On Oct. 10, 1990, the Dow reached a bear market low of 2,365 and most investors were terrified. I remember serving as moderator in a packed Bull vs. Bear panel at the 1990 New Orleans investment conference in late October. In an overflow room of about 500 investors, the bulls (Mark Skousen and Bert Dohmen) marched in to the theme from “Rocky,” while the bears (I better not name them) triumphantly entered to the theme from “Jaws.” I took a poll of the audience. Only two attendees (0.4%) identified themselves as bulls that day — at the very moment when being bullish would pay the biggest dividends.
The seeds of recovery were already being sown in technology and enhanced global trade. On Nov. 12, 1990, Tim Berners-Lee published a formal proposal for the World Wide Web. The previous month, East and West Germany had united and all of the formerly Communist lands (China and Russia included) began trading with the West. In the same month, the British Channel tunnel (chunnel) linked Britain to mainland Europe for the first time since the Ice Age, but the headlines in November 1990 were negative.
We feared that the Gulf War would end in a long-term stalemate of death and widespread destruction. Saddam Hussein said he would torch all the oil wells in the region. (Oil prices doubled from $20 to $40 a barrel after the Kuwait invasion and pundits said we would likely see another doubling). Most market pundits feared stocks would collapse and gold would soar, just as our New Orleans audience had feared.
By the end of 1990, the Index of Leading Indicators had fallen for five straight months. The Dow ended the year at 2633.66, down 4.34%, the only down year for the rest of the 1990s. What came next? When the Gulf War began on Jan. 17, 1991, gold collapsed and stocks soared 20% by the war’s end 40 days later. In 1991, NASDAQ gained 56%. Then, all the major stocks indexes quintupled from 1990 to 2000.
Today Could Be Another End of an Era — And a Quiet Rebirth
In my view, people fear the unseen Black Swans while ignoring the more positive Golden Swans. Here are some possible changes in the wind right now — my guess at what we might see in future history books:
The reversal of QE-2 and a dollar recovery: There is currently a great hue and cry against the Fed’s quantitative easing policies. The economy is recovering, so QE-2 may not be necessary. I predict the Fed will not complete its full eight-month easing by next June, in response to overwhelming global criticism. This would also serve to rescue the U.S. dollar from its tailspin and make U.S. markets more attractive.
The gradual end of terror as a global concern
: If the Cold War can end suddenly, moderate Muslims can pacify their violent brethren over time. Think back to 1945, when we thought Japan and Germany would always be militaristic. They were quickly tamed. Terror may already be on the road to extinction.
The end of big government solutions to every problem. Europe is trying austerity while the U.S. has tried hyper-stimulation. This is a global laboratory experiment. Which works better? The U.S. may bow to Europe here. The bipartisan Presidential Commission on reducing the deficit has proposed some key solutions, like raising the retirement age, eliminating major bureaucracies and simplifying the U.S. tax code by eliminating deductions. Perhaps the U.S. is ready to consider austerity cuts to reduce deficits.
Call me a dreamer, but that’s my view.
