A few humble thoughts about the stock market’s recent correction:
We all knew the market was too high. You would be hard pressed to find any observer who did not think that the market was poised for a fall. So, now we have our correction.
There is no sign at this point of a drastic fall in corporate profits, the main driver of stock prices. Except in the oil sector, profits are superb. This can and will change but it has not changed yet.
There is rarely a huge correction that lingers without either a liquidity crisis — i.e., a drastic fall in available credit or else a generalized depreciation of the dollar — i.e., inflation — or a generalized depreciation in asset values, i.e., deflation. Despite much talk to the contrary, there is at this point no sign at all of general deflation in any large industrial area, and very little inflation. There is no sign of a major bank failure or a shortage of capital. Indeed, capital is cheap and plentiful worldwide.
There is such a thing as a panic without any good cause. Those happen all of the time and they are not really “panics.” They are what happens when traders see the markets going up or down and go along for the ride, exaggerating the movements, often by a great deal.
MARKETS ARE NOT MADE BY ECONOMISTS OR STATISTICIANS. They are made by young guns in for a minute or five minutes, with no thoughts at all about ISIS or Ebola or the rate on long-term bonds. These guys are operating in the cocoon of the traders. Then economists and commentators and reporters try to rationalize what the traders have done in terms of historical meaning.
But that’s a hoax. The traders are just wheeling and dealing for the moment, and we are silly to think they know anything we don’t know. When the markets move wildly, it’s just frat boy hijinks most of the time. Eventually, some measure of rationality seeps into the picture and the market stops being a voting machine and becomes a weighing machine, as Buffett calls it.
Or, as we say in The Program, “Feelings come and feelings go, and feelings are not facts.” No one knows how far the market will fall or when it will turn. I mean NO ONE. Not even Buffett. But we do know that people who stay in broad indices and do not move in and out make money and lots of it over long periods. The amateur day trader or short-term trader gets killed. My own experience tells me that patience is a virtue and when the markets go crazy, take a long nap.
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