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TOP OF THE MANIA
SECOND
ANNIVERSARY
Record Highs
Nasdaq 5049 March 10, 2000
S&P 1527 March 24, 2000
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One of the most fascinating things
about the financial markets occurs shortly after a significant trend
reversal. No matter how shocking, embarrassing, dislocating, or costly
the reversal is, within two weeks there is no one who didn't make the
correct call.
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Our models are based upon the typical
behaviour of the stock market, credit spreads, yield curve, and
industrial commodities through the dramatic climax of previous new
financial eras.
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This served well on the way up as well as
during the transition to contraction.Within this, the model has
anticipated most of the big reversals, usually with enough time for a
CIO or portfolio manager to implement strategy. As each expected change
approaches, the ChartWorks independently confirms the likelihood of
change. This tactical advice is also used by stock, bond, and metal
trading desks.
For the reasons outlined above, this review
covers opinion going into the top and, in this regard, leading newspapers
included outstandingly articulated persuasions about the longevity of the
boom.
As the financial strains became visible at the end of each of the last
3 new financial eras, the editorial conviction was that nothing could go
wrong:
1873 – The U.S. was between
central banks, but the existing Treasury System was celebrated as superior
to a central bank in maintaining a financial boom.
1929 – After decades of
discrediting the instability of the Treasury System, the "new"
Federal Reserve System (1913) was celebrated as having unique powers to
eliminate the "old" excesses of "inflation" as well as
"boom and bust".
2000 – The Wall
Street Journal, on February 1, 2000,
dedicated a whole page on (only) a century of booms. The main observation
was that the last failure (1929) happened because the Fed then was "clearly
amateurish" and soaring
confidence was reflected with "It's
hard to imagine that happening again – we understand the business cycle
better."
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Our research noted that each previous new
financial era had lasted a decade and the mania blew out after 18
months of soaring interest rates and was followed by a multi-year
financial and economic contraction.
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Beginning in 2000, each weekly
publication included a countdown that March would be the 18 th
month. By February, our Boom
Indicators had reversed to a
warning and our allocation for a pension fund was downweighted from a
maximum of 60% equities to 40%.
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The attached, The
Internet – The New Technology,
which was published on January 11, 2000, described the financial
forces underlying each incredible tech celebration since the 17 th
Century. It concluded with: "Given
the dynamics of the leaders now and deteriorating breadth, speculation
in the stock market is approaching saturation. If it does, it would
again be anticipating the eventual saturation of another set of
wonderful innovations in communications that began with turnpikes in
the 1660s."
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Also attached is its barebones summary, New
Eras – Revisited And Updated,
which was distributed on Friday, March 10, 2000 – our regular
publishing day. It has been updated for continuity but with the high
expected for around March yet to be included.
April, 2000 (after the top): "The
irony is that the New York establishment in 1989 competently described the
action in Tokyo as a "bubble", but seems unable to make the same
diagnosis now. As with previous examples, participants find them too
prosperous for circumspection. As Lord Acton might have said, bull markets
tend to corrupt and great bull markets corrupt absolutely."
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