I recently came about this stunning feedback (paraphrased):
I’ve learned not to be nervous. Because each time after the stock market goes down, it always bounces back to its previous levels!
Wow.
Observations:
Stock prices have lost its functionality. The role of prices has been diluted and denigrated to mere numbers*! And since numbers have become the ONLY concern - all other things like valuations and risks have been damned to inexistence – hence, numbers can only go UP!
See, FREE LUNCHES via rising stocks have already reached an ENTITLEMENT status!
* unlike numbers in various gambling formats (similar to those displayed on the colored jerseys of jai alai pelotaris, or saddle towels of horse racers, or on dices) prices embed underlying financial and economic functions
Here, numbers are seen as a function of the recency bias or the rear view mirror syndrome. Numerical patterns have thereby been interpreted or extrapolated as “PAST performance GUARANTEES future outcomes”!
Yet a showcase of past performances…
In two major cycles (the martial law cycle 1970-9 and the EDSA I cycle 1992-1997) over the last 50 years, many have been trapped into such ‘market always bounces back’ outlook. That’s because such popular emotionally driven myths have been debunked with staggering consequences!
When reductio ad absurdum has been rampantly employed to justify or rationalize ticker tape movements, it is a reflection of an entrenched deep-seated faith nestled on complacency!
Today’s actions may not be a total mania in terms of the depth in public participation**. But when stocks have been acclaimed as having seemingly “reached a permanently high plateau” (Irving Fisher 1929) resonant of convictions from a religious creed, then euphoria or mania is at hand for those involved.
An increasingly tunneled vision means that 1995-1996 high PER ratios, market cap/GDP at close to 1996 and vacant space troubles for malls will have no impact or ramifications to the prices and the economy at all!
Wonderful! You see, this time MUST be different!
Notes
**the best observation of the depth in public participation would be in the number of attendees in stock market seminars and the number of actual new accounts opened. If there would be a stampede by retails to join, mania is spreading
Recall that in the two previous cycles (in 1970s and 1990s), public participation was even so much smaller than today. But the dearth of participation didn’t stop the unraveling of inflationary mindset.
*** It’s a TRUISM that markets return to their previous levels. However, such goes contrary to the present boom boom boom entitlement mindset.
Just take a look at the two previous secular cycles.
After a lengthy consolidation at the apex, stock prices REGRESSED almost to the levels which served as its springboard or its genesis. The evisceration of practically almost ALL of the gains had signified a précis of Newton’s Law in motion.
As the legendary Sir John Templeton admonished: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
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