by Roger Bourke White Jr., copyright October 2015
This is a case study of the Mania and Markets pattern. This is an example of some predicting that I did using the Mania and Markets model. This is written as the Iraq War and 2000's bubble evolved.
This is an example using the patterns to predict.
The number one crisis of 2003 is the Iraq War crisis. There is every sign that this crisis will reach some kind of resolution during 2003. So, it is not only a crisis, it is a mania marker as well. In my thinking, the Iraq War will represent "closure" on the mania that the 9/11 Disaster brought into being, and thus end that mania. [[Note: I later had to change my mind on this presumption. These days I see 2008 as ending the 9-11 Mania.]]
Is there a big mania building in 2003? I think so! It is being built around the Iraq War scare. Unlike the Hong Kong and Y2K examples, this mania has had a short gestation. Bush's saber rattling started in September 2001, so the event has been running only eighteen months, not thirty years. But it makes up for its short duration and unknown ending date by being a very exciting event.
So, Lesson One is in place: We have a mania situation. What about Lesson Two: What investment trend has the mania latched on to?
As I look at the news, I see one industry that is clearly in an unnaturally prosperous condition: Real estate, in particular the new housing market.
My experience over the last forty years is that a recession trashes the new housing market. But this trashing hasn't happened in 2001 or 2002. What is holding this market up? Conventional wisdom is that low interest rates are holding this market up, but my vote is mania. (Note again, this is an example of quiet investing running contrary to public doom and gloom.)
My prediction based on the "Mania Model" is as follows:
We are currently in a mania period. That period started with the shock of 9/11 and with the expectation that something would happen as a consequence of it. With time, the mania has become focused on G.W. Bush's saber rattling (War on Terrorism) and on the Iraq Crisis in particular. This is the doom and gloom element.
Now that the mania is focused, the mania will end when the Iraq Crisis is solved in some fashion -- war is fought, Saddam leaves, or some new crisis takes its place. If the crisis winds down, that means some other crisis has taken its place as a headline maker, and the Iraq Crisis will no longer support a mania. That counts as ending the crisis, and will mark the end of the mania.
When the Iraq Crisis resolves, the mania will end. The mania could end earlier than solving the Iraq Crisis if a credit crunch starts for some other reason, such as a Greenspan announcement that fighting inflation is now a Fed policy, and interest rates will be going up.
When the mania ends, the new housing market will tank because easy money will dry up. Coincident with this drying up, will be a serious readjustment of credit in the US, which will first cause great pain in the construction and finance industries, and then the pain will spread. Scandals comparable to Arthur Anderson and Enron will likely be uncovered.
This readjustment will go on for years and will be characterized by the housing market being soft and slow compared to the market of 2001 and 2002, so there is no opportunity to be gained by jumping on early bargains that show up in real estate. Wait at least a year, and more likely two or more, to see a bottom.
The contagion will likely spread to the large appliances and auto industries since these are also based on easy credit and consumer confidence -- the end of the mania will be marked by a collapse in consumer confidence and general economic malaise.
In other words, just as it seemed to be safe to get back into the investing waters. ... <queue: Theme song from Jaws>
The Iraq War has and come and gone. The big surprises of the war were its speedy and cheap conclusion and that the main justification for going to war seems to have been bogus: Iraq did not have huge stockpiles of weapons of mass destruction -- or any at all!
The mania should be ending. There is a good chance it is, but if Bush is ruthless and adroit, he may succeed in keeping the mania burning on for years longer as War on Terrorism. With the mania ending, consumer enthusiasm (AKA confidence) should wane -- it is recovery time.
The housing bubble hasn't burst yet, but that's because it's being deliberately sustained by Greenspan and The Fed's actions. Greenspan wants to see housing remain the engine for an upcoming economic recovery, and he's more worried about deflation than inflation, so he's lowering the prime rate again, which is encouraging another round of mortgage activity and pumping more paper wealth into the system. This, in my opinion, is delaying the burst of the housing bubble, and it's going to make it worse. Other news: Due to severe earnings drops in 2002, the S&P P/E ratio is still well over 20, which means the stock market is still behaving like we are in optimistic boom times.
Other significant news: The Freddie Mac Scandal. Freddie Mac is a key component in the mortgage industry. As of this date, the three top people at Freddie Mac have been summarily dismissed. That's a huge amount of smoke in a critical place at a critical time. I predict this news is the fluttering of the butterfly wings that is going to evolve into a housing hurricane.
Remember Lesson Three: When the housing market tanks, the effect will be long-lasting, and it will mark a major change in how the housing industry does business. I don't know the housing industry well enough to predict what kinds of changes are likely, but if it fits post-bubble patterns, there will be lots of consolidations and it's likely that Freddie Mac and Fannie Mae will be restructured to change their privileged charter positions.
My goodness! That crystal ball was crystal clear! It is kind of spooky in retrospect. One thing I didn’t catch in June 2003 was that Iraq would turn into a long and deep quagmire. That extended the mania. The hangover didn’t begin until 2007, and then... whew! I’ve been surprised at the depth of the bust. Another interesting element is what I called a housing boom transformed into a “mortgage boom” as the CDO (Collateralized Debt Obligation), a new financial invention, grew popular.
And finally, the hangover is transforming into our new Worry of the Decade. We are moving from worrying about terrorism to worrying about debt and income distribution. This is an example of not-going-back.
This is a real-world example of doing some predicting based on the Mania and Markets Model. The predicting is not perfect in terms of timing, and there were surprises.
But the pattern was fulfilled. This is a good example of how history can help in predicting the near future.
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