The Magazine Cover Top?

John Hussman makes an entirely unscientific but still very interesting point about market euphoria — as epitomised by a recent Barron’s professional survey leading a magazine cover triumphantly proclaiming “Dow 16000” — as a contrarian indicator:


I have no idea whether or not the Dow Jones Industrial Average will hit 16,000 anytime soon. A P/E ratio of 15.84 seems relatively modest even in the context of some weakish macro data (weak employment numbers, weak business confidence, high energy input costs) and that priced in real GDP they look considerably more expensive, but it’s healthy to keep in mind the fact that euphoria and uber-bullishness very often gives way to profit-taking, stagnating prices, margin calls, shorting, panic and steep price falls. That same scenario has taken place in both gold and Bitcoin in the past couple of weeks. Leverage has been soaring the past couple of months, implying a certain fragility, a weakness to profit-taking and margin calls.

Psychologically, there seems to be a bubble in the notion that the Fed can levitate the DJIA to any level it likes. I grew up watching people flip houses in the mid-00s housing bubble, and there was a consensus among bubble-deniers like Ben Stein that if the housing market slumped, central banks would be able to levitate the market. Anyone who has seen the deep bottom in US housing best-exemplified by a proliferation of $500 foreclosed houses knows that even with massive new Fed liquidity, the housing market hasn’t been prevented from bottoming out. True, Bernanke has been explicit about using stock markets as a transmission mechanism for the wealth effect. But huge-scale Federal support could not stop the housing bubble bursting. In fact, a Minskian or Austrian analysis suggests that by making the reinflation of stock indexes a policy tool and implying that it will not let indexes fall, the Fed itself has intrinsically created a bubble in confidence. Euphoria is always unsustainable, and the rebirth of the Dow 36,000 meme is a pretty deranged kind of market euphoria.

Nonetheless, without some kind of wide and deep shock to inject some volatility — like war in the middle east or the Korean peninsula, or a heavy energy shock, a natural disaster, a large-scale Chinese crash, a subprime-scale financial blowup, or a Eurozone bank run  — there is a real possibility that markets will continue to levitate. 16,000, 18,000 and 20,000 are not out of the question. The gamble may pay off for those smart or lucky enough to sell at the very top. But the dimensions of uncertainty make it is a very, very risky gamble.

13 thoughts on “The Magazine Cover Top?

  1. Where did everybody go?

    It matters not when this thing turns south, only that this era of lying, cheating, and stealing [at these levels] comes to an end, so that that your generation may get on with your lives.

    How amazing to witness this number of highly educated people selling out, this this degree, so completely.

    If nothing else, this should prove once and for all, that the road to the promised land traverses [not] through the intellect.

  2. I had a flashback of my life! Citibank is offering 2.9% Balance transfers. The last time they did that I bought tech stocks on credit card (Out of University feeling invincible!) It worked until it didn’t 😦

  3. Here in SoCal, you see all the sub-primes commercials again, along with seminars on how to make a fortune flipping homes. Amazing.

    I guess the moral of the story is that Human Nature truly does not change. If you play to people’s desires [with the proper institutional backing], there is a certain percentage of the population that will bite, either through greed or ignorance or, perhaps, outright boredom.

    I also got hammered in the tech bubble and lost half of my children’s college funds. An ugly lesson that has kept me in cash since.

    • Do you know I found saving to be the best form of investing. It is amazing how much intergenerational wealth can be accumulated from this simple strategy.

    • The bright side is we both got burned and thus had a burning desire to know why. We are intellectually richer for it. I believe that most of the alternative media sites and expose of the Fed fraud, resulted from that very ugly lesson. Our children and children’s children will be thankful for our wisdom. For example, cash is king (swoop on distressed real assets), and cash in the bank is safe, as long it is not in banks paying high interest rates in Cyprus!

      Since I have followed this mindset I have become a lot better off financially.

      • Unfortunately, I knew EXACTLY what I was doing and simply got caught up in it. Pure [greed induced] stupidity, no other excuse.

        • Me too, but I went away for a long weekend and made a big mistake- kept an open position, and while I was away the Market crashed, so by the time I realised there was no rally I was toast.

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