Hi everyone! It looks like I haven't posted in two weeks. I was on vacation, and believe it or not, it is far easier to find 15, 20 minutes when you are in work mode to make a post then when you are spending your day babysitting!
Now, I should be back to posting some good stuff. In this mini-post I want to look back at a prediction I made almost seven years ago...
Late in 1999, I had looked at the market, which you probably remember was nearing the end of the tech bubble.
What I saw:
- incredibly high valuation on tech companies
- looming rumours on defined benefit pension plans
- consumer spending exhaustion (which we now know was prolonged with the current real estate bubble and home equity extraction)
- declining auto sales for US car companies (also postponed somewhat with zero financing and huge cash incentives)
- a future employment problem with all the Y2K IT staff pouring in the market for a job (boy, was I wrong on that one though)
So, I had made this prediction of a crash (while ignoring the calls for Dow 36,000 and Dow 100,000) for a large decline in the stock market of 25-35% to clean up the overvaluation, or if it didn't happen, a sideways movement for 5 to 10 years until valuation come more in line with reality.
Interestingly, both of them, although very different, came through. The NASDAQ did crash, even more than I had looked for, in the order of 65%+.... and the Dow had hit a high of about 11,700, and has moved between 10,000 and the current high of 11,300 for the last 6 years.
What do I think will happen next?
I still think that with current valuations on the S&P being on the high side, and with macro economic problems so much worse than they were in '99, we should be in for a major correction, probably in the fall. The reasons are numerous, and each will deserve its own posting.
I am also holding a different potential view of the future, due to both rising corporate profits and rising inflation. It is very possible that if inflation hits high enough, and if corporate profits follow that inflation trend, share prices will rise accordingly, bringing a boom in share prices. The problem with stock prices rising 15% a year when inflation is 12% a year are obvious: you are not really making any money.
How would you play such a market? Leverage. Buying some call options on the indices would be the best way to get a good return on such a trend... of course volatity premiums on them should be through the roof as well...
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