Looking Past the Holidays and Into "The Void" Internet Mania, Rampant Stock Speculation will End

December 29, 1998

As the U.S. stock market stages is proverbial so-called "Santa Claus Rally," we can peer through the surface at what might lie ahead for investors after the holidays. For those who have been reading our analysis, some if what lies ahead should come as no surprise: the Internet Stock Mania--like past manias we have cited--will die soon, as will the end-of-year motivation for mutual fund and money managers to try to catch up to the performance of the benchmark S&P 500 index against which such professionals are measured. Money managers and funds have been underperforming the market for a few years, now--since 1993, to be sure.

In fact, we have included in our analysis for the month of December the fact that mutual funds came into this month holding a very high level of cash --9.8% of assets--and that a somewhat irrational investment environment--complete with rampant speculation in Internet stocks of the kind not seen since 1929 or 1873--is occurring. Not coincidentally, those two years saw a mild rate of deflation in wholesale prices in the U.S., a situation that worsened dramatically in the years following the rampant speculation in the stock market (see our Gold In A Deflationary Economy report for analysis of each inflation and deflation cycle since the year 1560). In both cases, a severe bear market and a "washout" of the incredible speculation ensued in the months and years that followed.

While at this point I always add that this is not 1929, nor is it 1873--it is 1998, I can also say that history does not repeat itself--it just rhymes, and this time around, once again, it rhymes pretty well.

So, while investors are caught up in the "greed" end of the fear/greed spectrum--to the point of employing more of a gambling strategy than an investment strategy--we take a look past the holidays and into the future in our upcoming annual forecast report series, this one entitled Forecast '99: Investing During The Void. I have spoken recently at international and domestic financial conventions about the fact that "The Old" is dying and will be replaced "The New," and between the two lies "the Void," and that forms "the rest" of what lies ahead after the new year.

Although writing about investing in "the Void" sounds sensationalistic and, in the least, ominous, it really is not. It is not a doomsday situation or forecast, but merely a fairly typical cycle in the investment markets that has occurred in the past.

To be more specific, evidence is mounting that The Old is dying. The old monetary system is dying, for example, as evidenced by the monumental event marking the introduction of the new single currency in Europe on January 1, 1999, the euro, and by the global financial turmoil and collapse of the currencies of many economies during the crisis of the past 1 1/2 years.

Evidence of the "Old" dying also is apparent in the cycle of debt repudiation, called the Kondratieff Cycle, the latter stages of which is marked by deflation, default, currency debasement, and the transition from paper assets (stocks, bonds, paper currency) back to hard assets. This is, in fact, occurring globally and is now affecting some of the world's largest economies in Japan (second-largest), and Indonesia (4th largest). Even the third-largest in Germany is already at a -4.5% year-on-year rate of wholesale deflation, and the United Kingdom is at a whopping-8.5% annual rate of deflation. The United States, in typical fashion, remains the strongest and has only a -1% rate of deflation this year and last. The last time this situation existed was--you guessed it--the 1930s. The time before that was during the 1870s. See also our article on this page, 1998 Collapse Of Global Markets Signals 1930s-Style Problems, and our Gold In A Deflationary Economy report, the latter of which also documents how the movement to a bull market in hard assets has already begun with the soaring gold prices in local currencies of distressed economies such as South Korea and Indonesia.

Governments of the world also tend to change over dramatically at this stage of the cycle, some violently, some painfully, and some much like the U.S. government is right now through constitutional procedure. Isn't it interesting that the only past impeachment of a United States President was Andrew Johnson -- you guessed it--just ahead of the accelerating deflation and the boom and bust of the stock market of the 1870s.

When The Old dies, there is a void before The New comes. The new monetary system, the newest investment trend, the new forms of government, the new applications of technology, and so on, all form parts of The New. Between the two, however, is The Void, and that is when rampant speculation dies; when markets collapse (the Void already exists in Japan and in Asia), when governments collapse, when war breaks out, when monetary systems change, and when new investment trends prepare to emerge. This kind of painful change, indeed, is already occurring and has been since 1997.

Investing during The Void is even more difficult than during The Old or The New, yet a large majority of investors appear oblivious to the fact that anything is changing at all. This is why I spend so much time preparing clients and subscribers for what lies ahead, even as our monthly market letter strategy in The Global Market Strategist® has investors largely invested in U.S. and European stocks into record high territory in the U.S., and even as my mutual fund money management program, The Bull & Bear Enhanced Index portfolio , has clients presently invested in the bull fund, the Rydex Nova fund, strategy for which I designed. One cannot argue with the rally underway, no matter what the cause, yet one must look ahead and prepare to reinvest when the old investment trend dies and the new trends begin.

Investors need time to react, time to anticipate. I do not believe in resting on one's laurels, and as such, I am thorough about examining what may lie ahead after the present investment positions we have on are liquidated. On cannot just liquidate--one must move money into the newest developing trend early, lest one be caught buying at a risky time. This, in fact, is occurring in the bond market now (note that bonds have been steadily declining since their bull market top of this past October) as investors realize too late that bonds have been a good investment. They actually outperformed stocks in 1997 and have outperformed most stocks during 1998, too. We recommended bonds in the summer and fall of 1996. We have since recommended profit-taking (these now qualify as long-term capital gains for those who invested in 1996) and are preparing clients and investors for the next investment trend.

So, enjoy those Internet stock profits if you're participating. Enjoy the bull fund, the bull market, and the good times while they're here. But at the same time, I strongly urge, whether you're a bull or a bear, whether you're for or against President Clinton, or whether you believe that inflation will or will not return, recognize that there are great Changes occurring. Our Forecast '97: Investing In The New World report, in fact, dubbed it Change "with a Capital-C" since the changes that we anticipated for 1997 and beyond would be so great, I had said, that the word "change" should be capitalized to distinguish it from the more minor changes of the past. While you're enjoying the robust economic times in the U.S., then, look at what may lie ahead, and what the next great investment trend--the next great bull market--will be in. It is not usually obvious, and as they say, "they don't ring the bell at the top" of the bull market in stocks. It just sneaks up on you. Perhaps it will sneak up again as early as the first of the year, 1999. This, and coverage of the latter stages of this Great Bull Market in stocks, will be the subject of intense coverage in our monthly market letter and all our daily research services.

14 karat gold is 58.5% pure gold