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The
World's Great Manias
A Call for Immediate Action
by Robert B. Gordon,
Sc. D.
September 21, 2003
PREFACE
Have you ever been in a boat on a big river and close enough to hear the roar of a waterfall just out of view ahead? I have been in a small boat and the falls up ahead was our great Niagara falls, sure death if the boat’s power failed.
Right
now, the entire civilized world is floating down a huge uncharted river
with a column of spray shooting into the sky somewhere ahead. Would you
choose to get off the boat if you could? Suppose your parents were on
the shore and screaming at you to get off the boat. Or what would you do
if you were on shore and your parents were on the boat?
I do not raise these questions lightly but to get the full attention of all my readers from 19 to 90. For the past two years in over 80 essays, I have figuratively been on shore screaming for my readers to get off the boat.
I have had some success, with a few families leaving the boat as a group, but frequently the younger or older members have stayed on board, enjoying their ride. I am particularly concerned about any family not being together for the severe crises I see ahead. Because, if I learned anything at all from my years in the Great Depression, it was the tremendous value of a family working and pulling together to overcome the obstacles they encountered.
I have decided to make another serious effort to explain the severe gravity of the world’s current problems. It is imperative in my view for families to be unified going into this crisis. I urge all readers to send this grave message to all in your family either by e-mail or by sending printed copies. It is extremely vital that every adult read this urgent distress call for the sake of your entire family’s welfare.
READING ABOUT PAST MANIAS
Many great books have been written about all the past manias. Some are easy reading and others are not. Last October in my essay Wall Street’s Greatest Crime, I included some fascinating quotes from several great authors. It is in my FSO archive and I encourage all current and old readers to read or revisit it in conjunction with this essay. All the books reveal that there is absolutely nothing new about manias. Just the faces and places change.
I received a number of e-mails from this earlier essay, saying that our leaders in Wall Street and Washington are not ignorant about past manias - they just do not want to scare the public about the dreadful consequences. I’ll let you make up your own mind, but its hard to accept this view because of the fact that the 1929 crash emptied Wall Street for years and President Hoover was booted from office. And we will almost certainly see the same results or worse this time. Is our current President working for re-election. You bet he is. Will he win? We'll all know in14 months.
I am very proud of the fact that Prof. Hernán Cortés Douglas, at the time a Visiting Scholar at Harvard University, liked Wall Street’s Greatest Crime so much that he asked his assistant in Chile to translate it into Spanish and make it required reading for their course in Business Cycles at the Catholic University.
THERE IS ONLY ONE ECONOMY NOW
Our world is, in 2003, inextricably bound together by trade and commerce of all kinds. In 1989, it was possible for Japan to have its own, and still continuing, crash and depression. But this one will certainly involve all of Europe, South America and perhaps China in addition to the U. S., Canada and Mexico The prospect of our country going thru an experience worse than the1930’s, and starting with our current staggering debt and trade imbalances, should demand the serious attention of every thinking American.
THE WORLD’S GREATEST MANIA AND CRASH
I have studied all of the world’s recorded manias and crashes with great interest. The facts and circumstances are always different but the action of crowds of unthinking people acting in herds is always the same. Thru the work of a brilliant retired accountant, Ralph N. Elliott, in the 1930’s, we now know that these crowds of people, when in a mania, are unknowingly following a law of nature. His work produced the Elliott Wave Principle which is used today, among other things, to understand stock market waves and to predict crashes and depressions.
Whether manias involved buying camels in a market place, before the time of Christ, or tulip bulbs in Holland in the1630’s, both the actions and the outcomes are predictably the same. There are many more losers than winners, and at the end of each mania prices are lower than they were at the start. For instance in the Golden Twenties, the Dow started at 100, rose to about 400 and, in the final1932 bottom, fell to 42, almost 90% lower.
Our current mania is, by every measure, the largest ever because the entire Western World was swept up in a long bull market starting either in1974 or 1982 and ending in the Internet stock market Bubble in early 2000. Depending on where you place the start, the Dow should eventually fall below 800 or 600 from it’s present level of 9500.
It is also of note, that in the bear market rally underway during this year, the percentages of bullish investors and analysts returned to the same high levels of early 2000. This fact tells me and others that the bear market psychology of extreme aversion to stocks that always comes at bottoms is still many years in the future. In my opinion, this bear market could easily go for another 20 or 30 years. People in their 50’s planning for retirement, should think long and hard about such a prospect. What it does mean is that concerned investors have got to stop losing money right now and learn how to make money in a long and severe bear market. In my recent essays, I have written extensively about this subject.
THE TULIP BULB MANIA
In Holland in the 1630’s, they may or may not have had a stock market. At least it did not leave any records. But they were buying and selling tulip bulbs in some sort of organized manner. A severe mania eventually developed which attracted all levels of their society. Prices of single bulbs rose to unbelievable heights, with one buyer trading his house for a single bulb. Before the mania ended it involved the entire country and, it was reported that they developed a market for trading options in tulip bulbs. There must have been some very heavy losers at the mania’s end.
THE SOUTH SEA BUBBLE
A number of fine books have told this story of a giant Ponzi scheme that involved the London City Council and maybe the King. Shares were sold on the promise of huge rewards from trading in the "South Seas", rather nebulous places reachable by ships. The great scientist Isaac Newton was drawn in and lost heavily. The bubble spread to the entire list of companies on the London Stock Exchange. In 1721-22 stocks rose tenfold and dropped even faster as the bubble burst. Nearly every company on the London exchange went out of business.
Of special interest to us in our day, is that Elliott Wave experts have carefully traced our current Grand SuperCycle Wave 3 back to this South Sea Bubble. Wave 1 of this multi-century stock wave ended at the top of this bubble and the ensuing corrective wave 2 ran from 1722 to 1784, representing a 62 year bear market correction of the South Sea Mania. Wave 3 of this Grand SuperCycle commenced in 1784 and topped 216 years later in early 2000. Having read Robert Prechter’s prophetic book At the Crest of the Tidal Wave in 1995, I was given advance notice that this huge wave was nearing its end. Now the big lesson for all of us from this sequence is very important. Elliott Waves, whether measured in hours or decades, normally have waves 2 and 4 of about the same length. Since the completed Grand SuperCycle Wave 2 lasted 62 years, from 1722 to 1784, one might expect the current wave 4 to be equally long. I mention this not to scare my readers but to give some idea of the huge size scale of the current Wave 4 bear market.
On the basis of everything known to date, it can be concluded that this complete boom/bust cycle will be much deeper and longer than the 1929 crash and depression. This is borne out by comparing data like dollar volume of trading divided by the value of the two Gross Domestic Products, thus compensating for the difference in the 1929 and 2000 economies.
Viewing this GDP corrected chart, the 1999 market peak looms larger that that of 1929 and the 1966-74 bull and bear cycle is just a minor blip on the chart. So, all the available data supports the conclusion that the current stock mania is certainly the largest ever in world history.
Of course, as a result of Alan Greenspan’s misguided efforts to support the stock market, we now as a nation have to face three bubbles in stocks, credit and housing. And most other nations, large and small, find themselves battling the same severe problems.
BOOM AND BUST IN JAPAN
After
World War II, Japan got its economy together and soon it became the
Wonder of the World. Business men from all over went to study their
great success story. Their export business boomed and their real estate
prices soared to unbelievable levels. At one point a plot of ground in
their capital was valued higher than the entire State of California.
With no bargains left at home, Japanese investors came to the U.S. and
bid high for Rockefeller Center and other trophy properties in our
country such as the Pebble Beach golf course. In those days no one
called it a gigantic bubble. Now they do and Japan’s real estate
prices have dropped sharply in line with it’s stock market.
The Japanese stock market reached its highest peak of just under 40,000 yen at the end of December 1989 and has suffered a long bear market, now in its 14th year with no end in sight. Hope and optimism rise with each succeeding bear rally but so far each of them has failed. With its best customer, the good old U.S.A., sliding into its own depression, Japan’s future does not look too bright. China, now a very large exporter, will also be adversely affected by a depressed American economy.
ARE MANIAS INEVITABLE?
During the 18th and 19th centuries there were a variety of panics and crashes within individual European countries as well as in the U.S. that do not concern us today. None of these challenged our 1929 crash in magnitude or the current Japanese depression in length. In 1997 in Southeast Asia there were major stock market crashes in the Hong Kong and Malaysia stock markets. They were both predicted in advance before their peak through analysis of their Elliott stock wave formations.
With Japan already in a depression, it will be joined in due time by the major European nations and the United States. The world will then have a global depression to deal with. This will cause a great hue and cry around the globe, to do something about the huge new crisis.
Unfortunately, the economists of the world and their government leaders have not yet discovered Ralph Elliott’s brilliant discovery of 70 years ago. Stock market manias are a natural phenomenon. They will undoubtedly continue in the future until the true causes are understood in the right places. Recognized early enough, it will be possible to minimize the after effects. Small controlled manias will cause small repercussions in the economy. The problem the World now faces, and will for years to come, is the huge job of recovering to a normal economy in the aftermath of the largest Stock Mania the world has ever known.
Looking back to Greenspan’s famous "irrational exuberance" speech in the mid nineties and his reckless actions later, this country has a huge job of rethinking how to prevent manias from ever again reaching gigantic size. Rethinking will be very difficult so long as our economists in academia and government remain totally ignorant of Elliott’s great work.
WHY WE’RE IN THIS MESS!
The true reason is because our economics profession and government leaders at all levels do not have a clue as to the cause of the 1929 crash and depression and have been leading this country down the same wrong path ever since. When I first learned these true facts in 1995, at first I was mad, fighting mad, but when I got over the shock I have been sad, very sad for our nation and its people.
How can an entire profession of tens of thousands of highly educated men and women be so wrong, so stupid. There is no answer but closed minds, unbelievably closed minds. In the 70 years since Elliott’s brilliant discoveries, I believe there have been just two papers on Elliott written by college professors. One of them is Hernán Cortés Douglas, Economics Professor at the Catholic University in Chile. His brilliant paper titled Forecasting Crashes and Recessions lay hidden in another web page, so I recently got his permission to republish it on FSO so the world can read it. Please go to FSO and read his paper written in easy to read English words. Written by a brilliant economist, it could be just what is needed to help convince you to act now.
Will this pitiful, almost criminal, ignorance about the causes of Manias and Crashes ever end? All we can conclude at this day is that it surely will not end before we slide into the World’s Greatest Depression. But Congress, like 70 years ago, will eventually be holding meetings and passing laws to prevent it happening next time. Will they ever learn about Ralph Elliott’s great work?
STRENGTHEN YOUR FAMILY TIES
I have been and will continue to sound the alarm about current and future problems. It is up to the families who have one or more members reading this message to do what needs to be done. Families with very young and/or very old adults will have to provide a special place for them in any discussions.
Continue to read the web sites where bearish experts publish their thoughts. Despite the market hitting new rally highs today, we are not in a new bull market. From all the bullish enthusiasm, it can be concluded that the real bear market has hardly begun. We cannot predict the year, but Wall Street will again become a ghost town as it was in the mid 30’s and again in 1974.
I‘d like to suggest, if I may, that large families, especially if quite scattered geographically need to have someone assume a leadership role. Another needed role is for someone to assume the role of information coordinator. Please do not expect to get by with your local paper and TV as a prime information source. Every concerned family needs to have one or more members reading and circulating expert views on the market and economy. In a recent essay, I have listed some of the web pages and experts I read frequently.
My health has returned and I will continue to write. Please let me know what subjects you want me to cover. Remember that I cannot and do not furnish specific personal advice.
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© 2003 Robert B. Gordon, Sc.
D.
Dr,
Gordon's Editorial Archive
Robert
B. Gordon, Sc. D.
Sun City West, Arizona
September 21, 2003
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