Trendwatching

Don't be Fooled by the Next Investment Fad, Mania, or Bubble

Ron Insana

CNBC anchor Ron Insana’s Trendwatching, his third examination of the stock market after The Message of the Markets in 2001 and Traders’ Tales in 1996, should have been entitled “How not to lose your bundle the next time around.” His stated purpose is to save the individual investor from him/her self during the next investment bubble that’s sure to come. And he delivers his message loud and clear, whether it will be heeded or not. Throughout this work, Insana strains to point out that although bubbles occur, you do not have to be a victim; that with the historical knowledge he presents, you can arm yourself to go forth and do battle with market forces to survive and prosper through the bubbles’ wild rides.

This book is a revealing trip down investment-history lane and should be placed beside every investor’s phone or electronic communications device as a reminder not to get caught up in the emotional mania that might be brewing right around the corner. He begins by defining what a bubble is, and borrowing strongly from Charles Kindleberger’s (who died recently) Manias, Panics, and Crashes, Insana traces bubbles starting from our most recent stock market debacle all the way back to Holland’s Tulip Craze in the early 1600s.

He finds that they all follow the Kindleberger (and Hyman Minsky) script: an invention or discovery sets off “a new era,” then easy profits (speculation) fueled by easy credit or monetary conditions lead to the eventual parabolic blow off. Revulsion and recrimination set in as prices plunge back to earth. The insiders will have made out like bandits but the little guys get left holding a worthless bag of stocks. Reforms are instituted to correct the excesses. Then the stage gets set for the next bubble which will be of a different variety but of the same nature as the one before.

The writing is crisp and the language is lucid. It’s as interesting as it is educational. Where I would have wanted more insight concerns Insana’s statement, “Bubbles, while useful in the building of transformational industries, are destructive when it comes to the financial well-being of the individual investor.” That sounds like he’s a bubble buster. Yet, he frequently references high-tech venture capitalist Robert McNamee who contends that without bubbles nothing is ever accomplished. So which is it? Can progress really happen without these manias in which we literally throw money at the “new, new thing” of Michael Lewis fame? Thinking along the lines much like the ongoing debate about what part adversity plays in human accomplishment, Insana raises the question of  whether we can build new infrastructure without hurting the losers who invariably get in too late and stay in too long? The question remains to be answered.

Another inquiry comes to mind while rummaging through the canal building, railroad building, automobile making, radio broadcasting…and Internet bubbles of the past couple hundred years: What part does politics play in the care and feeding of the “good times” so necessary for bubbles to form and spread. Did political elites of yesteryear encourage earlier bubbles? Although LBJ’s Fed chairman, William McCesney Martin, said that the Fed’s job was to “take away the punch bowl” just as the party gets started, would politicians sit idly by and watch the Fed (or some other monetary authority) squash a bubble, and with it the jobs and business conditions necessary for their (re)election? Well, we know George Bush did. But more recently, would Clinton have paid no mind to the Fed if it had begun raising stock margin requirements after Greenspan’s famous December 1996 “Irrational Exuberance” speech? Did Clinton not learn something from the Republican sweep of Congress in 1994 after Greenspan goosed short term interest rates 100% earlier that year, and long term rates followed by rising 25%?

Toward the end of the book, Insana ventures into the future by taking the precepts he has established for the creation of a bubble and plugs them into today’s market. It isn’t very difficult for him to make the case for hard assets being the next mania. Referring back to Kindleberger, he finds that just about all the ingredients necessary for a hard-asset bubble are in place: easy monetary policy, a weakening dollar, war, high oil prices, strong real estate demand, and an escalating gold price. The only thing missing to set off this bubble is the recognition of the presence of “inflation.” When that gains currency in the media, then it’s “everybody into the pool” and off we go again.

Perhaps the true worth of this book is the graph on the last page – a picture of what Insana has been defining, chronicling, and warning against. Taken from The Bank Credit Analyst newsletter, it is a composite chart of the path all bubbles take. Just fit in whatever current mania is climbing skyward, and if it resembles this pattern…GET OUT! For Insana, that’s the real payoff for keeping an eye on the trend.