What Are the Bears Missing?

Forecasts & Strategies
Personal Snapshots
January 2000

What Are the Bears Missing?
By Mark Skousen

“He has been wrong about the stock market for a decade, he said, because he is a contrarian.” — The New York Times, December 26, 1999

The 1990s has turned out to be the best-performing decade of the 20th century in terms of stock market performance. Several new factors palyed a role: Unexpected low commodity and consumer inflation, fiscal restraint, increased productivity, globalization and the collapse of the Soviet communism and the socialist model of central planning.

And yet, an incredible number of bright people missed the entire bull market. Year after year, they predicted the imminent collapse in stocks, yet the Dow increased three fold and the NASDAQ 10-fold. The New York Times named names: James Grant, Marc Faber, and more recently Barton Biggs. All Ivy League graduates. Many of my gold bug friends missed the bull market, too.

How is this possible? What kind of prejudices would keep an intelligent analyst from issing an overwhlming trend?

Confessions of a Gold Bug Technician

A good friend of mine is a technical analyst who searches the movement of prices, volume, and other technical indicators to determine the direction of stocks and commodities. Most financial technicians are free of prejudices and will invest their money wherever they see a positive upward trend and avoid or sell short markets that are seen in a downward trend. But my friend is a gold bug and no matter what the charts show, he somehow interprest these charts to suggest that ogld is ready to reverse its down ward trend and head back up. Equally, he always seems to think the stock market has peaked and is headed south. As a result, throughout the entire 1990s, he missed out on the great bull market on Wall Street and lost his shirt chasing gold stocks.

Another friend uses an old-style Dow theory that requres both the Dow Industrials and the Dow Transports to hit new highs before a bull is declared. Durring the 1990s, this Dow theorist had the bear in the box more than the bull.

Over the years, I’ve encountered three kinds of investment analysts: Those who are always bullish, those who are always bearish, and those whose outlook depends on market conditions. I’ve found that the third types, the most flexible, are the most successful on Wall Street.

“What Am I Missing?”

In the financial business, the key to success is a willingness to chage your mind when you’re wrong. Stubbornness can be financially ruinous. When a market goes against you, you should always ask, “What am I missing?”

Sound “Austrian” economics has taught me two principles that can be applied to this situations. First, marginal changes in the political or economic landscape can make big differences in the markets. Economists always talk about marginal analysis. Thus, marginal tax cuts, reducing the size of government, and minimizing trade barriers can turn a bear market into a roaring bull market.

Second, beware historical data. History does not repeat itself in every cycle. It does make a difference who is president, or what the new technology is.

“The bears are transfixed by historical data,” reports The New York Times. Indeed, in bull versus bear debates over the past 10 years, the bears have always brought up the fact that stocks are vastly overvalued “on an historical basis.” No argument there! But does that mean we must be bearish? Again, we must ask ourselves the all important question, “What am I missing?” The markets have been overvalued for years — but they keep going up because of new net benefits to the economy. This is data that is not part of the past.