This year’s stock market, scene of gloom and doom, busted dreams and broken hopes, the worst since our grandparents were children, will soon hit bottom. It will end its dismal, sickening decline, and start its rousing dramatic recovery, precisely when the Dow Jones Average hits the following point: 6,437.
(By contrast, it opened today at 7,112. So it just needs to loose another 675 points and we can call it a day.)
How do I know this? Elementary. Contrary to popular belief, financial markets do not run on economics. They do not run on emotion, technics, quants, or any other human designs. They run on irony.
6,437 is precisely the point at which the Dow Jones Average stood on December 5, 1996, at dinner time — just over twelve years ago. It was at that moment that Fed Chairman Alan Greenspan mounted the podium at the American Enterprise Institute in Washington, D.C., to deliver the annual Francis Boyer lecture. He then proceeded to place a curse on the market. He intimated, in memorably opaque prose, that stock prices in the 1990s represented a bubble about to burst:
“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? ”
Greenspan’s “irrational exuberance” phrase became an instant hit, an icon, perhaps the single most repeated two-word quote of the decade. But the Dow Jones Average laughed in his face. It proceeded to jolt above 7,000 in 1997, then 10,000 in 1999, and finally 14,000 in October 2007. After the 2000-2001 Dot-Com bust, Greenspan himself seemed to forget earlier caution, pumping mass dosses of liquidity into housing and preaching tax cuts and deregulation with abandon– causing him last October to admit “mistakes” that helped spark the recent crisis.
But the irony was this: Greenspan had gotten it right the first time. The stock market in 1996 was a bubble ready to burst, as it was again in 2000, as it was again in 2007. The “exuberance” behind it was, in fact, “irrational.”
Markets have a way of avenging themselves. And if irony is indeed its guiding principle, then this one today is not going to free us from its bear grip until it forces us to relive the lession of December 5, 1996. Only when the Dow Jones Average touches that magic number, 6,437, will the curse be broken. At that point, “irrational exuberance ” officially dies, to be replaced by “irrational pessimism” — time for the bulls to return.
The end is near. Science is science. Greenspan was right. Sorry if this is bad news. Have some coffee.