Holding the Permanently High Plateau

“Stock prices have reached what looks like a permanently high plateau,” said Ph.D. economist, Irving Fisher, on October 17, 1929.  “I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted.  I expect to see the stock market a good deal higher within a few months.”

At the time of Fisher’s prediction, the DOW was at 341.86…down from a high of 381.17.  Several days after Fisher offered his “permanently high plateau” thesis, the stock market’s decline accelerated.  So, too, did the reputation of America’s most famous economist.

On October 23, 1929, after stocks had dropped 20 percent, Fisher declared business was “fundamentally sound.”  You can view early video of Fisher’s ill-fated statement here, if you are interested.  Despite Fisher’s optimism and academic confidence, he was spectacularly wrong.

Neither business nor the stock market was fundamentally sound.  Stocks were not “a good deal higher within a few months,” as Fisher expected.  Instead, when it was all said and done, the DOW crashed over 89 percent…and the index didn’t return to its pre-crash levels for another 25 years.

Certainly, the Three Greek Fates – Clotho, Lachesis, and Atropos – cackled at Fisher.  Stock market prices are never permanent.  Did he realize he was tempting them when he spouted his “permanently high plateau” nonsense?

The Bears Are All Gone

“Myths and legends die hard in America,” once remarked Hunter S. Thompson.  We don’t think he had the stock market in mind when he offered this remark.  But, if he had, perhaps he would have been speaking of the popular American delusion that the stock market exists to make the average investor rich.

Whether it was during Fisher’s time or today, this notion is widely held even with plenty of evidence to the contrary.  For based on even the most rudimentary observation, it is crystal clear that the stock market doesn’t exit to make people rich.  Rather, it exists for the near exclusive purpose of separating a fool from his money.

“Everyone believes the U.S. stock market has reached a permanently high plateau,” opined Long-Term Trader, Michael Sincere, earlier this week.  “Everyone, that is, but the bears.”

“Last week’s Investors Intelligence survey showed bearish sentiment at its lowest since 1987 (13.3%).  In fact, short-sellers have nearly disappeared along with the few remaining bears.  In addition, the VIX is at historic lows (near 12), which reflects investor complacency.

“Put another way, almost no one believes this market will go down.”

Holding the Permanently High Plateau

“Where all think alike, no one thinks very much,” noted 20th century political commentator Walter Lippmann.  Given today’s ultra-low bearish sentiment and historic low VIX, one thing is obvious…no one is thinking very much.

But on and on it goes.  Bullish on its recent success, the bull market marches on like Napoleon’s army setting out in its march to Moscow in the Russian Campaign of 1812.  Like the Grande Armée, today’s investors believe they will never lose.

Such is the sort of pretenses that lead to disaster.  There were about 432,000 French soldiers who began the march to take Moscow.  Of these, not one in 40 – or about 10,000 – endured the return trip home.

In other words, nothing fails like success.  The idea of a permanently high plateau in stock prices is as ridiculous today as it was a hundred years ago.  At some point, a triggering event will cause even the most ardent believers to break ranks…and a mad scramble to the exits will ensue.

Yesterday, after initially falling about 10 points, the S&P 500 held the line…finishing up 1.76 points.  The permanently high plateau lives on another day.

Sincerely,

MN Gordon
for Economic Prism

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