Financial Times - April 3, 2000
New economy savaged by the same old bears
Spring is here, hibernation is over, and the bears are out again. Warnings from Wall Street eminences such as Albert Wojnilower ("Some of us believe that the speculation has gone so far that there is no easy or painless way out") and perpetual harangues from Austrian School economists such as Kurt Richebacher suffuse the air we breathe. Even Goldman Sachs' Abby Joseph Cohen, whose optimism has always been tempered, suggested raising cash last week.
Making the biggest splash however, at least from a scholarly perspective, is Robert J. Shiller, a distinguished economist from Yale University. His book Irrational Exuberance is a wonderful history and analysis of market booms and busts.
Three times in Wall Street's past 100 years, incredible speculative binges have grown, and grown, and grown yet again only to give way to wicked mornings after. There was 1901, most famously the 1929 crash and ensuing Depression, and the long 17 years of equity stagnation starting in 1966.
Shiller and his fellow doomsayers believe that the current market boom, in other words madness, has created a bubble - indeed the biggest bubble of them all - and will be followed soon by at least long-term stagnation if not outright devastation.
It is not that there is no real basis for optimism, the learned sceptics agree, with technology breakthroughs fundamentally transforming our economy, but the Wall Street hype has transformed rational optimism to market lunacy, or, in polite and now overused terms, "irrational exuberance".
Heaping ample doses of blame on Wall Street analysts, strategists and brokerages, as well as the purveyors of optimistic news such as Business Week, CNBC and many others, including Alan Greenspan's Federal Reserve, the bear pack accuses these folk of perpetuating a huge and unsustainable swindle on a gullible investing public.
They have sold unsuspecting innocents on such falsehoods as "the new economy", "in the long run stocks always go up", "inflation is dead", "the traditional valuations can't be used any more". And, the one I like best - conveniently used to explain away every bubble in history (including the miracle of Japan in the excessive 1980s): "It's a new era".
The bears make convincing cases that valuations are ridiculously high, volatility has reached dangerous levels, many marginal companies are selling at levels way beyond blue sky, and a significant number of investors are, to say the least, managing their personal finances imprudently.
Conceded, but, more importantly, so what?
The problem with these sceptics is that they don't answer the two most important questions: when will the bubble burst and the bull die? And what will follow?
Remember that the legendary Greenspan "irrational exuberance" speech was made in late 1996, almost three and a half years back and, more significantly for investors, some 5,000 Dow Jones points ago. For the most part, the same bears were in full roar back then.
Indeed, some of the naysayers have been crying danger since the early 1990s and urgently urging equities avoidance. How would you like to have missed the last five years or more by heeding their call?
What distresses investors most is the periodic "pockets" of suddenly, steeply declining equity prices. These bouts of dizziness seemingly do the same percentage damage in a fraction of the time that was needed in the past to correct excesses.
Think of the reaction to the Asian crisis in the fall of 1997, and of the profound fears stirred after the Russian default, along with the near-demise of Long-Term Capital Management, the hedge fund replete with Nobel laureates, in autumn 1998.
The bulls disappear, the bears give a roar or two, and famous market technicians wring their hands on cable television and incite panic selling - a sure sign that we are near the bottom.
So what if the bull goes on for another five years? It could happen. It has always seemed to me that the first rule of investing and trading is to know what you don't know.
Of course, the bull market will end. I said so myself on these pages nearly five months ago. But neither the bears, nor the bulls, nor I know when or what will trigger its demise.
It may or may not have anything directly to do with the economy; it may be geopolitical or something seemingly far removed, but, whatever its cause, it will be seen only in hindsight as the catalyst for fundamental mood change.
Yet remember, please, that the greatest gains in previous speculative binges have occurred in their final years.
The second question, of course, is: what will happen after the markets top? What if it is not the devastation of the 1930s but rather the stagnation of the 1970s (or the "golden recession" of 1990s Japan)?
After all, it really is a new economy, it really is the information age, there really is globalisation and the world's central bankers do indeed have the benefit of the knowledge gleaned since the Depression.
During the so-called "sober seventies", bear market and all, there were areas of equity success amid overall broad trading ranges. And certainly, if warranted, a portion of assets could be shifted to fixed income of one sort or another.
Devastation, of course, is possible. The contributing factors are there for all to see: personal debt, public debt, leveraged derivatives, the Nick Leesons of the world - I need not go on. But is it a probability, or merely a possibility?
When have the known dangers caused anything more than needed adjustments throughout financial history? It is the unknown, the wildness that lies in wait. Or, to put it another way, when the excesses are so great and so commonplace that no one pays them any heed: that is the time to watch out.
Yes, the bears' growling ought to be considered, but as before, the ageing bull - albeit prone to the maladies of old age such as the distressing corrections that come along - just may survive another year. Or two. Or three. Or more.
Alfred H. Kingon is a former assistant secretary of the US Treasury, secretary of the cabinet during the Reagan administration, and was US ambassador to the European Union from 1987 to 89. He is principal of Kingon International, an investment firm.