On Wednesday (October 17th 2000) the Dow Plunged more
than 421 points in the first half hour of trade. The Big Board went into free
fall from the opening bell, as CNBC reporters repeatedly stressed that small
investors should not be panicked into selling in this market.
The vast majority of inexperienced investors time
their market participation poorly. Record numbers of small investors have
been tempted into borrowing to buy stocks at high and inflated prices,
investors have been conditioned into riding out the waves.
Over the last few years investors have been
conditioned into riding out the waves. They have been told to hold on as
"the market will spring back and go on to new highs", which
admittedly to date it has done. People have been encouraged to buy on the
dips as "these prices are a buying opportunity and will seem like
bargains when the market comes back".
This October's fall on Wall Street was prompted by
continuing earnings warnings, consistently high oil prices and higher than
expected inflation figures in the US.
WAITING FOR THE
Margin Debt on stocks is now at record levels.
Record numbers of small investors have been tempted into borrowing to buy
stocks at high and inflated prices. As the price of the stock falls below the
margin level, calls go out to the leveraged investor. Just as transpired in
1929, if the investor defaults, and cant make the margin payment, the shares are sold out
from beneath him, creating further selling pressure. The more selling
pressure, the lower the share price falls, in-turn leading to more margin
calls, causing a debt induced selling spiral, which, in the past has been
followed by investor panic.
Commentators of this recent sell off on Wall Street
reminded us that we have seen this kind of market correction before;
"remember 1998", failing to tell their viewers the differences
between 1998 and today. In 98 there was not the same number of big cap stocks
in trouble. For example in 1998, IBM held up throughout the sell off. INTEL never lost anything like it did this
A collapse in an already over valued stock market
was averted in 1998 by the lowering of interest rates by the Federal Reserve,
further boosting money supply available to buy stocks. In the rising energy
cost and inflationary environment of today, this option will not be available
to the Fed.
Again CNBC stated the positive side of the day was
the massive volumes of shares traded, signaling that a possible bottom had
In the Crash of 1987, the real crisis was not so
much the evaporation of paper profits, but the inability of the financial
system to settle all the trades because of the exceptionally large volumes
involved. Many clearing houses and banks were unable to meet reserve
requirements, leaving the entire financial system in potential gridlock.
As history clearly demonstrates, the vast majority of
inexperienced investors time their market participation poorly, getting in at
or near the top (in the midst of the mania), and then ride it all the way to
the bottom before selling.
I first spoke to Franklin Sanders in 1997 while
shooting the documentary Millennium Money. When we spoke about the dangers of
this market phenomenon he said; " We are
talking about individuals here, not institutions. These people are not
seasoned investors, and by seasoned investors I mean people that have lived
through all the delusions of a bull market and gone all the way to the
bottom. You can read about it but until you have experienced it, until you
have seen your own self-delusion; you see the market top and all the
technical evidence is there, but you keep holding on, you say; no I think its going to come back, its got
to come back. The reason that happens is you start with this set of ideas in
your mind and its very
difficult to change those. It is even more difficult when all your self
interest is wrapped up in this set of ideas; all your treasure is wrapped up
in the stock market. How can you admit you have been wrong, and meanwhile the
market just keeps going down and further down.
another reason this market is so dangerous now. Look at the social change we
have been talking about, we are a people now that are motivated by greed.
When people look at their IRA's (pension funds) and they have gone down to
half, or a third of what they were, they are going to be mad, and they are
going to come out with fire in their eyes looking for a scapegoat."
Historically precious metals have been contra-cyclic
with Wall Street. The last big bear market in stocks was in 1973 - 1974. From
the market high in early 1973 to the low of late 1974, the Dow and S&P
500 lost nearly half of their value, while the high tech "Nifty
Fifties" tumbled more than 60%. Apart from a brief period in 1976, it
took 10 years, up to 1983, for the Dow to reach its 1973 highs. In the same
period, of early 1973 to late 1974, gold gained in excess of 150%, while,
between early 1973 and the market high of 1980, the precious metal gained an
amazing 1200%, a nice return for the few who had bought at the bottom and
sold near the top.
Today we are living in fast changing and volatile times. Leaving aside the
dramatic and disturbing social changes in the West in recent years, Middle
East tensions are increasing, oil prices continue to soar, the inflation
genie is again out of the bag and stocks are the most overvalued they have
been in all of history. Meanwhile gold and silver are the cheapest they have
been in twenty years.
Anglo Far-East Company