Those receiving conventional buy-and-hold advice from their brokers and advisors should be leery. We referenced Barton Biggs', former Chief Global Strategist with Morgan Stanley, book Hedgehogging in our April 2006 issue, Losers: Why We Invest with Them.
"Secular cycles, both in markets and sectors of the market, make a big investment management firm a very conflicting enterprise to manage if you are a businessperson, because the rational things to do to maximize short-term profitability are exactly the wrong things from both an investment and a long-term profitability point of view. For example, during 2000, even as the bubble was bursting, Morgan Stanley Investment Management, which has a business-dominated management, acted like businessmen: they heavily promoted the underwriting of technology and aggressive growth stock funds because those were the funds the salespeople could sell and that the public would buy. Management was not evil; they were doing what they thought was right. Large amounts of public money were being raised and very quickly lost. Short-term sales profits were collected at the expense of, not only the public, but the firm's long-term credibility and profitability."
Those who are looking for warnings from our "trusted" government officials should consider their track record. On July 12th of this year, U.S. Treasury Secretary Paulson declared, "This is far and away the strongest business economy that I have seen in my lifetime." Several days prior, on July 2nd, he stated, "In terms of housing, most of us believe that we are at or near the bottom."
If the truth is not already obvious to us, history can be instructive. With the help of Dr. Mark Thornton, of the Ludwig Von Mises Institute, one needn't look far to find examples of misleading statements at major market and economic turning points. Paul Warburg, an early advocate of the Federal Reserve, was on the Federal Reserve Board when he made this statement in January of 1930.
"Happily, we have now turned our backs upon the events of this unfortunate event."
Even more incredulously, on November 22nd of 1929, William Green, President of the American Federation of Labor, stated:
"All the factors which make for a quick and speedy industrial and economic recovery are present and evident. The Federal Reserve System is operating, serving as a barrier against financial demoralization. Within a few months industrial conditions will become normal, confidence and stabilization in industry and finance will be restored."
As a final word of warning, we leave you with the words of Dr. Carroll Quigley, a noted historian, former professor of history at Georgetown University, and consultant to the U.S. Defense Department, the Smithsonian Institute, and NASA. His tome, Tragedy and Hope: A History of the World in Our Time was used as a resource in our December 2006 issue: Mind Games.
"All past history shows that espionage has been generally successful and intelligence has been generally a failure. By this I mean that no country had much success in keeping secrets, in the twentieth as in all earlier centuries,but neither has any other country had much success in evaluating or in interpreting the secrets it obtained. The so-called 'surprises' of history have emerged not because other countries did not have the information, but because they refused to believe it. The date of Hitler's attack on the West in May 1940 had been given to the Netherlands by the German Counterintelligence Office as soon as it was decided; the Western countries refused to believe it. The same was true of every one of Hitler's surprises. Stalin was given the date of the German attack on the Soviet Union by a number of informants, including the United States Department of State, but he refused to believe. Both the Germans and Russians had the date of D-Day, but ignored it. The United States had available all the Japanese coded messages, knew that war was about to begin, and that a Japanese fleet with at least four large carriers was loose (and lost) in the Pacific, yet Pearl Harbor was a total surprise."
While the evidence of trouble has just begun to surface in U.S. equity prices, the love affair with credit, as demonstrated by record profits in the banking and brokerage industries, has only made investors, especially large institutional investors, more attached to this bullish run than ever. But, with the continuing contraction in the housing sector, and its impact on borrowing, the early warning signals are blowing.
The following is an excerpt from the email we sent our subscribers last Thursday, July 19th, regarding our latest issue of The Investor's Mind:
"We are releasing this month's Investor's Mind early because a variety of technical indicators are pointing to an end to the bull market run that began in the fall of 2002. I thought it important to release this piece on three high-level financial meetings that have taken place over the last few months, which I believe make it clear that those at the top of the money game have known for some time that the end of this period will bring massive shifts to the global capital markets."
Doug Wakefield
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