Irving Fisher's Warning To Margin Traders

Daniel Drew,  3/30/2015


As Zero Hedge posts mind-boggling headlines about Chinese margin debt, perhaps now would be a good time for the ultimate blast from the past, a trip down memory lane to the halls of Irving Fisher, the famous economist who said in 1929 that the stock market had reached a "permanently high plateau." Like most economists, he was wrong, and also like most economists, he offered a carefully constructed explanation from hindsight:
Stocks have fallen in a week 30%, and a week ago, they had fallen some 10% from the previous high of this year. The real reason, as I understand it, for this drop is that people have been speculating on small margins. It was not that the stock market was very much too high, but that people were so enthusiastic about making the money that they properly expected to make in the investment of stock, tried to do business on a shoestring. They went into debt, and the real lesson of this market is, "If you buy stock, buy them with your own money, and not with borrowed money any more than can be helped." If that lesson is learned, possibly in the end, this experience to some people, may be a blessing in disguise. This country is fundamentally sound.
Meanwhile, Jeremy Siegel, the modern day version of Irving Fisher, says, "20,000 is the fair market value of the Dow." This is the same guy who said everything would be okay in February 2008,
There will be no recession in '08. The economy will start the year slowly, with the gross domestic product growing less than 1% in the first quarter (after a similar increase in the last quarter of 2007). By the middle of the year, the economy should begin picking up steam; it should grow 2% to 3% in the second half. By June, the subprime-mortgage disaster will ease...Shares should have a good year, returning 8% to 10%. Stocks will rise as economic growth picks up in the year's second half and head winds from the credit crisis ease.
Siegel should receive some praise. It takes a certain skill to be so accurately wrong. Irving Fisher lives on.