You probably aren’t asking yourself for whom this bell is tolling, but I’d like to tell you anyway. (You’re welcome.) The classic contrary indicator for the market itself in recent (geologic) time was the 1979 Business Week cover pronouncing The Death of Equities. Apparently, because of endless and rampant inflation, stocks were never going to be a good idea again. That belief was also widely held in 1932 until 1934 (though it was because of deflation that time).
Aug. 13, 1979 Tombstone
Iranians took the US embassy that year as oil was on its way to $40 (having come from only $2 at the beginning of the decade) and gold was on its way to $800, at parity with the Dow, having come from $35 during the same time frame. No kidding. Just a few years before, with the Dow breaking 1000 for the first time, the Dow/Gold ratio was around 30. It doesn’t happen too often, but when it does things are about as bad as they get. The Dow/Gold ratio is now roughly 20 to 1. Surely, it’s absurd to think they will ever cross paths again.
In 1934, it was also at parity after the Rookie president devalued the dollar, another way of saying that gold, having been pegged at 20 and a fraction was re-priced at $35, a 70 percent whipping for the greenback. The banks had been closed in March of 1933 when FDR was inaugurated and the mob filled the streets. There was plenty to fear. The Dow had fallen from 361 to 40 points, or a 90 percent drop, and the world was probably coming to an end. Oh, and Hitler had become Chancellor a few months before FDR had become president. Clearly, you didn’t want to buy stocks then. Or did you? (They are up by 700x since then, which isn’t bad even when figuring in inflation, which had to wait its turn for about 40 years. All in good time.)
But if their paths do cross again (for the sake of argument let’s say around 5,500), that will be the time to sell gold and buy shares. Don’t worry so much about the price at that point; observe the crowd. The mob is infallible as photos from 1933 and 1980 (to buy gold) demonstrate. “Attention K-Mart shoppers, those boots that were selling for $35 recently are now on sale for $800; get ‘em while you can.” (Hmmmmmm.)
Chart of Tesla Shares
So, as you can see, it’s all over for the Tesla haters and the old fuddies who still think you can’t defy gravity. What can go wrong? Well, now that everyone is standing on the same side of the row boat (it’s a nice boat, made with teak and oak) giving each other high fives (or in this case, high 500s), the answer is plenty. That is because there is no one else to convince; there is no one left to humiliate.
Elon doesn’t have to make any mistakes or say anything silly (can you imagine?) to bring this stock back to earth; the mood of the market can do that for us. Shares don’t all have the same price/earnings ratio, or in this case (and as was commonly used during the 1930s) the price/loss ratio, and that is because some companies are endowed with more animal spirits than others.
Whether these shares and this parabolic chart become the poster boy for the next edition of Extraordinary Popular Delusions and the Madness of Crowds I cannot say. My crystal ball fell to earth recently (gravity has no respect and it doesn’t care if we are ready or not, nor does it care how spiritual we think we are – consider the 3rd Temptation of Christ) and so it has a few more cracks in it than usual. The new one I ordered from Amazon has yet to be delivered, so maybe Tesla can keep going up, without earnings, for another few years.
The Dow didn’t catch fire until August of 1982. I wouldn’t be surprised to see these shares going to 1,000 before flaming out, but they will and the fall to earth after a parabolic rise generally takes the same rapid path, with the same miserable result – an 80 percent drop. That will be the time to buy. You are chasing a rocket at the moment and even if you aren’t afraid of doing that, as Master Yoda says: ‘You will be.”