STOCK MARKET MELTDOWN

Until early in 2000, stock markets in the United States performed like a market speculator's dream of Paradise. The major market indexes and almost all individual stocks soared. As the market continued its upward spiral, a market mania developed. Rampant and "unsane" speculation in stocks followed. Mergers multiplied. IPOs (Initial Public Offerings of stocks), in some cases, soared hundreds of times, even though the stocks had no value whatsoever in terms of traditional ways of assigning value to stocks.

The Dow Jones Industrial average, the best-known stock index, reached a high of just over 11,700. The NASDAQ index topped out at 5049. Many stocks, even stocks of venerable companies with long histories of earnings and of dividend payments were - relative to the indexes - at or near historic highs. Then, beginning in early 2000, and continuing to the present time, reality set in. As I write this, the Dow is at 7,777, off over 33%. The NASDAQ is at 1,301, off over 74%!

The declines in all of the major stock market indexes in the United States have reduced the investors' values by over seven trillion (yes, trillion) dollars. That figure is even greater than the present United States debt. It does not include losses suffered in values around the globe, since virtually every market in the world has "followed" the American markets down.

The speculation in stocks in the 1990s was not fundamentally different from speculation manias that have risen from time-to-time throughout history. Other well-known speculation manias occurred in Holland in the 1500s and centered on tulip bulbs, of all things. Real estate manias occurred in Britain in the 1700s, in the United States, principally in Florida, in the 1900s and in Japan in the 1980s. The stock market rise of the 1920s was another classic example of a speculation mania. The 1929 stock market crash was followed by the Great Depression (world-wide) of the 1930s.

Several factors combined to spark and to maintain the stock markets' dizzying upsurge of the 1990s. Abandonment of traditional measures for applying value to stocks, to stock funds and to the indexes was one factor. Greed - as it always is in such manic situations - was another factor. Dishonesty on the part of investment houses, investment counselors, stock market analysts, company executives and other involved parties was another. The "Greater Fool Theory" played a role; this theory basically states that no matter what you pay for something, a greater fool will come along and offer you a higher price. Mob psychology was interwoven into all of the above. Once these factors "grabbed" the imaginations of millions of people, the market soared.

What goes up - in almost all cases - must come down. Those who invested in the market - especially those who got in near the end of the manic rise - and who stayed in have now learned this lesson all too well.

Once the market started down, in earnest, mob psychology again came into play. This time, it was the twin psychologies of fear and panic. A few of those who bailed out of the market did so with definite increases in the value of their investment portfolios. Many lost their original investment gains and either part or most of their capital investments.

Individual investors, in the final analysis, were the biggest losers not only because of the individual speculative investment decisions they made but because their retirement funds were in large, professionally managed accounts. The professionals fared no better than the average investor. Some of the largest and most prestigious mutual funds dropped just as much - in some cases dramatically more - than the indexes and individual stocks.

Some investors, mostly highly skilled professionals, made a lot of money in the dramatic drop by exercising "short sell" options. That is, they bought an option to buy stocks, or indexes of stocks, at one price for delivery at a later date at a lower price. In this strategy, when the price of a stock or an index drops, the option holder makes money, often "tons" of money.

By the time the twin mob psychologies of fear and panic had run their courses, new elements entered into the picture. One of these was sagging investor confidence. Hundreds of thousands of investors pulled billions of dollars out of the market, especially after several attempts by the markets to rally failed. Then, the uncertainties of terrorism and a war with Iraq took center stage. Uncertainty is one of the principle factors that drive market prices down.

The sad fact is that speculation manias are nothing new. Even sadder, something like this stock market meltdown will occur again. Next time, it may occur with real estate. There is a national debate among the "experts" as to whether the national real estate markets can continue their dramatic and sustained rises. Even those who think that the real estate markets are not due for a meltdown are puzzled about their robustness; they don't know what is maintaining the momentum. Whatever is keeping the real estate boom going could, rather quickly, melt away, causing yet another mania to burst.

The next mania-to-meltdown cycle probably won't be tulip bulbs, but you never know.