| Respond to of 164684

Part two: It is said that Henry Ford was taking the elevator to his penthouse one day in 1929, and the operator said, "Mr. Ford, a friend of mine who knows a lot about stocks recommended that I buy shares in X, Y, and Z. You are a person with a lot of money. You should seize this opportunity." Ford thanked him, and as soon as he got into his penthouse, he called his broker, and told him to sell everything. He explained afterwards: "If the elevator operator recommends buying, you should have sold long ago." Euphoria leads to those unacquainted with financial markets to enter in the last leg of the boom. And that's where they lose everything. About 88% of all the money now in mutual funds has arrived there in the past 6 years. These new investors have never been through a correction of even 10%. Most new entrants into the stock market are totally inexperienced. Overconfidence, excessive optimism, and euphoria lead to overindebtedness, unwise investments, carelessness, fragility, and a final collapse. These investments appeared justified in a context in which everything is going up and every mistake can be corrected and any indebtedness can be subsequently handled with higher incomes and wealth. Often these expected increases are paper-wealth increases and are not realized before the crash--especially for the latecomers to the stock market who join when all prudence advises staying away. Wall Street is today ending the last leg of the great bull market. The coming collapse will be worldwide, because most stock markets are synchronized with Wall Street. Even those markets in a different phase, such as the Japanese stock market, will experience a dramatic fall. On the other hand, many stock markets are situated, as Wall Street is, at the end of the last phase of the bull market. This is true for stock markets in Germany, the UK, France, Switzerland, the Netherlands, Spain, Canada, Mexico, Brazil, South Korea, Philippines, Australia, India, and many others. As these markets are synchronized in the same phase as New York's, they will soon begin to fall in a worldwide collapse of stock markets. This collapse will anticipate, as the 1929 crash did, a severe contraction and depression in the world economy.