This last week I came upon something fascinating. I found three men who understood human behavior, its relationship to the stock market and its history. They each concluded on the exact same principle.
Charles Dow, known as the Father of Technical Analysis and created the Wall Street Journey and the Dow Jones Industrial Average:
“There is always a disposition in people’s minds to think the existing conditions will be permanent. When the market is down and dull, it is hard to make people believe that this is the prelude to a period of activity and advance. When the prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one, which make it unlike its predecessors and give assurance of permanency. The fact pertaining to all conditions is that they will change.”1
Hank Paulson, the US Treasury Secretary from 2006 to 2009, said this in the documentary film “Hank: Five Years from the Brink,"
“I get asked all the time, ‘What’s the likelihood of another financial crisis?’ and I begin by saying, it’s a certainty. As long as we have had markets, as long as we have banks, no matter what the regulatory system is, there will be flawed government policies. Those policies will create bubbles. They will manifest themselves in the financial system no matter how it’s structured and how it’s regulated. But the key thing is to have the tools and the political will to act forcefully to limit a crisis. Now a number of things that I was forced to do, that we were forced to do during the crisis made the problem worse beginning with big banks.“2
Bill White, Chief Economist - Bank of Int'l Settlements [1995 - 2008] from the film “Money for Nothing: Inside the Federal Reserve” had this to say about the 2008 Financial Crisis:
"When they got into it, the whole idea was that we'd soon be out it. So, the magnitude of what was to come down the road was completely discounted. And then, at some moment people realized they really over-extended themselves. So, that what looks like the Great Moderation has within it, the seeds of its own...of its own end."3
The point I wish to convey in this piece is simple; Bull Markets don’t last forever no matter how many talking-heads wish to convince you otherwise. History proves this, time and time again since the ancient BC eras.4
Due to hubris and reaching beyond our means, markets get over-heated and consequently fall back down to Earth. Markets have forever been a measurement of hubris [greed & pride].
History shows that upon financial crises, legislation is passed to create a solution to the current problem which creates a temporary boom with some greed and euphoria mixed in to create a bubble and voilà —an eventual & inevitable bust occurs. Unfortunately, none have been able to subtract the human element of hubris, greed and irrational exuberance from any reforms.
That’s why it’s difficult for me to understand why so many believe that the current state is not without its own flaws. What’s most apparent to me is that our current state of low interest rates is no different than it was from 2002-2008. There are plenty of people who understand this notion that low rates for too long precede a bubble— inevitably bursting due to debts mounting and someone can’t repay them or lies about their credibility.5
The Japanese Asset Bubble that burst in early 1992 was in part due to the preceding decade of lower-than-usual interest rates thus encouraging speculation that led to the bubble itself.6
Are there other symptoms to our current Bull market signaling trouble? Yes. But I’m not going to get into that because that’s not the point of this short piece.
History has taught me more about the future than any prediction by any current economic ‘expert’.
Check out the sources below and read up on some of the examples I listed from historical crises.
Jos. G. Sellery
1 Chartered Market Technician Level 1, page 8.
2 Film: “Hank: Five years from the Brink.” The quote was stated at the end of the film with 5:29 minutes remaining in the film.
3 Film: “Money for Nothing”. This quote was stated in the film with 27:56 remaining in the film.
5 Just a few examples in history that demonstrate this repetitive occurrence.
Lehman Brothers 2008
Japanese Real Estate Bubble 1989
Jay Cooke & Company 1873
The Knickerbocker Crisis of 1907
Scroll down to “Causes.” “Monetary Policy” is right below it and here is the quote from there:
“With the exception of the first discount rate cut, most of the discount cut was closely motivated by international policy to intervene in the foreign exchange market. Despite aggressive monetary easing by BOJ, the US dollar slid as much as 35% from ¥237/U$ (September 1985) to ¥153/U$ (February 1987). Consequently, the move by the BOJ was heavily criticized since such moves appeared to influence the outcome of the yen, a much neglected domestic factor. As a result of such move, money growth was out of control. In the 1985-1987 period, money growth had been lingering around 8% before being pushed up to more than 10% by the end of 1987. By early 1988, growth had reached about 12% per annum.
The Bank of Japan has also been criticized for its role in fueling the asset bubble. The movement of the BOJ to appreciate the Japanese yen rather than stabilizing the asset price inflation and overheating meant little could be done during the peak of the crisis. Despite the Bank of Japan stepping in to hike the interest rate by May 31, 1989, it seemed to have little effect on the asset inflation. Indeed, land prices continued to rise until the early 1990s.”