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Contents

Cover

Title Page

Dedication

Foreword

Acknowledgments

Part I: Anatomy of a Super Boom

Chapter 1: The Boom Equation

The Late, Great Technician

Finding the Next Five Hundred

How War and Peace (and Inflation) Impact the Market

Four Basic Tenets of Wartime Markets

Not Your Daddy’s CPI

War: What Is It Good For?

Booms and Busts of the Twentieth Century

Chapter 2: A Strangled Economy

Dot-Com Bust versus 1929 Crash

War on Terror

The Housing Bubble

Four Horsemen of the Economy

We Are Not There Yet

Part II: The Fortune Tellers

Chapter 3: The History of Ignorance and the Ignorance of History

When You Assume

Dow 36,000

Chapter 4: An Argument against Financial Calamity

The Dent Method

Conquering Prechter’s Crash

Depression Averted

Chapter 5: Yale Hirsch and the 500 Percent Move

Part III: Booms and Busts of the Twentieth Century

Chapter 6: Panics, World War I, and the Roaring Twenties

The First Components: World War I

Roaring Twenties

Chapter 7: Depression, World War II, and the Baby Boom

World War II

Why Not Korea?

Consumer Boom

Chapter 8: Vietnam, Stagflation, and the Information Revolution

Rising Conflict, Rising Inflation

The Great Stagflation

The Information Age

Politics Paves the Way

The Lesser Impact of Boom-Time Wars

Longest Bull Market

Part IV: The Prodigal Pattern Returns

Chapter 9: Inflation

Creation of the CPI

A Different Tale

Hedging Inflation

The Coming Boom

38,820 and Beyond

Chapter 10: Investment Ideas and Strategies

Seasonality and the Best Six Months

In the Meantime: A Trading Strategy Preboom

Appendix A: Yale Hirsch’s 1977 Stock Picks

Appendix B: 1977 Smart Money Newsletter Reprinted

Key Terms

About the Author

Index

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

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This book is humbly dedicated to Yale Hirsch, my illustrious father and mentor—man of many talents, great thoughts, and big ideas. An iconoclastic market thinker, who made the greatest market call in history in 1976 for a 500 percent move in the market from the 1974 low to 1990. Thank you for giving me the business and all your love and support these past 44 years. Not only did you teach me the market, but you taught me how to appreciate all things in life. I proudly stand on your shoulders and prudently ride the coattails of your life’s work.

To my knowledge, Yale was the first to call the bottom of the last secular bear market in October 1974 and the first to predict the last super boom in March 1976.

Foreword

Nearly every trading desk on Wall Street has a copy of the Stock Trader’s Almanac on it. That’s not an exaggeration—if you travel to the offices of enough Wall Street banks, mutual funds, and hedge funds, you’ll see plenty of dog-eared copies of the Almanac.

That is how I first met Jeff Hirsch—reading the STA. I began my career in finance working as a trader. In my first job on a trading desk, we newbies received very little training. We were thrown into the deep end of the pool, and if you managed to avoid drowning—poof!—you were a trader. It was all very Darwinian.

Those of us who managed to survive learned quickly of the many things that affected how markets traded. Valuation, liquidity, sentiment, technical, and interest rate trends all moved stocks and bonds. But there was something larger at work that we did not see in the day-to-day trading. If you stepped back far enough to observe longer arcs of time, you could see a certain cycle. Indeed, it became apparent that markets moved with a certain rhythm, with variations of specific patterns repeating over and over again.

The Stock Trader’s Almanac was the first source I encountered that quantified these cycles. Whether it was the pattern of triple witch option expirations, or the seasonal best six months of the year, the STA provided a framework to view market history through the lens of repeating cycles.

History repeating (“Rhyming,” according to a quote attributed to Mark Twain) was the spark that sent me hunting for a broader view of how markets work. Why do stocks rise and fall? What factors drive short- and long-term prices? Why do valuations fluctuate so much?

Jeff and Yale Hirsch are the father–son duo behind the Almanac. They each spent much of their careers as the editor/publisher of the book—Yale from 1966–2000 and Jeff from 2000 to the present day. But they also have something else in common: They are students of market history. This has led them to rather nonmainstream understandings of the workings of the stock market. Seasonal data, longer-term trends, and historical cycles are part of their repertoire.

Besides the genetics, they have something else in common: Their understanding of secular markets and historical patterns has led each of them to make an outrageous forecast from the depths of a market collapse. The same historical, cyclical, and mathematical analyses underlay each of their predictions, made three and a half decades apart. Postwar peace dividends, excess inflation from war and crisis spending, and rapid adoption of new technologies are the factors that drove the prior secular market booms, and according to Jeff, will drive the next one as well.

Let’s look at a bit of history: In the spring of 1976, in the middle of a terrible decade that saw very little progress in equities, rampant inflation, an oil embargo, several recessions, the end of a very unpopular war, and a presidential resignation, Yale Hirsch made a very unusual forecast. From those dark days of disco and polyester, he predicted a 500 percent move in the markets. Even more surprising, he hit the bull’s-eye.

When you consider the context, it is an unlikely, even absurd forecast. The Dow had kissed 1,000 back in 1966. In 1974, it was still 40 percent below that level. Inflation was rampant, recessions seemed to come along every few years, and the country was still reeling from the double blows of Vietnam and Watergate. Ten years into what would turn out to be a 16-year period of zero market progress (1966–1982), the Dow was flat in nominal terms. Adjusted for inflation, it was down almost 45 percent.

How could Yale make such a forecast? The historian in him noticed something interesting about markets. It seemed that inflation surged during each of the world wars. That was followed by a 500 percent catch-up rally in equities after each war ended. With the end of the Vietnam War, could markets three-peat?

Indeed, that was the basis of Yale’s prediction: In a special report in Smart Money, he estimated that from the 1974 intraday low of Dow 570, the Dow would rise 500 percent by 1990, hitting 3,420. The S&P did gain 500 percent from its 1974 low to high in July 1990. The Dow crossed 3,420 in May 1992—off by a few years, but all things considered, a terrific and money-making call.

Thirty-five years later, Yale’s son Jeff has made a similar forecast. According to the author of this book, the next super boom cycle will follow a decade of wars in Iraq and Afghanistan. It will send the Dow Jones to 38,820 by 2025.

I certainly don’t need to explain how outrageous this forecast is—but I want to distinguish it from the 1990s dot-com excesses. We saw ridiculous books with titles like Dow 36,000 and even Dow 100,000. These were indicia of bubble mania. Sentiment had run wild; the belief that valuations no longer mattered was becoming increasingly accepted. Out of this mania came some pretty awful—and for investors, money-losing—tomes. They were based on theories subsequently shown to be false, leavened with excess optimism, the recency effect, and a lack of critical analysis.

Numerous factors distinguish this book and its outrageous forecast from those that preceded it:

This book was written in the depths of a bear market collapse and recession—not in the final spasms of an 18-year bull market.

It is based on historical patterns that have held true three times during the twentieth century following each of its major wars.

It is contrary to the conventional wisdom, rather than an excessive extension of it.

When Jeff first announced this forecast, it caused a stir. Several media pundits dismissed it out of hand; they had already been burned by Dow 36,000, and they were not going to make that mistake twice.

However, of all these books that made seemingly ridiculous market forecasts, I would not be too quick to dismiss this one. It is based on a sound methodology, from a student of market history. It forecasts that the secular bear market that began in March 2000 continues for a few more years, than gives way to technological innovation and ensuing prosperity. But it’s not all roses, as Jeff also identifies the risk of our crisis-managed economy. Inflation, which accompanied the prior three periods of postwar prosperity, is a major risk factor over the next two decades.

It is thought-provoking stuff. I hope you find it as fascinating as I have.

—BARRY RITHOLTZ
January 2011

Acknowledgments

Writing a book is an adventure. To begin with it is a toy, an amusement; then it is a mistress, and then a master, and then a tyrant.

—Winston Churchill

In addition to the groundbreaking work Yale Hirsch has done over the past four decades, especially in the mid-1970s, this book draws heavily on the work of Judd Taylor Brown while he was vice president and director of research at the Hirsch Organization from 2000 to 2009. Judd and I resurrected Yale’s 1974 “BUY!” recommendation in 2002 and developed the three-part series in our Almanac Investor Newsletter on how war and peace impacts the market in late 2004 and early 2005. We collaborated on the first manifestation of the current 500 percent super boom move forecast on page 42 of Stock Trader’s Almanac 2006. The research, analysis, and writing Judd produced while employed at the Hirsch Organization was relied upon profoundly in this book. I wish him all the best in his new culinary pursuits.

This book would not have been possible without the herculean efforts of Christopher Mistal, who tirelessly brainstormed with me, researched, edited, cajoled, and supported me in this project in every way conceivable. It is his calm demeanor, critical thinking, and software development that is the glue of the Hirsch Organization.

I’d like to thank the editorial team at Wiley for their enthusiasm about turning this forecast into a book: Pamela van Giessen, Kevin Commins, Peter Knapp, Cristin Riffle-Lash, and most of all, my new editor, Evan Burton, who diligently guided this project to completion in an incredibly short period of time.

I’d also like to thank Barry Ritholtz for agreeing to write the Foreword and always being a candid voice of reason and inspiration to me personally and to the world through his ever-salient financial blog, The Big Picture.

And last but certainly not least, my wife, Jennifer, and our two boys, Sam and Nate, my muses. Thanks for understanding my tight deadline and letting Daddy write on countless nights and weekends. I owe you big time.

—JEFFREY A. HIRSCH

Part I

Anatomy of a Super Boom

Dow 38,820 by 2025 may seem incredible at this current juncture in our economic, political, and financial history, but as you will find out throughout these pages, it is mathematically reasonable and requires no big leap of faith. Moves of this magnitude have happened several times before at similar points in history with such regularity and clear causes that you will agree by the book’s end that the potential for another super boom is undeniable.

When Stock Trader’s Almanac 2011 first hit the street in October 2010 and this forecast became widely known, skeptics wrote, e-mailed, blogged, and invited me on the air for cross-examination. My good friend and colleague Barry Ritholtz e-mailed me the same three letters he posted to his blog, The Big Picture: “WTF?” After explaining the logic behind my prediction, he followed that up with a post that the move was well within the average annual historic market gains. Despite the initial skepticism, others began to agree a boom was possible.

But why make such a bold forecast? Many before me have been burned by predictions that never came to be. It amazes me how well remembered the follies are and how forgotten the bulls’-eyes.

The simple answer is because I believe it will happen. My father’s super boom prediction in 1976 was historic. Since inheriting the family business I’ve kept a careful lookout for signs of another super boom. Several years ago, those signs began to emerge.

From December 2004 to February 2005, we at the Hirsch Organization ran a three-part piece on war and peace and the market in our Almanac Investor eNewsletter. The full piece first appeared on page 42 of the Stock Trader’s Almanac 2006. Our 2006 book, The Almanac Investor: Profit from Market History and Seasonal Trends (Wiley 2006) also featured a chapter on “How War and Peace Impact the Markets,” including the prospects for a 500 percent move.

Part One answers the foundational questions about 500 percent market moves, or what I’ve dubbed super booms: What are they? Where do they come from? What causes them and what is their impact on the market? This part also addresses the current economy and its role in the next super boom.