Weekly Update
‘You can lead a horse to water, but you can’t make it drink’
– old saying
We may warn investors about the risks in the markets, but we can’t make them take action to do something about it. We recall back in late 1999/early 2000 receiving calls from people wanting to open up a brokerage account so that they could buy some tech or dot.com stock. We politely told them that to open an account would require we meet with the prospect, learn their investment goals, fill out papers, and await approval from the compliance department. The process could take more than a few days. By that time, the stock they were targeting could be up a further 10%, 20%, or even more.
Things were moving that fast. From lows in October 1998, the tech-heavy NASDAQ index soared almost 260% to its high in March 2000. The price earnings ratio (P/E) of the NASDAQ soared to an unheard-of (and never heard of again) 175 while some individual companies had P/Es over 400. The fact that the companies did not make any money was not an issue as the focus was on their long-term potential and growth. Warnings that the market was in an unsustainable bubble and that a potential crash could follow were largely ignored. Those communicating the warnings were dismissed as doomsayers, charlatans, or worse. Some received death threats. Two years, later by October 2002, the NASDAQ had fallen 78%. The bubble had burst.
Fast forward five years later. The Dow Jones Industrials (DJI) had soared to new all-time highs gaining 98% from October 2002 to October 2007. The NASDAQ had gained 158% in the same period but was still down 45% from the March 2000 high. But the real focus was on the hot housing market where prices had more than doubled since 2000 and where some regions saw even more spectacular growth. The growth had been spurred by the loosening of credit encouraged by government action, particularly through what was known as the Community Reinvestment Act and government agencies such as Fannie Mae and Freddie Mac.
This post was published at GoldSeek on 3 December 2017.
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