A market of extremes

By Doug Casey

It’s funny how the worm turns. Not even counting things like Tulip Mania and the South Sea and Mississippi Bubbles, financial history is replete with times such as we’ve just finished. Turnpikes were the subject of a mania in the late 1600s in England; canals were hot there in the 1790s (and later in the U.S.); in 1824-25, 624 prospectuses were issued for railroads in England. Telegraph issues were hot in the 1860s, radio and auto issues in the 1920s. Stocks ending in the suffixes “onics” and “ex” in the 1960s. And the biggest bubble in world history, the dot-coms, has only recently burst. We have yet to see the real fallout, in my opinion.

The $64 question, of course, is what happens next. As the numbers show, just because some air has come out of the bubble, and there is the odd comment in the popular press about how this may be a bear market, doesn’t mean it’s over and you should look for things to buy. People are still just feeling uncertainty. Before it’s over, they’ll run a much richer gamut of emotions, including fear, panic, resignation and total capitulation. As a bear market eats away at stock prices like a cancer, shareholders will go through the emotional stages of those who have been diagnosed with terminal forms of that disease.

The recent mania focused mainly on the Nasdaq where, for years, the average P/E lingered in the 20-1 area. Then, starting in 1991, it moved up to the 40-1 area. Then starting in 1997 it went parabolic, topping out at something like 150 in 2001. The pendulum, in process of reverting to the mean, will go far beyond it in the other direction.

I, of course, have long been quite conflicted about the market. On the one hand, the longest trend in history is the Ascent of Man, and that trend is not only going to continue, but accelerate. On the other hand, it seems clear that the U.S. is devolving almost daily into a far less free and far more oppressive country, with the U.S. government inducing most other governments to follow its lead. And that trend has gone hyperbolic since 9-11. That’s plenty of reason to be quite negative on the market. On the other hand, unless the U.S. really goes over the edge, entrepreneurs will continue to be driven to create wealth by founding companies and developing technologies, bringing their investors along with them. Back on the other hand, we’ve gone through a bull market of epic proportions, and bull markets are followed by bear markets as surely as night follows day. Companies can grow and grow, even while their stocks can go down.

They say that one’s take on the market tells you more about them than it does about the market, and it’s usually true. Which of the above factors (and I could make the list vastly longer) strikes you as the most important?

As for myself, I haven’t trusted this market for most of its long duration. When “Strategic Investing” came out in November 1982, I spent about a quarter of the book explaining why I thought the market was going to 3000 by the end of that decade. It seemed like an outrageous, even absurd, prediction at the time. Now, not so much later, it would be considered a catastrophe if the market declined to 3000.

Although the average investor doesn’t seem to have a clue about it, the fact is that markets go from being very underpriced to very overpriced, and back again, in cycle, regularly exceeding even the wildest projections on both extremes.


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Doug Casey

Doug Casey is the author of "Crisis Investing," which spent 26 weeks as No. 1 on the New York Times Best-Seller list. He is also editor and publisher of the International Speculator, one of the nation's most established and highly respected publications on gold, silver and other natural resource investments. Doug has made his subscribers millions with his in-depth research, right-on perceptions and contrarian attitude. Learn more about becoming a subscriber to the International Speculator. Read more of Doug Casey's articles here.