Warnings of bubble sounded, but few listened

Some warned about bubble

few listened

September 29, 2002|By JAY HANCOCK

THE FIRST time Robert J. Shiller saw his book-length prophecy of the stock market collapse on sale, he was in a Washington train station.

It was March 21, 2000. Shiller, an economics professor at Yale, was appearing before a House subcommittee on monetary policy. The subject of his testimony was the same as that of his book: the go-go market.

The Dow closed at 10,867 that day; the Standard & Poor's 500 at 1,501; the Nasdaq at 4,865.

Had you wandered into the B. Dalton store in Washington's Union Station and picked up Shiller's book, Irrational Exuberance, you could have read this: "The present stock market displays the classic features of a speculative bubble: a situation in which temporarily high prices are sustained largely by investors' enthusiasm rather than by consistent estimation of real value." The outlook for stocks, he went on to say, "is likely to be rather poor - and perhaps even dangerous."

Not everybody got snookered. As stocks soared and reason fled, some saw the bubble for what it was and said so. Of course, most of us didn't listen.

This is a column about the Cassandras, the lonely voices uttering truths about stocks at decade's end. It is not exhaustive, but in interviews with Shiller and others, I have tried to identify some of the smart folks who, it turns out, solved the riddle of the Dow and could have saved much for many.

Shiller thought stocks might implode before he finished the book. Fortunately for him and his publisher, however, it appeared at the absolute peak, producing, in retrospect, a piece of Churchillian, voice-in-the-wilderness prescience.

The S&P 500 topped out three days after Shiller saw his book in Union Station.

Despite the publication date, "it's not clear that I had it completely down," Shiller says of his timing. "But in 1999 it was getting so out of hand that I decided to write a book."

Indeed, Shiller had been bearish for some time. This was true of most of the prophets. Nobody that I know of said, "Buy, buy, buy" through the 1990s and then, "Sell everything!" at the end. But the people cited here get credit for seeing when the ridiculous morphed into the ultra-ridiculous and adjusting their alarums accordingly.

An impressive record of calling stock market plunges, including this one, belongs to Robert H. Parks, a longtime Wall Street analyst who advises institutional clients and teaches finance at Pace University.

On Jan. 3, 2000, in the Christian Science Monitor, Parks described the boom in technology stocks as "the biggest single financial bubble in U.S. history" and said the Nasdaq would deflate within months.

In August last year, after the Nasdaq had fallen to the then-unthinkable "floor" of 2,000, Parks wrote that "the bursting equities bubble has not run its course, especially among Nasdaq stocks." He was right.

For the record, Parks told me he is still bearish, calling stocks' outlook "bleak to black." Shiller says of the market, "I still think it has a good chance of going down substantially from here, although I can't rule out a rally."

Other seers of the late 1990s were Anthony and Michael Perkins, brothers who wrote the book The Internet Bubble. The Perkinses' technology magazine, Red Herring, was blamed for inflating the bubble, but perhaps they atoned by writing in November 1999: "Our advice to Internet investors is simple: If you own any of these stocks, it's time to sell."

Quite a few people, including Warren Buffett, predicted the Internet collapse, although they were a minority. A smaller group believed, as did Shiller, that the whole market was bloated.

An even tinier cadre sounded early warnings about telecommunications, which was tied to the Internet. Credit here goes to Pascal Aguirre and Mark Bruneau of the research firm Adventis. In mid-1999, they were among the first to see a looming "glut" of fiber-optic capacity.

Even in the business media, which have been justly battered for egging on investors, there were bearish heroes. Columnist Robert Samuelson sounded cautionary notes. Floyd Norris wrote a terrific piece in the New York Times on March 31, 2000, that quoted Nobel Laureate Franco Modigliani as saying that the Dow could fall to 8,000 or 9,000 and that Internet stocks were "very much a bubble."

But my favorite prediction came from Kansas City Star columnist Stephen Winn on March 18, 2000. Viewed from September 2002, Winn's admonition bears the authority of Jehovah on Mount Sinai.

"The people who get hurt when today's stock-market bubble bursts should never complain that they weren't warned," wrote Winn, who quoted Buffett and others who feared a bust. "The collapse of grossly inflated prices always comes as a terrible shock to those who lose their shirts. The cries are loud and pitiful: Why, oh why, weren't we told this could happen?

"But anyone who can't hear the warnings about today's speculative frenzy just isn't listening hard enough."

Wish I'd written that.

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