After experiencing two Federal Reserve induced
booms and busts in the last fifteen years, you would think people would learn.
But the true lesson of history is that people never learn from the lesson of
history.
How did
the S&P 500 trace out a total return of zero between 2000 and the end of
2011? By first losing half its value, then more than doubling, then losing more
than half its value, and then doubling again. Across history, extreme
valuations have invariably been followed by similar behavior – wide cyclical
swings, yet only modest overall returns over the following decade.
Anyone fully invested in the stock market at
this point in time is delusional and mad. If they think they can sense danger
before the rest of the herd and exit once the stampede starts, they are badly
mistaken. Just as they were in 2000 and 2007. Now is the time to regain your
senses and stop playing in this rigged Wall Street game.
After
years of Fed-induced yield-seeking speculation that has driven equity
valuations to the second most extreme point of overvaluation in history (and
the single most extreme point on the basis of median valuations), investors
have somehow convinced themselves that this time will be different; that this
time the market will maintain at a permanently high plateau. That belief is
nothing new – it’s the same delusion that investors have held at speculative
peaks across history, refusing to accept the familiar signs of danger until the
equally familiar losses were conclusively in hand.
“Men, it has been well said, think in herds; it will be seen that
they go mad in herds, while they only recover their senses slowly, one by
one.” – Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds
