Contrarian Thinking Secured Me Against Over Optimism in the Boom Years


What are the upside possibilities in this grim situation? There is no doubt that investors of all kinds are looking to the dark side of all possible expectations. I call myself a contrarian, and contrarian thinking secured me against over optimism in the boom years of the 1990s and early 2000s. Surely I now have a duty to look at the contrarian view, even when it contradicts an instinctive feeling that there is a great deal of trouble still ahead of us.

Contrarianism has never meant a simple reversal of the immediate situation. Contrarians do not say to themselves, or to their fellow contrarians, “GM, Ford and Chrysler are in terrible trouble, let us pile into their shares.” In a week when almost all the news is bad, one has to be a cautious if one is to avoid further nasty surprises. Contrarianism is a matter of hedging one’s expectations, so as to avoid surprises.

The first contrarian point can be made about the stock market. There are a large number of companies which meet two criteria. They can be expected to survive the crisis and their shares are much cheaper than they were. I am not a stock picker, but a glance at the stocks listed on the New York Stock Exchange shows that there is a good choice of shares which offer a price earnings ratio below 10 and a share price below half the high level for 2008. Which of these shares are in good shape I do not know, but collectively they offer good value. They may, or may not, be near the bottom, but in three years time I feel that they will, collectively, seem to have been bargains. In emerging market stocks there are some even more striking bargains, with price earnings at 5 or even below. Of course, one has to avoid shares in companies which are in the eye of the storm – such as companies which make automobile components or sell real estate.

The strongest macroeconomic reassurance comes from the “automatic stabilisers”. In the early 1930s, most countries had private spending which accounted for between 80 and 90 per cent of national income. When spending was cut by private individuals to protect their own finances, there was little public spending to maintain the balance. That created a competition in mutual impoverishment, well recorded in Maynard Keynes’s General Theory (1936).

Governments in the early 1930s tended to cut their own spending, in a premature effort to balance their budgets. When private individuals cut back nowadays, Governments not only maintain their expenditure, but actually increase it as a part of a contracyclical policy. At some point in the future, this may lead to Governments having to cut back to avoid inflation, but the initial consequence is that Government spending acts as a contracyclical, anti-deflationary, force. This does not mean that Governments have all been converted to Keynesianism; it is rather that the old doctrine of balancing budgets in order to maintain fixed rate convertibility has virtually disappeared. There is no longer international pressure on Governments to make deflationary periods worse by deflating themselves.

I would add a third contrarian argument. One should never underestimate the capacity of human beings to respond to challenges. Homo Sapiens has got through 50,000 years of evolution by surviving individual and collective challenges of a fearsome kind. As a species we may have made many mistakes, but we are survivors. Democracy, as the dominant political structure of the 21st Century, gives humanity a flexibility of organisation and requires Governments to be responsive to human needs.

There is a time lag between any economic crisis and its resolution. But no contrarian ought ever to despair. Human experience can be summed up in proverbs. One such proverb is that it is always darkest before the dawn. It is pretty dark right now.

William Rees-Mogg
for The Daily Reckoning Australia

William Rees-Mogg
Leading political editor William Rees-Mogg is former editor-in-chief for The Times and a member of the House of Lords. He has been credited with accurately forecasting glasnost and the fall of the Berlin Wall – as well as the 1987 crash. His political commentary appears in The Times every Monday. His financial insights can only be found in the Fleet Street Letter, the UK's longest-running investment newsletter.


  1. mmmmmmm …. automatic stabilisers and the future of the pound?

    The nation of shopkeepers pushes the envelope with financial jockey services displacing rust belt industry and meanwhile oil & gas production dwindles (that which had paid for Maggy the shopkeeper’s restructuring adventures). Lord William Rees-Mogg should take care when doing the happy clapping not to inadvertently be the sage of his empire’s ruin.

  2. Whichever company has the forsight to take a slightly contrary point of view and build the vehicle which we will travel in, in the future is worth investing in.

    This new type of aircraft is the most stable ever, it flies optimally in windiest conditions, sucking in the energy of the wind, to give it lift.

  3. Bear market rally.

    Dan has speculated that the sharemarket may experience a rally comparable to mid-November 1929 to mid-April 1930. Some news items hint at this possibility.

    On September 2, 2008 this news heading appeared: “Tice: Huge Stock Decline Ahead”.

    The article reported:

    “David Tice has made himself famous for successfully shorting stocks. Now the investment manager sees a bear market for the next five years, with share prices dropping 50 percent to 70 percent over the next 18 months.

    “Tice says it’s difficult to predict when the market’s plunge will begin. “Who knows what will happen to the market until the end of the year?” he asks rhetorically” (, September 2, 2008).

    This called to mind a similar prediction in September 1929:

    “Speaking before his Annual National Business Conference on 5 September [1929], Roger Babson observed, ‘Sooner or later a crash is coming, and it may be terrific…factories will shut down…men will be thrown out of work…the vicious circle will get in full swing and the result will be a serious business depression’” (John Kenneth Galbraith, “The Great Crash”, p.108).

    “Later that day the stock market declined by about 3%. This became known as the “Babson Break”. The Great Depression soon followed” (“Roger Babson”, wiki).

    From the close on September 5, 1929 to the close on November 13, 1929, the Dow fell 46.3%. (From September 3 high the fall was 47.9%).

    From the close on September 2, 2008 to November 20, 2008 the Dow fell 34.2%. (From October 2007 to November 2008 the Dow fell 46.7%).

    From November 13, 1929 to April 17, 1930 the Dow rose 48%.

    Bob Hoye made this comment in “Pivotal Events”, November 19, 2008, :

    “In 1929, the big hot stocks were in the DJIA, and this time around they are in the NASDAQ. We have been using the classic fall crash model, which is based upon the major post-bubble contractions. Typically, forced selling reached a maximum in late October, when the market briefly rebounded, and tested the lows around mid November.

    “Occasionally there can be some interesting dates. In 1929 the panic low was on October 29, the bounce was to November 4, and the test was accomplished on November 13. This time around, the equivalent dates were October 28 and November 4.

    “It is uncertain how long this correlation may last, but generally once the test is completed we have been expecting a tradable rally out to around March. This would likely carry most equity sectors with it.”

    On November 19, 2008 the Dow in the test of the October low closed below it. In 1974 the Dow in a retest of the October low also closed below it, in December.

    The Dow Jones decline of 2007-2008 is 0.6% more than the decline of 1973-74. As noted in “Barack Obama, Jimmy Carter and JFK – Clues to the future?”:

    “In the history of the Republican party, (Abraham Lincoln was the first Republican president), only three times have the Republicans held the presidency for two consecutive terms before losing office. The three Administrations were those of – Dwight D. Eisenhower (1953-1961), Richard Nixon/Gerald Ford (1969-1977), and George W. Bush (2001-2009).

    “Now that the Republicans have lost office after two terms, the post Eisenhower administration of Democrat John F. Kennedy/Lyndon B. Johnson and the post Nixon/Ford administration of Democrat James E. Carter may provide clues for what the future may hold…”

    To this scenario may be added the link between Dow valuation and nominal highs and the longwave P/E ration cycle, seeing that the Dow nominal high occurred in the third year of George Bush’s second term as president, as opposed to the last year of Richard Nixon’s first term as president, and the Dow has not experienced a ‘comeback’ rally like the 1929-1930 type rally.

    Continuing from above article:

    “The 1974-76 Dow Jones Industrial Average rally of 75.7%, that began in the recession of 73-75, a ‘type’ for a future rally, beginning in a recession?

    “The Dow valuation high of 1966 = 2000;

    “or alternatively

    “The Dow and ‘glamour’ stock high of 1968 = The Dow and ‘dotcom’ stock high of 2000 – Presidential election years.

    “Valuation highs in Democratic administration second-terms in 1966 and 2000.

    “Mild recessions in Republican administration first terms in 1969/70 and 2001.

    “Nominal Dow highs in Republican administrations in 1973 and 2007.

    The 1966 (1968) decline of 36% to May 1970 = The 2000 decline of 38% to October 2002.

    The Dow declined 45.08% from 1973 to 1974;

    so far, the Dow declined 46.68% from 2007 to 2008.

    The bear market low of 1974, below the 1970 low = The bear market low of 2008?, below the 2002 low? (On November 20 the Dow closed 266 points above the 2002 low).

    The bear market rally high of 1976 lower than the nominal high of 1973 = the bear market rally high of 2010? lower than the nominal high of 2007?

    or alternatively

    if the bear market low of 2008? is higher than the bear market low of 2002, or even it is not, the bear market high of 2010 higher than 2007?

    Bear market 1966 – 1982 (16 years) = Bear market 2000 – 2016?

  4. Obviously at their peak circa 2001 Wall Street stocks were at about 40% overprices (or more) based on traditional PE ratios. This ten year greatest period of wealth creation in US history was merely asset inflation. The steps taken by Greenspan to prop-up stocks in 2001 resulted in the housing bubble which brings us to where we are now. Hindsight is 20/20 vision, but there were many people including myself that were critical of what was happening at the time. This made Greenspan a short-term hero and a long-term failure which matches exactly the policies that he pursued.

    We cannot ignore history, but at the same time we must put history in context. Today is a much different world to circa 1929. One of the primary differences is that today we have a Fiat Banking System. The other primary difference is that stocks in 1929 were not as overpriced as they have recently been, based on PE ratios (about 18 in 1929 versus about 30 before the recent crash). Today it is a world (USA and others) where stock markets are manipulated upwards and house prices are manipulated upwards by various financial methods. Central Bankers provide the mechanism via cheap money to increase stock prices and then prop-up stock prices and also house prices. I can see no other aim other than to reduce return on capital which in turn increases the wealth of the very wealthy in the short term as stock markets are overpriced. Long-term however it forces a new paradigm of capitalism with reduced return on capital (al la Japan) and reduced incentive to save and invest and reduced ability to save. Consumption has been the new saving with asset-price-inflation replacing dividends and interest. We have seen the folly of these policies firstly with Japan and now with the USA sub-prime crisis and the resulting banking collapse and credit crisis as losses wipe-out bank capital, asset values, and both the ability and desire to make credit available. The increased liquidation of assets which has resulted has also added to the deflation of asset prices.

    I can see no reason as to why these monetary policies have been pursued when they obviously have the potential to cripple the USA economy through massive debt. One of the major problems I believe is that the institutions that can make change are controlled by a) economists, b) bankers and c) politicians. The politicians want short-term fixes and the economists and bankers respond. The other important influences are the moneyed-elite and the institutional investors, and it is obviously not in their short-term interests to support a change of policy. All of the responses are for short-term fixes and ignore the long-term ramifications. They also ignore market fundamentals and prevent markets from going where they want to go. Obviously right now is not the time to abandon intervention because the short-term results would be catastrophic. However this comes at a time when those very policies that are used to save us from disaster are the policies that brought us to the brink. There can be no denying that firstly the Fed allowed massive asset-inflation and then intervened to prop-up stocks starting in 2001. The obvious reason why these policies are wrong is that they must eventually come to an end when returns approach zero zero. As that point approaches there will be less and less incentive to save and less and less incentive to invest. This begs the question: “How will that debt be repaid?”. This scenario obviously questions the ability of the USA to fund its military budget and remain the world’s superpower. It also raises the question of who will replace the USA in that role.

    There appears to be a tiny minority of voices screaming for change. Ron Paul is an exception, but he is largely ignored. Some of the important indicators are: a) increasing trade deficit, b) increasing budget deficit, c) continual Central Bank intervention, d) continual economic crises. E) decreasing returns on stocks. The policies are wrong because a) they create massive debt for future generations, and b) they must eventually end when returns are zero and capitalism and the market economy have ended, and c) they put the USA at the mercy of its creditors, and d) they threaten the US Dollar stability.

    What is the point of having all of these PHD economists being produced, if they either have no influence or the wrong influence on economic direction, by either their silence or their backing of the wrong policies?

    Alternatively if the long-term policies pursued by the Fed of asset-inflation are correct, why are they correct and how can they be sustained long-term?

  5. There is no doubt that at the moment gloom and doom is the order of the day and as a result we are all subject to an endless barrage of “I told you so” articles and comments about the evil greed of Wall Street etc. So it is refreshing to read something that is a little more optimistic about the future. I hope that in 12 months time we have the bulls back out in force because they are far more cheerful chaps!

  6. Another proverb is , its darkest just before it goes pitch black……


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