The bulls are back in town

Thursday, 4 November 2021 — Wollongong, Australia

[7 min read]

Dear Reader,

In 1999, James Glassman and Kevin Hassett published Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market.

For those who don’t remember, 1999 was the year before the market peaked. It was the infamous tech bubble. The bubble popped (on the Dow, at least) in January 2000. Stocks finally bottomed just over three years later.

This week, 22 years after the author’s prediction, the Dow reached its lofty perch of 36,000. So the book is getting a bit of publicity. Glassman even penned an op-ed piece for The Wall Street Journal, proving that the market, despite its best efforts, is yet to humble him.

‘The Dow Jones Industrial Average stood at 825.86 as trading closed on Nov. 2, 1971. It closed Tuesday at 36,052.63. That is almost a 43.7-fold increase. Do the math. If the Dow continues to rise at the same rate, 50 years from now it will be 1,573,865. In other words, Dow One Million.’

In 50 years, most of us will be dead. Glassman certainly will be. So I guess you can make these claims, based as they are on the iron laws of mathematics, without too much concern.

It’s a bit like a politician pledging net zero by 2050. They’ll be sitting back on a tax-payer funded pension by then, watching some other hapless chump deal with the problems they created and/or ignored.

I bring Glassman, his book, and article up because the iron laws of mathematics don’t take into account human emotion. It’s a fact Glassman readily acknowledges — without a hint of irony (my emphasis added):

‘In 1999 Kevin Hassett and I published a book, “Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market.” We thought the market would reach that milestone much sooner than it did. I think we underestimated human psychology. People are exhilarated by the vagaries of stock prices, but they are, at the same time, scared to death of losing what they’ve accumulated. The equity risk premium may be too high for a rational person examining history and economics, but it is a constant fact of financial life. And that’s a good thing! The high returns to stocks are the reward you get for conquering your fears and your greed.’

Glassman and Hassett published their book at the height of the dotcom boom peddling a new strategy for the coming rise in the stock market. And Glassman blames his wayward forecast on underestimating human psychology?

Ya think so!

I’m not having a go at the bloke for getting it wrong. Forecasting is a mug’s game. But investing is about the future and assessing probabilities, so we all have to make judgements about the future.

What I find interesting is that Glassman was obviously swept up in the hype of 1999. His book argued that stocks were significantly undervalued and would rise to 36,000 by 2002–04.

As far as wild, bull market predictions go, this was a doozy.

Now he’s telling us that making money in the market is simple!

‘Making money in the stock market is easy. Why do we make it so hard?

‘The best strategy for long-term investors is so obvious that I blush to write it down: Buy market index funds, preferably by making monthly automatic investments, and then forget about it. Certainly, those with shorter horizons or with the means to make riskier bets for higher rewards can do as they please, but for nearly all Americans the rules of the road are manifest.’

Making money in the market is not easy. Anyone listening to Glassman back in 1999 would know that only too well. That’s because we’re human. Not counting machines that can rationally see through every bear market to the charging bull on the other side.

Now he’s telling you to just plough your hard earned into an index fund and be done with it…

What he doesn’t say is that your long-term return is determined by the price you pay. Buying at the time of Dow 36,000 meant that in 2011, your capital still had barely moved. You would have only really started to generate decent returns in the last 10 years.

Likewise, going all in now on an index where ‘everyone’ is playing the index game, means you’re increasing the risks of earning very ordinary long-term returns.

The bulls might be back in town, but they’re selling you a story of past returns. In their eyes, past returns are an indication of future performance. That’s a completely wrong take at the bottom of a bear market and it’s a completely wrong take near the top of a bull market.

Let me say it again: the return you make largely depends on the price you pay. If you understand this, you understand more than most ‘professionals’ like Glassman.

One man who understands this more than any other I know is my good friend and fellow editor Vern Gowdie. Vern’s devotion to ‘the price you pay’ has been to his detriment over the past few years.

But using history as his guide, Vern is adamant that he’s right. His latest report highlights four potential ‘Code Red’ investments that could blow this market up.

I disagree with Vern on the scope of the bear market he is predicting. But I absolutely agree, when looking purely at the ‘can’t lose’ indices, markets are in dangerous territory.

As an antidote to today’s bullishness, I recommend having a read of Vern’s report, and having a long, hard think about it.

Regards,

Greg Canavan,
Editor, The Rum Rebellion

Dear Reader,

‘Modern society is hypnotized by socialism. It is prevented by socialism from seeing the mortal danger it is in. And one of the greatest dangers of all is that you have lost all sense of danger, you cannot even see where it’s coming from as it moves swiftly towards you.’

Russian novelist Aleksandr Solzhenitsyn

Little noticed in the Western media, last month, Russian president Vladimir Putin made an important speech in which he explained what was wrong with us:

‘We are surprised by the processes taking place in countries that used to see themselves as pioneers of progress. The social and cultural upheavals taking place in the United States and Western Europe are, of course, none of our business; we don’t interfere with them.’

‘Never interrupt your enemy when he is making a mistake,’ said Napoléon. But while Putin might enjoy watching us err…he continued with his helpful analysis:

‘Someone in the Western countries is convinced that the aggressive erasure of whole pages of their own history — the “reverse discrimination” of the majority in favor of minorities, or the demand to abandon the usual understanding of such basic things as mother, father, family or even the difference between the sexes — that these are, in their opinion, milestones of the movement toward social renewal.’

Win-lose all the way

We write today with no more knowledge of the proper relationship between the sexes than anyone else. But ‘abandoning the usual understanding’ is at the heart of the West’s financial problem.

And it’s something Russians can readily grasp, if not Americans. For seven decades, the Soviet Union required its citizens to do bizarre and unwelcome things.

Their whole economy — from top to bottom — was controlled by the Soviet elite. Ordinary families, meanwhile, often two or three of them crammed together, lived in drab apartments, sharing a single bathroom.

They wore drab clothes. They called each other ‘comrade’. They stood in line to shop at stores with empty shelves. They waited years to buy a poor-quality car.

They did what they were told, in other words…no matter how stupid it was.

One of the most remarkable features of the Soviet experiment was that it almost eliminated the politesse of a civilised society. The usual understandings, between merchant and customer, client and service provider, employer and employee…had been erased.

It was win-lose all the way…and the losers saw no reason to smile about it.

Been there, done that, said Putin:

‘Looking at what’s happening in a number of Western countries, we see with amazement our own practices, which we thankfully have left behind, hopefully, in the distant past.’

Out of whack

Here at the Dairy, our beat is money. There, we see most clearly how abandoning the ‘usual understandings’ is undermining growth and prosperity.

That is, usually you know who you can count on…and who you can’t. Your grocery stores will usually keep their shelves stocked…and your gas stations will keep the pumps operating.

You expect your reporters to give you the news straight…and your politicians to be crooked.

But when the most basic and important features of a free economy are skewed — such as the Federal Reserve’s artificially low interest rates — the whole system goes out of whack.

Some people get wealth they don’t deserve. Others are deprived of it. People stop smiling and go for each other’s throats.

For 18 decades (with a short interruption during the war between the states), Americans could depend on the dollar. It was connected by law to gold.

That’s why prices at the end of the 19th century were about where they were when the century began; a person whose great-grandfather saved a dollar in 1800 could enjoy the full measure of it right up until the Federal Reserve was created in 1913.

Since then, the dollar has lost about 98% of its purchasing power. And today, it is losing its value faster than at any time in the last 12 years.

Where the money goes

But where is the ‘value’ going? Where does it go when it ‘goes away’?

It goes to the deciders!

As we reported last month, the upper 10% own 89% of all publicly traded stocks.

So when the Wilshire 5000, the broadest measure of the stock market, went from US$22 trillion in March 2020, to US$47 trillion last week, the elite gained approximately US$22 trillion…in just 18 months.

Most of that money will probably go back whence it came in the next crisis. But today, it stands like a red star on the Soviet flag…a symbol of corruption and incompetence on a vast scale.

Great dividers

But money isn’t everything. Here’s Edward Luce of the Financial Times:

‘…my larger fear today is about the west’s general lack of deference towards the things that matter most, not least the institutions and habits of mind that protect us. These include an independent judiciary, a professional media, the culture of relatively good-faith debate, the lost habit of assuming those with whom you disagree are not evil, and the sense of larger belonging to a community with mutual obligations.’

Yes, Dear Reader, it’s those ‘limits’ I told you about last week…those habits and ‘usual understandings’ — not laws — that protect us.

And yet, they seem to be losing as much value as the dollar. Again, Putin is on the case:

‘The battle for equal rights and against discrimination is being turned into aggressive dogmatism bordering on the absurd, when the great authors of the past — such as Shakespeare, are no longer taught in schools and universities because they and their ideas are seen as backward. The classics are considered backward for their failure to understand the importance of the questions of race or gender.’

For the Bolsheviks, there was no more important question than economic class — proletariat or bourgeoisie? Bolshevik…or counter-revolutionary?

If you fell on the wrong side of that either/or, you were doomed. And great Russian writers, such as Boris Pasternak and Aleksandr Solzhenitsyn — either because they were critics of the Soviet Union or backward-looking romantics — were silenced.

Now, it is the US that has its rabid mobs, book banners, and dogmatic world improvers.

It has its Great Dividers, too — vaccinations, climate change, historic monuments…black or white, gay or straight, male or female, Republican or Democrat.

‘Abandoning the usual understanding’, it still puts one foot in front of the other. Where it is going, we don’t know.

But we don’t think we’re going to like it.

Regards,

Bill Bonner,
For The Rum Rebellion