“Don’t play cards with a man named Doc. Don’t eat at a restaurant called Mom’s. Don’t sleep with a woman whose troubles are greater than your own.” – Nelson Algren, A Walk on the Wild Side
Fresh Fruit or Rotting Vegetables?
As an extended bull market comes to a close, a peculiar atmosphere settles over Wall Street. With the sun setting on the market, a scent drifts through the air, unidentifiable yet reminiscent of fresh fruit or decomposing vegetables. You can sense it, but pinpointing its exact nature is challenging.
The Dow Jones Industrial Average (DJIA) reached a record high of 26,616 on January 26—almost five months ago. Since then, it has fluctuated unpredictably. In this current environment, buying the dip might not yield the expected rewards.
During the market peak in mid-2007, before the 2008-09 crash, some of Wall Street’s top analysts confused the initial dip’s aroma for fresh fruit. They jumped at the opportunity to buy the dip unaware of the true nature of the scent. What was it—fresh fruit or rotting vegetables?
The truth became clear only in mid-2008 when the bear market unleashed the foul odor of rotting vegetables—leading to a crash of over 50 percent in the DJIA.
Some dips are worth buying, while others are not. The dip from mid-2007 to mid-2008 was certainly a time to avoid investments. So, what about the current dip?
Highly Dubious
Renowned billionaire hedge fund manager Paul Tudor Jones is known for his adept market predictions. Recently, he shared his insights during a discussion with Goldman Sachs CEO Lloyd Blankfein as part of the “Talks at GS” series.
With a mix of expressions, Jones shared his assessment:
“You must be aware that this isn’t a sustainable price… When you consider the prices of stocks, real estate, and more, we are poised for a return to normal real interest rates and long-standing term premiums. We must revert to a viable fiscal policy, which likely means asset prices will decrease in the long term.”
The prospect of mean reversion in real interest rates and falling asset prices over time is concerning. However, Jones didn’t provide specifics on the repercussions of such a decline, suggesting a long-term bearish trend on stock market indices like the S&P 500.
Before diving deeper, it’s crucial to clarify: the 2008-09 financial crisis was not a real, prolonged asset price decline; instead, it was a mere bump in the road. A true long-term asset price decline leads to something far grimmer: a depression.
America has not endured a significant economic depression since the 1930s. So long has it been that few living individuals experienced that era’s hardships. To understand better, we must turn to historical accounts.
A Walk on the Wild Side
Here are the haunting words of the late Nelson Algren from his often-overlooked novel, A Walk on the Wild Side:
“In 1931, the Ladder of Success had been inverted; the top was at the bottom, and the bottom was at the top. Leaders, once adorned with gold watches, were now delivering baby photos door to door in worn-out shoes. Physicians had taken to selling skin lighteners, while ship captains waited in vain for an opportunity to find work.
“Offices of significant fire insurance firms crumbled to ash, which seemed only fitting. When the unpaid fire department finally cleared out, little remained but charred files, empty swivel chairs, and heaps of shattered glass amid the mahogany remnants.
“Such mahogany had served only the brokers. Soon, brokers began leaping from rooftops, indifferent to those below, just as they had been when fortunes were flourishing. Industrial magnates scrambled to grasp every dollar they could find for one last desperate run, while attorneys turned on one another merely to keep their practice alive.
“And every institution housed a usurer, locked away in solitude, counting percentages on the wall day after day.
“In no time, the enterprising door-to-door salesman became the backbone of the American economy. He would work briefly for companies like Realsilk Hose or Hoover Vacuum, only to pilfer supplies for personal gain. Change snatching, too, was on the rise, as many relied on it to survive week after week.
“Meanwhile, the secretary of the Federation of Labor observed that Business resisted any further decline.
“Self-sufficiency for the destitute and government assistance for those overflowing with resources became the prevailing plan.”
Does this reflect what Jones anticipates with declining asset prices over the long term? Only time will tell.
Sincerely,
MN Gordon
for Economic Prism
