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More On Warren Buffett’s 1999 Market-Top Call And The Similarities To Now

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    September 23, 2013

    As you know from our commentaries, we have been puzzled why the Fed would begin tapering its QE stimulus this month, given that economic reports were indicating the economy is stumbling again, and in its previous statements it had said it would not begin to taper until it was sure the economy can handle it.

    But in the minutes of its last meeting, in speeches by various Fed governors, in its Beige Book remarks about the economy, and so on, it had become almost a sure thing that it would begin tapering at this meeting.

    And Chairman Bernanke, who touts a transparency policy, said nothing to discourage that widely known expectation by markets.

    Was the failure to communicate a deliberate move to provide markets with a positive and manipulative surprise, or had the Fed learned something at the last minute that we are not yet aware of?

    For whatever reason, it leaves the Fed in a bind.

    Credit Suisse economist Neal Soss provided the best explanation I’ve seen of why tapering had to begin this month or not all under Bernanke’s chairmanship.

    Soss said prior to the decision that the reason to expect tapering to begin in September “is the calendar”.

    He pointed out that if the Fed does not begin to taper this month, its next opportunity would be its October meeting, right in the middle of the expected debt ceiling fight in Congress. And President Obama is likely to name Bernanke’s successor in mid-to-late October. As Soss pointed out, that would not be an ideal time for the Fed to announce a potentially disruptive operational change in its monetary policy.

    And the next opportunity after October will not be until its December meeting (there is no meeting in November).

    But that will be Bernanke’s final FOMC meeting. The next one will be under the leadership of his successor. Would Bernanke make such an important directional policy change for the Fed as his final act, and leave his successor to deal with it? Not likely.

    So why the surprise reversal Wednesday to do nothing, missing its best opportunity, after preparing markets to expect it, and when markets had become okay with the expectation? Especially since it will be very difficult to act at either of its remaining meetings this year?

    Is the economy in that much more trouble than was thought?

    Other Voices:

    Jeffrey Saut, chief investment strategist at Raymond James Financial:While we could get a pullback on worries about the debt ceiling and the continuing resolution, my guess is it will go the same way as the fiscal cliff went – a bunch of sound and fury signifying nothing. If the market pulls back on Washington worries, I think it’s a buy.”

    Financial Times: “Aggressive investors may well decide to chase this year’s already impressive rally in equities, in the belief that an accommodative central bank still has their back.”

    Michael Hartnett, Bank of America Merrill Lynch: “The longer Main St. [the economy] takes to recover, the greater the risk of asset bubbles. Equity fund inflows this week are running at record levels, investor cash levels are high, US stocks are at all-time highs, and today Priceline became the first S&P 500 issue ever to trade above $1000.”

    Barron’s. Jacqueline Doherty: “What now seems clear is that it’s going to be a lot harder than most thought for the Fed to remove its stimulus without seeing some major side effects — and not good ones — in the markets. So, given stocks’ amazing gains in recent years, it may be time to start taking chips off the table. This bull market is 54 months old, downright ancient compared with the average bull, which lasts 39 months, notes Frank Gretz, a technical analyst at Wellington Shields.

    Wall Street Journal: “Less than 48 hours after the Federal Reserve surprised markets by not pulling back on its signature easy-money policy, its communications challenges were on full display—mixed messages from different central-bank officials. The two officials, Kansas City Fed President Esther George and St. Louis Fed boss James Bullard, were speaking at separate events in New York on Friday and disagreed over whether the Fed did itself a favor with the decision to keep in place for now its bond-buying program or may have shot itself in the foot.”

    To read my weekend newspaper column click here: Has Warren Buffett Nailed Another Market Top

    More on Warren Buffett’s call of market top in 1999.

    Due to space restrictions in newspaper articles, usually 900 words max, I wasn’t able to include in the article a considerable amount of additional information from what Buffett said in his warning in 1999 about the next 17 years.

    I want to provide it as it has some similarities to situations today.

    Some further excerpts from what he said then:

    Investors in stocks these days [1999] are expecting far too much, and I’m going to explain why. . . . . To get some historical perspective, let’s look back at the 34 years before this one – and here we are going to see an almost Biblical kind of symmetry, in the sense of lean years and fat years–to observe what happened in the stock market. Take, to begin with, the first 17 years of the period, from the end of 1964 through 1981.”

    I’m going to interrupt Warren here to insert a chart of that secular bear market of 1965-1982.


    Warren continues:

    “Then in the 1980s the situation reversed itself. And here’s what equities did in the next 17 years. The increase in equity values since 1982 beats anything you can find in history.”

    And here I’m going to interrupt Warren again to insert a chart of that secular bull market of 1982 -1999.


    Warren continues:

    “At the low in 1982, as is so typical, investors were projecting out into the future what they had been seeing. That’s their unshakable habit: looking into the rear-view mirror instead of through the windshield. What they were observing, looking backward [the period of 1965-82], made them very discouraged about the country”

    “But after a bull market has been underway for some time, and you reach a point where everybody already in the game is making money, a crowd is attracted into the game, responding simply to the fact that it seems a mistake to be out of stocks. In effect, these people superimpose an I-can’t-miss-the-party factor on top of the fundamental factors that drive the market.”

    “However today [1999], staring fixedly back again at the road they just traveled, most investors have rosy expectations. A Paine Webber and Gallup Organization survey released in July [1999] shows that the least experienced investors–those who have invested for less than five years–expect annual returns over the next ten years of 22.6%. Even those who have invested for more than 20 years are expecting 12.9%. Now, I’d argue that we can’t come even remotely close to that 12.9% over the next 17 years.”

    “Over the next 17 years, equities will not perform anything like – anything like – they have performed over the past 17 years. . . If I had to pick a probable annual return it would be 4% after inflation, and if 4% is wrong, I believe the percentage is as likely to be less as more.”

    “Now, maybe you’d like to argue a different case. Fair enough. But give me your assumptions. If you think the American public is going to make 12% a year in stocks, I think you have to say, for example, “Well, that’s because I expect GDP to grow at 10% a year, dividends to add two percentage points to returns, and interest rates to stay at a constant level.” Or you’ve got to rearrange these key variables in some other manner. The Tinker Bell approach–clap if you believe–just won’t cut it. Beyond that, you need to remember that future returns are always affected by current valuations, and give some thought to what you’re getting for your money in the stock market right now.”

    His forecast for the next 17 years has been on the money so far.


    The question now is whether, by raising Berkshire’s cash hoard to $49 billion again, and saying it’s because stocks aren’t cheap anymore and he just can’t find anything to buy, he is saying he believes we’re near the next cyclical top that will keep his predicted 17-year secular bear market running?

    By the way, Buffett also apparently raised Berkshire Hathaway’s cash level prior to the market top in 2007, based on this comment by Thomas Priore, CEO of ICP Asset Management in November 2008, “The winners from Lehman’s bankruptcy and AIG’s government bailout will be investors such as billionaire Warren Buffett, who can buy without borrowing. . . . . Buffett’s Omaha, Nebraska-based Berkshire Hathaway, has been involved in eight acquisitions since October, including yesterday’s $4.7 billion purchase of Constellation Energy Group Inc. in Baltimore. That compares with six in the previous 12 months, when Berkshire’s largest acquisition cost only $350 million. The deals were possible because the company still had cash on hand totaling $31.2 billion at the end of June.”

    Subscribers to Street Smart Report:

    In addition to the charts and recommendations in your secure area of this blog, see Wednesday evening’s Mid-Week Markets update (after the Fed’s ‘no taper’ decision) in your secure area of the Street Smart Report website.

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more.