> That's a good point about the post-9/11 recovery. But I still suspect > the indirect consequences of 9/11 played a role. From the graph, it > looks like the post 9/11 recovery coincided with the surprisingly easy > victory over the Taliban.
No, I remember the market bottomed on 9-21, just 10 days later (and remember the market was shut down for 4 trading days right after the attack), and the market immediately began to surge vigorously back up. Traders with long memories began buying as soon as the market reopened, because similar shocks, because the markets have always rebounded quickly in the past from similar shocks, such as the Pearl Harbor attack or the assassination of President Kennedy. I well remember another distortion that happened right after 9-11: gasoline prices immediately shot up to ridiculous levels at many outlets--no danger posed to oil supplies on 9-12 of course, just lots of merchants (but not all) trying to exploit a general climate of fear. I don't know who to despise more--the greedy gasoline merchants, or the unthinking dupes who were stupid enough to actually buy at those elevated prices. The latter are probably the same people who believe there's a social security "trust fund," that every up and down wiggle in the GDP is caused by decisions of the US President, or, in the northeast, that everyone with a southern accent dresses in white sheets and pillow cases for their barbeques. And it's plausible that part of the > subsequent decline stems from the growing realization that further > military action would continue after the Taliban's defeat. More likely, part of the decline comes from because the markets are uncertain as to whether there will be further military action. After the 10% correction following Iraq's invasion of Kuwait in 1990, the market took off like a rocket as soon as the US began dropping its bombs on Iraq the following January. It is not so much war as uncertainty that rattles the markets. The markets were also weak during the weeks following the election of 2000, when no one knew for sure who the next US President would be. There were very vigorous rallies in July (which quickly gave all the gains back) and, I think, Ocotober of last year. The latter rally was driven heavily by hedge funds buying heavily into telecom and other tech-related stocks with a very dim outlook. As soon as these stocks show signs of weakness, they will dump them just as quickly (maybe they have already started--I'm not following this sector much these days). Insiders in these stocks have been overwhelmingly (over 90%) sellers even as the price was driven up by hedge fund speculation. Many small investors, who held steady during events that could have turned into market routs on a few occasions in the late '90's, are sitting on the sidelines nursing their cash. Until their confidence returns, none of these bear-market rallies will be sustainable--they're known in the trade as "suckers' rallies," although this shoe only fits if you don't know when to get out again, and I would guess that most small investors don't. Since 2000, this has been a trader's market--a market in secular decline punctuated by fierce but brief rallies which soon give back all their gains. About 20 years ago, Harry Dent wrote a book called _The Great Boom Ahead_. Based solely on demographic projections, he predicted the course of the market with surprising accuracy, including the recent weakness (although he wrongly anticipated this weakness would be accompanied by temporary inflationary pressures). He predicted the market would recove in 2003 and enjoy "smooth sailing" through 2008. After 2009, he thinks the US economy will fall off the cliff into a depression. He makes this assumption solely on demographic projections (which may have since been altered by heavy immigration, I don't know), although I think the retirement of the baby boomers (demographically, the boom began in 1943), reducing surplus social security revenue, drawing down their 401K's and IRA's, and switching many of their investments from stocks to bonds, will be enough by itself to precipitate an economic crisis at some point. Oh yes, I seem to recall a matter which I never got around to replying to in a previous thread (I'm bad about that) concerning someone's doubt that aging boomers would switch their investments from stocks to safer investments like bonds. It has long been the practice for financial advisors to tell their clients to put more of their money in bonds and less in stocks as they get older. One popular rule of thumb among such advisors is that the amount one invests in stocks should be 100% minus his age. If we enter a particularly bad market after 2008, I expect many boomers will shift 100% of their money into high grade bonds. By the way, I read somewhere (I think it was the PIMCO site) that bonds outperformed the broad market averages for the decade of the '90's. This sounds surprising, but the first half of the decade stock prices were weak. Another factor affecting the economy several years from now is that world oil production is predicted by many petroleum geologists and oil industry exec's (such as the retired former president of Dutch Royal Shell) to peak *about* 2010 and enter a permanent decline. This same phenomenon happened in the US in 1970 (and was accurately forecast way back in the 1950's). The rate of new oil finds peaked in, let's see, I think it was either 1962 or 1964, and has been falling ever since. The oil and auto industries are working on substitutes--mainly hydrogen fuel cells--but the transition will not be smooth. Since 1973, sudden oil price spikes seem to be invariably followed by recessions, so this is another reason to expect some very rough times after 2008 or so. Another negative effect on the economy around then is that, beginning in 2008, demographic shifts from immigration policy is predicted by political analysts to make it extremely difficult, if not practically impossible, for any Republican to win a Presidential election. Democrats will also begin to retake and ultimately dominate Congress, especially the lower house where all tax and spending bills originate. At that point, redistributive economic policies will likely come back in fashion. Somewhere in all this, I expect foreigners (internationals? are we allowed to say "foreigners" anymore?) will probably sell off their US investments and look for greener pastures elsewhere, perhaps the Far East. I think lots of readers will pooh-pooh this forecast and say one can't predict the future this far out. Maybe they should print this email and put it in a safe but memorable place for the next 20 years. Then they can email me again and say, "I told you so"--or not. [snip] > > > This is a straw man. I was arguing that the size of the bubble is being > over-stated, and the importance of standard unforeseeable random shocks > understated. > -- > Prof. Bryan Caplan Yes, but some of us disagree. I, for one, think the reverse is true--the impact of random psychological shocks is overstated, the secular trend was correcting by to normalcy a market that was unrealistically overvalued, and that trend would have continued without the random shock from which the market soon and fully recovered in any event--before proceeding lower again. I also disagree with the adjective "random" to describe 9-11. It became obvious to me fairly early in the '90's that resentment against US foreign policy had made Americans overseas the preferred target of terrorists. Then in 1998 two US embassies were bombed by Al Qua'ida, and syndicated columnist Pat Buchanan wrote a column predicting a major terrorist strike would sooner or later come to American shores. Muslim terrorists had already attempted (and very nearly succeeded) in blowing up the World Trade Center in 1993, and there were reasonably credible reports that the OKC boming in 1995 included an Islamic connection--of course, the Feds ignored this evidence until after 9-11, when they acknowledged it again. All said, the event itself of 9-11 should have been a total surprise to the markets. Even the date was apparently not random. I read somewhere that it was the anniversary of Ariel Sharon's massacre of Palestinian refugees at the Sabra and Shantilla refugee camps (no doubt my mention of this event will earn me another round of "anti-Semitism" accusations from the usual crowd), but the article did not say whether the anniversary was according to the Gregorian solar or Islamic lunar calendar. At any rate, the market should have been factoring in the danger, but it wasn't. It was priced for perfection due to irrational euphoria a.k.a. "bubblemania." Someone studied every discernable bubble (defined as the market overshooting its historical P/E's by a certain amount) for a fairly long ways back. He found a lot more bubbles by his definition than I expected (I have forgotten the exact number though) and found that everyone of them overcorrected to the downside. We will see whether history repeats this time, or whether demographic-driven market euphoria takes hold again and lifts the market to new all-time highs in 2008. In the short term, I anticipate a sharp rally when the outcome of the US-Iraq standoff becomes clear, regardless of whether it is settled peacefully or by war. We'll see. ~Alypius
