John P. Hussman, Ph.D.
President, Hussman Investment Trust
February 2021
The nutshell is this: the old line economy stocks just don’t work because they have earnings and eventually rising interest rates impact earnings. New economy stocks have no earnings, so investors don’t see a need to exit.
– Wall Street analyst on CNBC, early March 2000, said with a perfectly straight face
Nothing so animates a speculative herd as a parabolic price advance in an asset detached from any standard of value. I am convinced that future generations will use the present moment to define the concept of a reckless speculative extreme, in the same way our generation uses “1929” and “2000.”
I included the CNBC quote above in an investment research letter I published on March 7, 2000, at the peak of a bubble that would ultimately take the technology-heavy Nasdaq 100 down by an improbably precise -83%. I say “improbably precise” because this is how I opened that same letter:
“On Wall Street, urgent stupidity has one terminal symptom, and it is the belief that money is free. Investors have turned the market into a carnival, where everybody “knows” that the new rides are the good rides, and the old rides just don’t work. Where the carnival barkers seem to hand out free money just for showing up. Unfortunately, this business is not that kind – it has always been true that in every pyramid, in every easy-money sure-thing, the first ones to get out are the only ones to get out. We’ve seen two-tiered markets before: most prominently in 1929, 1968-69, and 1972. Even at those pre-crash extremes, the S&P never sold above 20 times record earnings. The market clearly faces problems at a multiple of 32. Technology stocks will ultimately fare worse. Over the past 5 years, the revenues of S&P 500 technology companies have grown at a compound annual rate of 12%, while the corresponding stock prices have soared by 56% annually. Over time, price/revenue ratios come back in line. Currently, that would require an 83% plunge in tech stocks (recall the 1969-70 tech massacre). The plunge may be muted to about 65% given several years of revenue growth. If you understand values and market history, you know we’re not joking.”
– John P. Hussman, Ph.D., March 7, 2000
One of the hallmarks of every bubble is a loss of interest or ability of investors to distinguish between investment and speculation. Once that mentality has taken hold, and prices become wildly elevated, it is impossible to sustain the bubble without also making its consequences worse. In 1934, Benjamin Graham and David Dodd described the spectacular errors of investors that ultimately contribu