Leithner Letter Nos. 163-166
26 July 2013 - 26 October 2013

During every preceding period of stock speculation and subsequent collapse there has been the same widespread idea that in some miraculous way, endlessly elaborated but never actually defined, the fundamental conditions and requirements of progress and prosperity have been changed, that old economic principles have been abrogated, … that business profits are destined to grow faster and without limit, and that the expansion of credit can have no end.

BusinessWeek, November 1929
(cited by John Hussman,
Closing Arguments: Nothing Further, Your Honour, 13 May 2013)

For as long as I can remember, veteran businessmen and investors – I among them – have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of ownership and not betting slips. … The investor has no choice but to sit by quietly while the mob has its day, until the enthusiasm or panic of the speculators … has been spent. He is not impatient, nor is he even in a very great hurry, for he is an investor, not a gambler or a speculator. The seeds of any bust are inherent in any boom that outstrips the pace of whatever solid factors gave it its impetus in the first place. There are no safeguards that can protect the emotional investor from himself.

J. Paul Getty, “The Wall Street Investor” (1962)
(repr. in The Book of Investing Wisdom, Peter Krass, ed., 1999)

Neither in Pamplona nor in Stock Markets Do We Run with Bulls

The end of one financial year and the beginning of the next is an appropriate time to reflect upon the outgoing year’s events, twists and turns, triumphs, trials and tribulations. It is also a time to place them into a broader context, consider their causes and consequences, learn one’s lessons and set one’s course for the next financial year. It’s time, in other words, to confront one’s actions and expectations with cold logic and hard evidence. For a summary of our actions’ results since 1999, click here.

What about the expectations that underlay these actions? I disclaim any ability to foresee short-term changes of business conditions, the level and direction of financial markets or the prices of securities. I possess no crystal ball and ignore – but often succumb to the temptation to mock – those who imply that they do. Neither I nor anybody else can time the short-term movements of markets and securities with any reliable degree of accuracy; over the long term, however, investors worthy of the name can roughly value them. For more than a decade, cautious assumptions and careful reasoning have yielded the same conclusion: the prices of most financial assets in Australia have been excessively high; accordingly, the people who’ve bought them resemble speculators more than investors.

From this reasoning follow several additional conclusions. The policies which ignited the boom of 2003-2007, like those which unleashed previous booms, were dangerously misconceived. They were misguided because – like their predecessors – they sow the seeds of bust. The false upswing doesn’t just precede the genuine downswing: it causes it. Alas, since 2007 governments around the world have not abandoned their harmful policies. Quite the contrary: in a futile effort to reignite the boom, they have intensified them into an unprecedented frenzy of interventionism. They are oblivious to the fact that “stimulus” dispenses no honey and much poison: it simply intensifies the eventual bust.

To read the entire Newsletter (PDF), click here.

Chris Leithner


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