Some of you may remember the unforgettable title of the 1999 financial best-seller, Dow 36,000. It made a lot of waves back during the heyday of the internet stocks and day trading, but unfortunately for the authors, the timing of the book’s release was less than ideal. The market topped out in late ’99 and the infamous “tech wreck” followed in 2000. To this day, Dow 36,000 is considered as the ultimately example of a contrarian indicator – that is, when a book cover announces an extremely bullish forecast, the end is usually near for the bull.
I was surprised to discover recently that the Dow 36,000 forecast has been resurrected. A Bloomberg article last week penned by the co-author of the book, James Glassman, tried to make the case that his mis-timed forecast still has validity in the foreseeable future. Glassman argued that Dow 36,000 is within reach in view of current levels of market momentum, corporate earnings valuations, etc. Given that the first release of Dow 36,000 was a contrarian harbinger of doom, should we be concerned by its reappearance in the media?
To answer that question I recently paid a visit to my local Barnes & Noble bookseller. I’ve derived a great deal of useful data over the years, from a contrarian perspective, from perusing the shelves of mainstream booksellers. When the financial section of book stores like B&N are brim-full with bearish titles, like they were for much of 2009-2012, you’re generally safe in assuming that the market is probably not going to crash. This is based on the principle that when all the scary bearish scenarios make the covers of mainstream books, the negatives have already been fully discounted by the stock market. What’s more, book authors are notorious for being behind the curve of market trends. Most of them write about what happened yesterday, not about what’s going to happen tomorrow.
Bearish book titles have abounded in recent years and a few examples will suffice: The Warning: The Coming Great Crash in the Stock Market, Conquer the Crash, the The Great Crash Ahead, Patriots: Suriving the Coming Crash, the Coming Collapse of the Dollar and How to Profit From It. Admittedly the numbers of crash-related books have thinned from bookstore shelves in the last year or so, but I found many more bearish book titles on my latest visit than bullish titles. I didn’t get the impression, as I did in the late ‘90s, that the collective mindset of financial book writers was overly optimistic – far from it! There’s still a great deal of caution and conservative that characterizes today’s leading financial book titles and Dow 36,000 is at this point an anomaly.
If ever Dow 36,000 and its ilk become the rule rather than the exception, we’ll definitely have much to worry about as far as the stock market is concerned. For now, however, I think we can pretty much discount the super-bullish forecast of Dow 36,000 as being an attention-getting ploy rather than a manifestation of widespread bullish psychology.
Gold and the Cyprus Crisis
The latest scare out of Europe occurred during this week’s EU Summit. European finance ministers agreed to extend a bailout for Portugal and Ireland. They also agreed on a 10 billion euros rescue plan for Cyprus, a reduction from the original 17 billion euros. The European Central Bank (ECB) had planned on forcing banks in Cyprus to impose a 9.9% levy on deposits compared to the previously announced 6.75% levy on bank deposits up to 100,000 euros. Cyprus politicians on Mar. 19 voted the levy down in defiance of the ECB, however. In response the ECB backed down and agreed to proceed with supplying liquidity to Cyprus banks without the tax.
Had it been implemented, the unprecedented levy could have triggered a widespread panic over similar levies being imposed on other peripheral European banks. This in turn would have raised additional concerns on the European debt crisis, resulting in capital flight to safer havens. The mounting problems in Cyprus have increased demand for alternatives such as gold and safer assets such as U.S. Treasuries. But the move to gold so far has been a slow walk instead of a spirited run. That could change next week if phase 2 of the ongoing drama in Cyprus doesn’t unfold according to plan.
Banks in Cyprus will remain closed until at least Monday, the same day the country must come up with a plan to rescue its banks or lose the emergency funding that has been keeping them afloat. In a press release dated Mar. 21, the ECB said it has “decided to maintain the current level of Emergency Liquidity Assistance” until Monday. “Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF program is in place that would ensure the solvency of the concerned banks.”
The European Union and International Monetary Fund have promised Cyprus 10 billion euros in assistance if the island nation can come up with an additional 5.8 billion euros. After rejecting the plan to tax insured and uninsured bank deposits, Cyprus is now racing to come up with alternative plans such as borrowing pension-fund assets, selling the island’s two biggest banks and getting a loan or investment from Russia, whose citizens have large deposits in Cyprus banks. None of these options are very promising, according to experts, and most observers think taxing deposits will be part of any solution.
All of this falls under the category of “the more things change, the more they stay the same.” It would seem that even after only three years of failed experience, ECB authorities are still trying to impose heavy-handed austerity type measures on the citizens of beleaguered countries. Italian voters voiced their clear displeasure with austerity in the recent parliamentary elections. Even some ECB members were forced to concede that the central bank’s insistence on heavy tax measures against member countries aren’t working. Yet once again we see Europe’s leaders trying to impose an economy-killing tight money policy on failing nations. As per our recent discussions, Europe’s troubles should eventually translate into higher gold prices.
