Understanding this Super Bull Market

This is the final part of a series of articles about prolonged periods of economic prosperity, and stock market booms from the past. What does history teach us about oncoming crashes, depressions, and peaks in the stock market? Plenty. And many of the lessons should still apply today... (Instock, New York)

By Marvin vanBolt

New York City - Dec 9 - In 1890, a year before the end of a super bull market, inflation had started rising, and the government began developing anti-business policies. Just as the boom was ending, the first antitrust law was passed to regulate monopolies. Is it just a coincidence that, in the present day, the US government's lawsuit against Microsoft coincided with this year's peak in the NASDAQ?

Near the end of the great Railroad Rally, the rail lines had expanded to nearly every major city and agricultural region. The network expansion was not nearing an end, but the growth rate had definitely slowed.

The lesson here is that the key distribution network of the day -- like railroads, autos, or information superhighways -- can continue to expand long past a peak in the economy and stocks. For instance, during the depression that followed the Roaring 20s, the US government poured billions of dollars into building roads, as well as electrical infrastructure used for the buildout of the nation's power network.

Outright speculation was one sign of the market's peak in 1929. Investment pools, where several institutional investors would work together to push the shares a single stock higher, were common in the 1920s. The amount of margin lending used to buy stock with leverage was, by far, the largest in history, totaling 3-times the federal budget at the time.

While similar speculative activities have occurred today -- day-traders organizing online to push stocks higher, for instance -- the level of speculation was far greater in 1929. After the great crash, the Securities and Exchange Commission (SEC) and Federal Reserve central bank was created. As a result, the amount of margin lending has been cut, and organized stock manipulation, like pools, has been outlawed.

Structural changes in the economy and stock market are why most scholars believe the severity of the '29 crash will not be repeated. Though one might argue that this year's decline in New Economy stocks has already been just as bad.

The current super bull market is being driven by the expansion of an information distribution network. It's roots can be traced back to the mass market penetration of the personal computer in the early 80s.

Certainly, the growth rate of the first PC-based networks -- namely local area networks -- slowed many years ago. However, the Internet led to a new growth cycle for computing networks. The growth rate of the first-generation Internet probably peaked earlier this year, at least for developed economies. Even so, it is hard to believe that future uses of the Internet will not lead to a new growth cycle as the Web is still simplistic compared to what visionaries imagine for the future.

Finally, the surging inflation that has signaled the end of many super bull markets is simply not present today. A reasonable conclusion is that America, and other areas of the world, might be beyond the midpoint of the current cycle of prosperity, but there is still no end in sight.


<center>

<HR>

</center>