Set forth below is the text of a response that recently posted to the Quora site:
What do you think of David Stockman’s comments that the U.S. Stock Market is now in its third bubble of the 21st Century?
Stockman is right.
He is missing one piece of the puzzle.
This has nothing to do with good luck or bad luck.
There IS something fundamentally broken at the core of our financial system.
The one thing that Stockman does not quite grasp is the ultimate cause of these multiple bubbles. He is right that in a direct sense it is the Federal Reserve that is propping up the bubbles. But the Fed responds to pressures like all other entities. We cannot expect the Fed to make good calls until we remove those pressures.
The Fed is propping up the bubbles because WE want it to. The Fed is a political institution. The Fed will stop propping up the bubbles when the people of this country adopt an anti-bubble perspective. Then the Fed will be happy to help us out.
The core problem is the Buy-and-Hold investing strategy. Buy-and-Hold ALWAYS causes massive bubbles. There has never been an exception in the 140 years for which we have records of stock-market returns. Once the stock market is in a bubble, there are trillions of dollars in Pretend Money in people’s portfolios. They spend that money on good and services and thereby pump up the economy. Then no one wants the bubble to be popped because popping it would bring on an economic crisis.
What we need to do is to explain to people how important it is to exercise price discipline when buying stocks. We now have 34 years of peer-reviewed research showing that stock risk is reduced by 70 percent when investors exercise price discipline (that is, lower their stock allocations as valuations increase).
We know what works intellectually. The problem is that we did not learn what works until 1981, when Nobel Prize Winner Robert Shiller published the research showing how critical it is that all investors always practice long-term timing. Unfortunately, earlier research had suggested that timing might not be required or might not even work. An entire industry was built to promote this wrong-headed approach before Shiller published his research. The last 34 years has been a story of turf battles as researchers have tried to get the truth out and industry leaders have gone to battle with them.
It’s very hard to pop bubbles. Popping them always brings on an economic crisis. There is always going to be huge opposition to the idea of bringing on an economic crisis. The time to stop bubbles is BEFORE they develop. What we need to do is to show people how much sooner they could retire if they followed research-based strategies rather than the Buy-and-Hold stuff pushed so hard by the ethically challenged salesmen who dominate discussion in this field.
We need a national debate on these issues. Shiller predicted the financial crisis in his book, published in March 2000. Most of the explanations for the financial crisis that have been put forward were put forward to score political points. We need to get serious about overcoming the financial crisis. We should be looking to people who know enough about how stock markets actually work to have predicted the crisis long before it hit us and to people who are not compromised by their employment in the stock-selling industry.
Again, this has nothing to do with luck. As a people, we CAUSED this economic crisis. That was not true of earlier financial crises. But this time we had decades of academic research that warned us of where we were headed while we permitted stock prices to rise higher and higher. This is the first ELECTIVE economic crisis in our history. We should all pull together to get the work done to insure that it is the last.
The good news is that we on the verge of solving the problem of the boom/bust cycle. We will all enjoy stock investing much more once we are able to invest in a way that is truly smart and simple and safe. Nothing but the popularity of Buy-and-Hold stands in our way at this point.