Oil has continued its historic slide. In our view, this is one of the many unforeseen consequences of Federal Reserve policy. By encouraging US oil producers to borrow at ultra-low interest rates, the Fed exaggerated the usual boom-bust cycle of the commodity markets. Cheap credit made it possible to overinvest in production, which made it possible to overproduce, which caused prices to collapse. Others have a different explanation. They believe that $30 oil proves the genius of mankind always able to find new sources of energy and to overcome the problems we make for ourselves. Who's right?
As scriptwriter William Goldman said about predicting winners and losers in Hollywood: "Nobody knows anything. Not one person in the entire motion picture field knows for a certainty what's going to work. Every time out, it's a guess and, if you're lucky, an educated one." Nobody knows anything in the financial world either. At least, that is what the old-timers say. The young guys know what is going on. The old guys know they don't. Bloomberg columnist Barry Ritholtz recently reminded us of a well-known market forecaster who was spectacularly wrong: Joe Granville.
Joe called the top of the stockmarket in 1981. His subscribers received the following alert by way of a phone call or answering machine message: "This is a Granville Early Warning. Sell everything. Market top has been reached. Go short on stocks having sharpest advances since April." His subscribers listened. The Dow plunged 6% on record volume following Granville's call, wiping out hundreds of billions of dollars in investor wealth.
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But within a few years, most of those subscribers were kicking themselves. They probably wanted to kick Joe, too. One year later, a secular bull market began. Investors who rode it out until the top 18 years later made cumulative gains of 1,412% (excluding dividends).
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Granville was one of the great showmen of the newsletter trade. After he died, in 2013, Forbes' Peter Brimelow remembered: "In Tucson once, Granville began by walking across a swimming pool on a plank hidden just below the surface, then telling the assembled multitude, And now you know!'... In Minneapolis, when asked how he could keep close to the market while travelling so much, he dropped his tuxedo pants to reveal boxer shorts printed with stock quotations that he successively identified, finally pointing to his crotch with the delighted cry of And here's Hughes Tool'." (Hughes Tool Company was a well-known Wall Street stock. It is now part of Baker Hughes International.)
Granville was at the height of his fame when he made his 1981 call. He had enjoyed a string of prescient calls in the 1970s. His advice was taken seriously by many. His photo appeared on the front page of The New York Times perhaps the only time in history a financial newsletter writer got his picture on the front page. In 1981, Joe was approaching 60 not exactly an "old-timer", but old enough to know better old enough to know that he didn't know everything. But not only did he completely miss the start of the bull market in 1982, he also ignored and denied it for the rest of his life. The result? Catastrophic losses.Our old friend Mark Hulbert, of Hulbert's Financial Digest, had Granville at the bottom of his 25-year ranking, with "average losses of more than 20% a year on an annualised basis".
Missing a bull market is no sin. But betting against the biggest bull market in US history turned out to be a bad career move for Granville and a bad financial move for his followers. And so it goes on from young to old, from know-it-all to know-nothing, from boom to bust, from bull market to bear market, from greed to fear and back again.
All we know is that markets generally do a better job of predicting the future than individual guesswork. The 1929 crash, for example, told of trouble ahead. The US needed a correction. But how could the markets have known that presidents Hoover and Roosevelt would turn it into a long, drawn-out depression? The great crashes of 2000 and 2008 were both warnings. But each time, the Fed came back strong with new policies to drive up stocks again. And now can the markets predict what monetary experimentYellen & Co. will undertake next?
Last week's sell off in stocks was telling us something. But what? We cup our ear, we bend down, we listen carefully as the market whispers softly. We can barely make out what it is trying to say. It is so faint. Like a voice from beyond from Heaven. "Is that you, Joe?"
"Get out" says a feeble voice.
