first majestic silver

DOW 4000, Then the REAL Crash?

April 13, 1998

I have greatly enjoyed hearing from readers, especially the combative ones who have argued, in effect, that this bull market will continue forever. Herewith, a response to some of your comments and queries.

You predicted the Dow Industrial Average will eventually drop below 4,000. Isn't that a bit ridiculous with the index now hovering near 9,000?

It may be overly optimistic. More likely is that the Dow will fall below 700 at the trough of the next bear market. That is about where it stood in August 1982, when the bull took off.

What is the relevance of prices in 1982?

As stock market guru Bob Prechter points out, history's true manias have usually climaxed with prices falling to levels below where they stood when those manias began. This was true, for instance, of the Dutch tulip bulb craze that began in 1637. Prices for some bulbs rose from pennies to hundreds or even thousands of dollars in two years, then collapsed to near zero in a matter of months. Eighty years later, when the South Sea Bubble burst, the average share shed 98 percent of its value in just two years and many stocks continued to fall to zero. More recently, the 1929 crash eradicated 89 percent of the stock market's value.

Why do you think this is a mania rather than just a bull market?

One very compelling sign is the sizable number of corporate executives who have been receiving eight-figure bonuses and severance packages, even for mediocre or failing performance. It is possible for companies to pay them so absurdly well only because the coin of the realm these days is ... absurdly overpriced shares.

Any other signs of mania?

Never before in history have dividends been nearly so low. This implies that the vast majority of investors simply don't care about dividends, so confident have they become that hefty capital gains year after year will more than offset paltry yields. Also, the powerful rally of technology stocks recently into a fusillade of cautious earnings forecasts suggests not mere aggressiveness on the part of investors, but blind arrogance.

You look too young to have the maturity and knowledge required of a legitimate and credible financial columnist.

The picture was taken last year, when I was 47. I've been an ardent student of the market for 36 years, since 1962, when I received for my thirteenth birthday a hundred shares of stock in a hot telecom company. Since then I've spent twelve years in the trading pits of a major exchange, seven years as state editor for a daily newspaper, and have freelanced research on a regular basis to some highly reputable investment firms, one of them a $60 billion global player.

Why should anyone take your forecast of a stock market disaster seriously?

I would rest my credibility on another seemingly off-the-wall forecast that I made in Barron's and in a major newspaper about six years ago. I wrote then that the inflationary spiral many economists seemed to fear was all but impossible because much more powerful, deflationary forces were building in the global economy. At the time, deflation was loony-bin talk. But when Asia's economic troubles began to mount last summer, the word started turning up in the headlines of newspapers that hadn't used it there in more than 60 years. Recently it even passed the lips of Fed Chairman Alan Greenspan. I believe he has been aware for several years of the grave threat posed by a possible deflation. But he has been constrained by his position of power from using the word, fraught as it is with implications of bankruptcy and institutional collapse.

With such bearish views, how do you manage to sell a stock-market newsletter?

Little Black Box Forecasts is geared to market professionals and traders who seek to profit each day regardless of which way the stock market moves. It uses technical methods that shed no light on the question of when this bull market will end.

When will this bull market end?

I have no idea. But I must concede there is no basis for asserting that stock prices could not double or even triple from current levels before the party ends. This is what happens in a blowoff. Dow 9000 may sound like nosebleed territory, but that's what most investors must have thought in the late 1970s about the shares of Resorts International after they climbed from $2 to $50 in little more than two years. Who knew then that the casino operator's stock was yet to double, then double again, before plummeting back to earth?

What do you recommend for investors seeking safety?

The same thing I tell my mother: Sell some of your Microsoft shares and put the proceeds into certificates of deposit, non-numismatic gold coins and a few other investment vehicles whose performance has been relatively dismal in recent years.

Is there any way to hedge a stock portfolio?

I'd recommend the occasional purchase of put options on the Philadelphia bank stock index. Unlike the high tech sector, which makes and sells actual things, the banking business is virtually all smoke and mirrors. When the world awakens to the fact that their main business is crapshooting with derivatives, banking shares will fall with stunning speed.

If you had to make the bullish case?

Over the near-term, mortgage refinancings alone have created enough household liquidity in the U.S. to keep this bull market alive. Longer-term, if the Asia crisis passes quietly -- a possibility I strongly doubt -- it could keep the global bull market going for another ten years or more. And there's one more wild card: If the Social Security system starts moving toward privatization this year or next, it would be very bullish -- though ultimately dangerous, since all that cash could conceivably push stocks to galactic heights.

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.
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