|Beware bearers of false security
April 23, 2000
Newspaper headlines speak of “panic” “meltdown” “staggering losses” and “free fall,” yet what did the world’s leading finance ministers say from their meeting in Washington, D.C.: “Everything’s going to be alright—there, there.” Well, not those exact words, but they might as well have been.
The headline of the Globe and Mail’s April 17 business section read: “Investors urged to keep cool—Finance chiefs voice optimism.” Can you afford to take these guys seriously?
Put yourself in their place: reality finally hits North America’s dangerously inflated stock casinos, wiping out billions of dollars, for a while at least. Do you concede that the technology-dominated bull market bubble has finally burst, and that prudent investors should stay on the sidelines until the shakeout is over, or do you offer platitudinous reassurances?
Since the world’s economy depends on investment, and since investors are nervous, you’d say just about anything, no matter how stupid, to ensure that money kept flowing into the stock casinos. The day after Bungee Tuesday (April 4), when the markets crashed but recouped most of their losses in the last three hours of trading, Finance Minister Paul “I wanna be PM” Martin said: “All the commentators that I’ve seen so far say it is a normal correction.”
Normal?! What definition of normality, does he subscribe to, and does he believe what he’s saying? Is it normal for stocks to lose 45 to 50 per cent of their value in eight days? Is it normal for stock index activity to resemble an electrocardiogram? What has happened over the past month is most certainly not normal. We’ve seen this kind of erratic behaviour before.
On Oct. 19, 1929, General Electric traded at US$339; on Oct. 24, $308; on Oct. 29, the day of the crash $222—a 10-day loss of 34.5 per cent. On the same days, figures for Zenith were: $36, $29 and $20, for a loss of 44.4 per cent.
The day after the crash, the market rebounded. GE rose 11.3 per cent to close at $247, while Zenith closed unchanged. Eastman Kodak, after fluctuating between $218 and $233 from Oct. 19 to 27, hit $181 on Oct. 28; $170 on Oct. 29; but then rose 12.9 per cent to close at $192 on Oct. 30.
October 1929 is known as the year of the Great Crash. It was in all the papers, and has become one of the watershed events of the 20th century. Yet according to Martin’s definition of normality, the crash wasn’t a crash at all; it was just a normal correction. Either the history books have to be rewritten or Martin is dissembling. In many ways he and other “voices of calm” sound a lot like an Oct. 29, 1929, Wall Street Journal editorial:
“It was a panic, a purely stock-market panic, of a new brand. Everyone seemed to agree that it was due to the fact that prices of some stocks were selling beyond respective intrinsic values and a correction has taken place in a number of stocks that show declines ranging from 50 to more than 100 points.”
The other troubling aspect to treating this crash as a normal correction, is the idea that such a drastic correction was necessary. The bull market that began in the early ’80s was going to run out of steam sooner or later, and so a correction of a few per cent or even a return to a bear market would indeed be normal. This is different.
The one question nobody seems to have asked is: why did managers of stock exchanges allow questionable tech companies to issue stock to a gullible, greedy public? When I was in the stock brokerage business, I learned that a company had to have a decent business record before it could be allowed to issue stock. Granted, investors are responsible for their decisions, but stock exchanges, especially the Nasdaq, did nothing to prevent these airy-fairy companies from skewing the markets, and so must be deemed responsible.
At this point, I come back to the thoroughly stupid “new economy/old economy” distinction, which goes a long way toward explaining the kind of mentality that allowed the crash to happen. So besotted are we with all things Internet—and “new”—that we jump aboard IPO bandwagons like so many lemmings. Unless stock exchanges undertake reforms to put the public good ahead of gambling, it would be more honest to print the stock tables in the sports pages next to the horse racing results.
Anything that Martin or any government official says about the stock markets is entirely predictable, and must be viewed as propaganda for public consumption. Buying into their comforting scenario, at the expense of one’s own skepticism and better judgment, could be hazardous to your financial health.
As the Globe reported Wednesday under the headline: “Stock markets soar again, but is it a ‘sucker rally’?”: “The mother of all sucker rallies, so far, came shortly after the 1929 Crash. In the Crash itself, the Dow Jones Industrial Average lost half of its value between September and mid-November of that year, but then it rallied by 48 per cent to reach 294 in April of 1930.”
In his book 1929—The Year of the Great Crash, William K. Klingaman said he didn’t know if another Depression was on the way, but he refused to be swayed by experts who blithely assure us that everything will be all right.
That’s the best advice anyone could give.