The US economy
Outguessing the market
Peter Brimelow
Lake Lanier, USA
Any ny eort to understand the United has to begin with its enormous size and physical abundance. One day recently, I found myself standing in a wood inspecting yet another vast lake I never learned about in A-level geography Lake Lanier, which unwinds apparently endlessly a thousand feet up amid the mountains of northern Georgia. I tried to express my naive sense of wonder to my host, who owned that part c the wood and the house looking through it to the shore. He said politely that he liked the lake too. Without childhood memories of Winder- mere on August bank holiday, the empti- ness and serenity looked quite ordinary to him. He took the brilliant sunshine for grattted as well.
I had flown down that morning from New York to Atlanta — a distance little short of that between London and Algiers — to investigate another aspect of Amer- ican multifariousness: the proliferation of investment newsletters. Currently, there are about 1500 of them, fluctuating with the market. Typically, they cost between $200 and $500 a year and offer advice on the stock markets once or twice a month, sometimes supplemented by a telephone 'hotline' number that subscribers can dial to listen to a taped commentary on the stock market's latest tergiversations. Most of these newsletters are small, kitchen table affairs. But a solid handful are not. With circulations of 15-20,000 or above, letters like Martin Zweig's Zweig Forecast or Richard Russell's Dow Theory Letter probably net their owners over $1 million a Year.
Wall Street and the stuffier financial press view the investment newsletters with distaste. Partly this is because the entre- preneurs who publish them are often com- pulsive, even lunatic, self-promoters. Joe Granville, whose Granville Market Letter achieved celebrity status some years ago, once had himself borne into one of his public meetings in a coffin, to illustrate his triumph over criticism. He took to display- ing a tame chimpanzee at the podium, named after a hostile newspaper col- umnist. Eventually, he even announced that an earthquake was imminent in Cali- fornia. It did not materialise. Then Gran- ville catastrophically failed to anticipate the great bull market of August 1982, and fell off his flying trapeze. The reason for Granville's popular fol- lowing, however, was that in the years Immediately prior to 1982 he had been remarkably accurate on the stock market's direction. He had said it was going to go down, something Wall Street with its direct interest in sales and commissions is notor- iously reluctant to do. And in fact the investment newsletter industry in general really got its start during an era of unpre- cedented establishment economic error: the Great Inflation of the last 20 years. The leading investment letter writers were just quicker to see the implications of profligate monetary expansion than many banks and insurance companies, whose bond port- folios sank with all hands, or academic economists, entranced by a vulgarised Keynesian orthodoxy. The letter writers urged gold, the classic refuge against infla- tion. For years they were known derisively as 'gold bugs'. The insult became progres- sively easier to swallow as the metal's price rose from $35 in 1968 to a 1981 high of over $870. (Interestingly, many of the famous newsletter gold bugs, like James Dines and Harry Browne, are now saying that the age of inflation may be over.) Large organisations are notoriously allergic to new ideas. It should be no surprise that independent if eccentric indi- viduals can occasionally run rings around the institutionalised wisdom of Wall Street. Another example: 'technical analysis' the art of predicting a stock's future price from the shape it has made on a chart was flourishing among newsletter writers long before the big stockbrokers accepted it.
Of course, business school academics who study the stock market still don't accept technical analysis. But then, they tend to believes that most Wall Street research is a waste of time too. For a generation, the prevailing academic wis- dom has been that it is not possible, consistently and over the long term, to pick stocks that will appreciate faster than the overall stock market. And there's chilling evidence for this proposition, although it has, had surprisingly little impact on the investment industry, which has gone grind- ing on trying to outguess the market regardless.
More recently, however, there have been signs that this 'efficient market hypothesis' may not be completely airtight. Some of these 'anomalies' are due to the newsletters. For example, the New York- based Value Line Investment Survey has been rating hundreds of stocks in order of their performance potential for years with far more success than it ought to have enjoyed according to the theory. Accord- ing to Mark Hulbert, the young Oxford- educated American Quaker who measures the newsletters' performance in his Washington-based Hulbert Financial Digest, several have had spates of success- ful predictions too long to be explained by luck. And a few have been successful right through the five years he has been follow- ing them.
The investment newsletter phenomenon is profoundly American. Nothing on the same scale exists in Britain. Several factors account for this. Not only is there an I incredible number of wealthy Americans, but the stock market itself is much more democratic: the New York Stock Exchange recently announced proudly that 42 million Americans own•stocks directly, a particu- larly impressive figure given that the coun- try's 226 million population necessarily includes many spouses and dependants. Moreover, as political scientists keep saying, America is pluralistic. Unlike Bri- tain, there is no coherent elite. The inhabi- tants of that great American hinterland do not defer to the expertise of Eastern financiers; in fact, they are quite likely to detest and despise them. It is significant how many of the investment letters are ferociously right-wing in political tone, a conservative samizdat operating in contra- distinction to the generally liberal predic- tions of the Establishment television net- works and major newspapers, an indica- tion of the roots of Reaganism. The ear- nest American faith in education and self-improvement, producing such much- derided but effective unBritishisms as de- gree courses in Home Economics or the MacDonald fast food empire's 'Hamburger University', is also at work. And when finance is no longer the exclusive preserve of a select priesthood, it is less easily regarded as an esoteric art to which outsid- ers cannot possibly make a contribution.
• My host in Georgia was Robert Prech- ter, the 35-year-old proprietor of The Elliott Wave Theorist, widely regarded as a rising star in the industry. Prechter has specialised in the Elliott Wave, the alleged discovery by a retired accountant some 50 years ago that stock prices move in com- plex related sequences, zigzagging upwards in five 'waves' and down in three, reflect- ing numerological patterns that apparently occur in nature, for example in the propor- tions of seashells. Elliott Wavers are a minority within a minority, often viewed with bewilderment by fellow-inhabitants of the investment underworld. However, they are an international fraternity: a key early study was English, R. C. Beckman's The Elliott Wave Principle Applied to the -Lon- don Stock Market.
However Prechter arrives at his conclu- sion, there is no argument that he is a gifted trader. When I was talking to him in early July, he dissented from the then- current consensus that a full-scale bear market was under way. He said that the bottom had already been reached and that a rally would soon start, which it did, explosively, in August. He expects it to continue — waving up and down, of course — until the Dow Jones Industrial Average reaches 2,000. As I write this, it's around 1,200. If he's right, his subscribers won't care if he does it by reading the entrails of of goats.
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