STUDENT OF THE MARKET RESEARCH
OCTOBER 10, 2002
The following piece documents the remarkably similar reasons why the bull markets of 1929 and 2000 were unique and should run forever.
Despite this reasoning and with remarkable fidelity, they both lasted for 116 months. That's from the top of the last business cycle with the old era of inflation to the euphoric climax of speculation.
BULLISH FOREVER
NEW FINANCIAL ERAS: 1990s AND 1920s
The enthusiasms in projecting most new financial eras seem to naturally group into four main reasons. The first is the new era itself, followed by the political shift from left to centre as CPI inflation diminishes with rejuvenation in Europe and opening of new consumer markets. Other points are the celebration of high technology and cost-cutting which were prompted by intense price competition in a disinflationary period. The end of the old era of inflation also provided the appearance of new found discipline in monetary policy.
The 1920s examples are from the well-known article by John Moody in the August, 1928 edition of The Atlantic Monthly. The examples from the 1990s were collected as they appeared in the Wall Street Journal.
NEW ERA
WSJ 1990's: " Most Wall Street forecasters
are still scrambling
to come up with explanations [for the dramatic rise]. Most people don't realize that there has been a
change in the nature of the U.S. business cycle.
WSJ 1990's: " Experts who watch the economy see reason for
reassurance
that several [longer] trends are coming together to fuel a global growth wave that is
unprecedented in size and scope. We've entered a golden age that will last for
decades."
MOODY 1928: " Nearly all of the accredited seers and economic
experts have been at a loss to explain it. The mistake
is to assume that times have not
fundamentally changed. They have changed
and we are in a new and remarkable
era."
POLITICAL SHIFT
WSJ 1990's: " The rejection of socialism by much of the developed
world has also led to greater opportunity for low-cost production from these countries."
MOODY 1928: " All the European calamity prophets have been
continuously discredited [and] there is a real possibility of a general renaissance developing
during the coming generation."
WSJ 1990's: " The move to freer markets, in countries where state
control stifled commerce in the past, is the best thing for prosperity you could possibly have."
MOODY 1928: " [O]ur own experiment in government operation of the
railways had gone far to slight the
propaganda of
public ownership. After
the
restoration of the railroads to their owners, a remarkable increase in the
speeding up of deliveries
developed."
HIGH TECH AND COST CUTTING
WSJ 1990's: " Dramatic enhancements in computer chips and
software are revolutionizing every productive activity in U.S. companies
Costs are dropping
rapidly
Companies are constructing factories where it makes the most economic
sense a cost cutting activity."
WSJ 1990's: " Technological innovation
creates new industries
and mutes business cycles."
MOODY 1928: " [D]eclining tendency in commodity prices
narrowed profit margins. A very direct impetus was thus given to the modern effort toward the more
scientific development of mass production and distribution and the cutting out of
waste."
REFORMED MONETARY AUTHORITY
WSJ 1990's: " Post World War II business cycles have [had] their
stops and starts coming from identifiable tightenings and loosenings [by] the Federal Reserve [but if
inflation has peaked] the Fed's vigilance has paid off."
WSJ 1990's: " Monetary austerity and fiscal restraint are bolstering
growth." " Most economists believe [less government economic stimulus] helps reduce inflationary
pressure."
MOODY 1928: " Another vital fact which had gone far to stabilize
fundamental financial and business conditions
was the founding of the Federal Reserve Banking
System
The old breeder of financial panics, the National Banking Law, which had
been a menace to American progress for two decades, had been replaced by a
modern, scientific reserve system which embodied an elastic currency and an orderly
control of the money market."
EXQUISITE IRONIES
Under mounting credit pressures usually associated with the top of the
great boom in 1873, the leading New York newspaper editorialized that the treasury system was
superior to a central bank in sustaining the boom. "True, some great event may prick
the commercial bubble, and create convulsions; but while the Secretary of the Treasury
[U.S. was at that time between central banks] plays the role of the banker
for the entire United States, it is difficult to conceive of any condition or circumstances which he
cannot control. Power has been centralized in him to an extent not enjoyed by the
Governor of the Bank of England. He can issue the paper representative of gold to the
amount of scores of millions."
However, experts today imply that only a central bank has the necessary
omniscience and power. The following, from the Financial Times in 1997, recorded the modern
view: "The classic danger is of an unchecked panic, resulting in bank collapses and a
sharp contraction of the money supply. Yet such a crisis can always be halted, since
there is no limit to the money a central bank can create."
DURATION
The discovery of long term
bullish reasoning and, in some cases, the closeness of the phrasing shows
that great financial booms are remarkably similar. This makes sense as all
six new eras followed an equivalent mania in tangible assets. Then
shifting political forces and investor preferences eventually created a
great speculation in securities. These typically completed in a dramatic
climax in the ninth year after the last business cycle top of the old era
of inflation.
