Wall Street Learns Nothing And Forgets Everything
That title quote is from the Dean of Wall Street, the imcomparable Benjamin Graham. Those are the most prescient words an investor can ever remember. Graham's 1949 book The Intelligent Investor is considered the best book on investing ever written. Who says so? Warren Buffett, the greatest investor of modern times and a man with more wealth than the GDP of 170 countries.
http://tinyurl.com/ganjd
So, why do I use this as the title of my post? First, it is important to understand Wall Street is always wrong eventually. That fact cost equity investors $13 trillion globally in the 2000 bubble. Secondly, because it appears Wall Street is currently experiencing a bout of amnesia. Thirdly, once again it appears Wall Street has not learned from their prior mistakes.
I've been writing about industrial commodity bubbles for six months and it reached a crescendo at the end of the first quarter when we watched commodities explode in a final blow off rally. A rally that was likely fueled by the incompetent move to raise rates by the Chinese central bank. Unfortunately, the Chinese central bank left the savings interest rate the same while raising rates. So, incredibly this act incented Chinese banks to wrecklessly increase their already foolish lending practices. (Loan out accumulated savings deposits with a larger profit spread.) So, as we found out a few weeks ago, lending actually exploded by over 31% year over year into already overheating real estate and industrial sector bubbles. The Chinese Politburo has totally lost control of their economy in a big way.
Historically, bubbles typically come in pairs. There's actually a rational reason for this irrational behavior. The first bubble happens at the end of a long cycle of tremendous wealth building and extreme levels of crowd enthusiasm. Once that bubble is popped, the wealth that isn't lost in the first bubble looks for a home in the most undervalued assets to create the second bubble. All that is needed to create this second bubble is cooperation by central bankers which we got by lowering rates to 1% post 2000. Think of it as locusts going from field to field, leaving destruction in their wake. Everyone is obviously aware of the first bubble, it was the equity bubble in 2000 led by large cap and large cap tech in the US. The second bubble has been in hard assets including oil, industrial metals, real estate, the associated asset stocks and equity markets in countries whose economies are driven by hard assets such as Russia, Brazil, Saudi Arabia, Dubai, etc. By the way, although it may be obvious from my statements, this is a massive global asset bubble.
So, let's play a game. It's a visual game. You get to guess what these charts are. The text is too small to tell but if you click on the charts individually, they will blow up to the point where you can read the company name, the dates and the prices. Care to guess? The answers are below the graphs.
All charts are courtesy of the wonderful site Prophet.net. You may click on the individual charts to get a larger view.
The first chart is the of the stock market bubble of 1929. The chart to its right is the Nasdaq 100 bubble in 2000. The next four charts are of the Brazilian Stock Market, Toll Brothers home builder, Phelps Dodge a copper producer and Titanium Metals. THESE CHARTS ARE FROM TODAY! (I cut off the last few months of Toll Brothers to show the six years of comparison. It is not a good sign that the stock is already down over 50%. My work argues a decline of 80+%) I randomly picked these charts. The charts from other industrial metals, miners, transports, energy stocks and real estate stocks are all very similar.
Oh, and what is the final chart? That is the price of the Nasdaq 100 after the bubble burst. So, which charts look worse? The ones from 1929 and 2000? Or the charts from 2006? As far as price appreciation, it's the 2006 charts. All charts are six years in length to give equally fair comparison. Notice how the stocks were languishing then exploded into the prices of today. Crowd mania. Group behavior. Stupidity intensified. So, are these bubbles? Or will things be different this time? Do these charts inspire confidence we are going to have a great 2006 for equities or a great economy going forward? How about 2007? Will these stocks continue to rise to the moon? Is it a goldilocks global economic environment? Watch these stocks or the other stocks in the same industries. They hold the future for equities and the global synchronized boom.
In closing, a few comments about bubbles and crowd psychology. Bubbles are a strange phenomenon that is the culmination of "group think". More detailed psychology behind bubbles can be read at the good doctor's blog **http://tinyurl.com/rodhx**. To borrow a few lines from the good doctors, my favorite behavioral drivers for such a phenomenon are:
@Vividness of concept- China is going to need massive amounts of copper to industrialize an economy with 1.5 billion people.
@Perception of scarcity-We are running out of oil. Uh, that's a joke. We need to start using coal because oil is disappearing.
@Magnitude of payoff-You can make more money reselling a house in Miami or San Diego than you can make working a whole year.
@Urgency-You've got to get in now before it's too late.
@Impulsive behavior-The icing on the cake that transcends generations as a human trait with no end.
This cycle, it's so bad that even some of the most brilliant minds on Wall Street have bought into the concepts driving these assets. Although many are now running scared after the belief in housing and metals is been threatened. Jim Jubak over at MSN MoneyCentral has actually written that iron ore and copper are now scarce commodities in this global boom. Uh, I guess he never studied geology. Temporary supply constraints due to lack of exploration? Well, yes I can surely agree to that. Scarce? I've got some swamp land for you. One gentleman, and a very bright man, told me that the supply of copper on the London Metals Exchange was only 2 days when copper was over $4 a pound! Look out silver, we have a new precious metal! Wow, I thought. That is quite a small supply. Until I told him the average was ten days supply when copper was languishing at 50 cents a pound. He obviously thought it would be something like six months or a year's supply. I've even heard many brilliant Wall Street advisors argue these commodities are going to run for a "super cycle" of 10-20 years. Psst. I have a secret for you. Quit believing everything you read or hear. It has never, ever happened and I can give you a sound economically based argument that it can never happen. Now, will hot money float from commodity asset class to asset class over a period of 10-20 years? Maybe from metals to grains to food or whatever? Sure, that will likely happen. That's alot different than the Wall Street group think that copper, as an example, is going to trend up in value for 20 years. There is ZERO historical precedence of that. Just a minor hint for those who believe such a statement. IT WOULDN'T BE CALLED A COMMODITY IF SUSTAINABLE PRICE INCREASES OVER DECADES WERE THE NORM.
Let's look at the brilliant Gustave LeBon's work taken from "The Crowd" written over one hundred years ago.
http://tinyurl.com/ee786
“In it’s ordinary sense the word ‘crowd’ means a gathering of individuals. From the psychological point of view the expression ‘crowd’ assumes quite a different signification. The sentiments and ideas of all the persons in the gathering take one and the same direction, and their conscious personality vanishes. A collective mind is formed, doubtless transitory, but presenting very clearly defined characteristics. It forms a single being. The most striking peculiarity presented by a psychological crowd is the following: Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think and act were he in a state of isolation. This very fact that crowds possess in common ordinary qualities explains why they can never accomplish acts demanding a high degree of intelligence. In crowds it is stupidity and not mother-wit that is accumulated.”
What did good old Forrest Gump say? Stupid is as stupid does.
http://tinyurl.com/ganjd
So, why do I use this as the title of my post? First, it is important to understand Wall Street is always wrong eventually. That fact cost equity investors $13 trillion globally in the 2000 bubble. Secondly, because it appears Wall Street is currently experiencing a bout of amnesia. Thirdly, once again it appears Wall Street has not learned from their prior mistakes.
I've been writing about industrial commodity bubbles for six months and it reached a crescendo at the end of the first quarter when we watched commodities explode in a final blow off rally. A rally that was likely fueled by the incompetent move to raise rates by the Chinese central bank. Unfortunately, the Chinese central bank left the savings interest rate the same while raising rates. So, incredibly this act incented Chinese banks to wrecklessly increase their already foolish lending practices. (Loan out accumulated savings deposits with a larger profit spread.) So, as we found out a few weeks ago, lending actually exploded by over 31% year over year into already overheating real estate and industrial sector bubbles. The Chinese Politburo has totally lost control of their economy in a big way.
Historically, bubbles typically come in pairs. There's actually a rational reason for this irrational behavior. The first bubble happens at the end of a long cycle of tremendous wealth building and extreme levels of crowd enthusiasm. Once that bubble is popped, the wealth that isn't lost in the first bubble looks for a home in the most undervalued assets to create the second bubble. All that is needed to create this second bubble is cooperation by central bankers which we got by lowering rates to 1% post 2000. Think of it as locusts going from field to field, leaving destruction in their wake. Everyone is obviously aware of the first bubble, it was the equity bubble in 2000 led by large cap and large cap tech in the US. The second bubble has been in hard assets including oil, industrial metals, real estate, the associated asset stocks and equity markets in countries whose economies are driven by hard assets such as Russia, Brazil, Saudi Arabia, Dubai, etc. By the way, although it may be obvious from my statements, this is a massive global asset bubble.
So, let's play a game. It's a visual game. You get to guess what these charts are. The text is too small to tell but if you click on the charts individually, they will blow up to the point where you can read the company name, the dates and the prices. Care to guess? The answers are below the graphs.
All charts are courtesy of the wonderful site Prophet.net. You may click on the individual charts to get a larger view.
The first chart is the of the stock market bubble of 1929. The chart to its right is the Nasdaq 100 bubble in 2000. The next four charts are of the Brazilian Stock Market, Toll Brothers home builder, Phelps Dodge a copper producer and Titanium Metals. THESE CHARTS ARE FROM TODAY! (I cut off the last few months of Toll Brothers to show the six years of comparison. It is not a good sign that the stock is already down over 50%. My work argues a decline of 80+%) I randomly picked these charts. The charts from other industrial metals, miners, transports, energy stocks and real estate stocks are all very similar.
Oh, and what is the final chart? That is the price of the Nasdaq 100 after the bubble burst. So, which charts look worse? The ones from 1929 and 2000? Or the charts from 2006? As far as price appreciation, it's the 2006 charts. All charts are six years in length to give equally fair comparison. Notice how the stocks were languishing then exploded into the prices of today. Crowd mania. Group behavior. Stupidity intensified. So, are these bubbles? Or will things be different this time? Do these charts inspire confidence we are going to have a great 2006 for equities or a great economy going forward? How about 2007? Will these stocks continue to rise to the moon? Is it a goldilocks global economic environment? Watch these stocks or the other stocks in the same industries. They hold the future for equities and the global synchronized boom.
In closing, a few comments about bubbles and crowd psychology. Bubbles are a strange phenomenon that is the culmination of "group think". More detailed psychology behind bubbles can be read at the good doctor's blog **http://tinyurl.com/rodhx**. To borrow a few lines from the good doctors, my favorite behavioral drivers for such a phenomenon are:
@Vividness of concept- China is going to need massive amounts of copper to industrialize an economy with 1.5 billion people.
@Perception of scarcity-We are running out of oil. Uh, that's a joke. We need to start using coal because oil is disappearing.
@Magnitude of payoff-You can make more money reselling a house in Miami or San Diego than you can make working a whole year.
@Urgency-You've got to get in now before it's too late.
@Impulsive behavior-The icing on the cake that transcends generations as a human trait with no end.
This cycle, it's so bad that even some of the most brilliant minds on Wall Street have bought into the concepts driving these assets. Although many are now running scared after the belief in housing and metals is been threatened. Jim Jubak over at MSN MoneyCentral has actually written that iron ore and copper are now scarce commodities in this global boom. Uh, I guess he never studied geology. Temporary supply constraints due to lack of exploration? Well, yes I can surely agree to that. Scarce? I've got some swamp land for you. One gentleman, and a very bright man, told me that the supply of copper on the London Metals Exchange was only 2 days when copper was over $4 a pound! Look out silver, we have a new precious metal! Wow, I thought. That is quite a small supply. Until I told him the average was ten days supply when copper was languishing at 50 cents a pound. He obviously thought it would be something like six months or a year's supply. I've even heard many brilliant Wall Street advisors argue these commodities are going to run for a "super cycle" of 10-20 years. Psst. I have a secret for you. Quit believing everything you read or hear. It has never, ever happened and I can give you a sound economically based argument that it can never happen. Now, will hot money float from commodity asset class to asset class over a period of 10-20 years? Maybe from metals to grains to food or whatever? Sure, that will likely happen. That's alot different than the Wall Street group think that copper, as an example, is going to trend up in value for 20 years. There is ZERO historical precedence of that. Just a minor hint for those who believe such a statement. IT WOULDN'T BE CALLED A COMMODITY IF SUSTAINABLE PRICE INCREASES OVER DECADES WERE THE NORM.
Let's look at the brilliant Gustave LeBon's work taken from "The Crowd" written over one hundred years ago.
http://tinyurl.com/ee786
“In it’s ordinary sense the word ‘crowd’ means a gathering of individuals. From the psychological point of view the expression ‘crowd’ assumes quite a different signification. The sentiments and ideas of all the persons in the gathering take one and the same direction, and their conscious personality vanishes. A collective mind is formed, doubtless transitory, but presenting very clearly defined characteristics. It forms a single being. The most striking peculiarity presented by a psychological crowd is the following: Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think and act were he in a state of isolation. This very fact that crowds possess in common ordinary qualities explains why they can never accomplish acts demanding a high degree of intelligence. In crowds it is stupidity and not mother-wit that is accumulated.”
What did good old Forrest Gump say? Stupid is as stupid does.
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