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Manias, Groupthink and the Absence of Fear
02/21/2019 5:00 am EST
There are so many indications of a mania that we cannot fathom why this is not widely discussed by professionals. Equally important, there are many indications that the mania is in the process of imploding, also profoundly ignored by professionals, cautions Alan Newman, editor of CrossCurrents.
Total dollar trading volume (DTV) soared 26.3% in 2018, to a truly awesome and bizarre $89.4 trillion. Trading averaged a total of more than $354 billion every trading day.
Not only was last year’s DTV percentage gain the largest since 2007, the annual total was 91.4% higher than 2007. Trading was amplified by an immense expansion in leverage, increasing 276% from the level of the tech mania.
This recent period is likely the most fantastic exercise of Groupthink in stock market history. We find it hard to believe, but ICI just reported cash assets of mutual funds have again fallen to the record low of 2.9%, also achieved in January and February of 2018.
One of the worst aspects of our analysis is the seemingly bizarre absence of fear. There is no urgency, except to buy. There is no fear, no panic and no concern that bear markets invariably follow bull markets. Given two bears in the last generation cut prices in half, the lack of capitulation over the past 20 months is a stunning development.
We know from the past that it takes a massive increase in trading to fuel excitement. This was true into the highs of 1929, 1987, 2000 and 2007. While it is true that valuations seem to be of no consequence — that is true only until they are of consequence.
The crash from the tech peak took stocks down 50% and took Shiller’s Cyclically Adjusted P/E (CAPE) to roughly 22.7. The crash from the 2007 double bubble bust also took stocks down 50% and took CAPE to 15.
At the very best, we should expect the resolution of the current mania to end somewhere between CAPE 15 to CAPE 22.7. If CAPE went to 20, that would take stocks down another 33% from today’s level to Dow 16,400, not all that far from our bear market target of Dow 14,719. We remain bears and still believe our bear market target is reasonable.
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