WHAT WE LEARNED FROM 2018
coffin. And when he sees Humpty Dumpty sitting on the wall, he knocks him off. The longer and higher the bull market goes, the less likely it is to continue. Why? Because there are feedback loops and automatic stabilizers that bring an out- of-whack market back into whack. High prices bring low ones. And vice versa. And a boom built on stimulus gimmicks casts a particularly dark shadow; it always ends in a bust. Mr. Market, of course, can do what he wants. Steel, concrete, and cabbages may be predictable. He’s not. When something is widely expected, it usually doesn’t happen. Because if you knew in advance what was coming, you would race ahead. It would be like knowing where you were going to have a fatal accident – that would be the last place you’d go! And that’s why investor sentiment indicators are only useful as contrary indicators. When investors are extra bullish, it’s time to get out. When they are extremely bearish, it’s time to buy. But you don’t have to trust surveys to find out – just look at the prices. Real sentiment moves with the ticker. And currently, stocks are very expensive. In terms of Shiller’s P/E ratio, which looks at share price compared to the past 10 years of earnings, stocks are almost exactly where they were in 1929. Tobin’s Q ratio, the ratio of market value to a company’s asset replacement cost, is 1.08.
interest rates is so destructive. The big players game the system. They know what to expect... so the risk of speculating goes down. And with the inflation-adjusted rate of interest on Fed Funds below zero, the cost of speculating goes down, too. No wonder the amount of speculating goes up! And since most speculating is done with borrowed money... the amount of debt goes up. Then, like an overloaded ferry, the extra debt weighs down the economy. Riding low in the water, there is still no guarantee the boat will sink. But watch out. Like an overloaded ferry, the extra debt weighs down the economy. Riding low in the water, there is still no guarantee the boat will sink. But watch out. BACK INTO WHACK We’ll wait along with everyone else to see what “Mr. Market” will do. But we’ll keep an eye on the weather, too. There are patterns, trends, and moral lessons that make some outcomes more likely than others. It’s not like flipping a coin, where every flip is independent of the last one. A 20-year-old man may want a refrigerator with a lifetime guarantee. But a 90-year-old can save his money. Even a cheap icebox will probably last longer than he will. And Mr. Market is a cynic and a spoiler. When he smells flowers, he looks for the
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January 2019
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