The Tower of Babel Indicator

July 8, 2009 by Matt McCracken

3 They began saying to each other, “Let’s make bricks and harden them with fire.” (In this region bricks were used instead of stone, and tar was used for mortar.) 4 Then they said, “Come, let’s build a great city for ourselves with a tower that reaches into the sky. This will make us famous and keep us from being scattered all over the world. - Genesis 11: 3-4 - New Living Translation

On September 13th, 2007, the Associated Press reported…

The world’s tallest building, still under construction in the booming Gulf emirate of Dubai, has become the world’s tallest free-standing structure, its developers said on Thursday…The developer announced in July that Burj Dubai, Arabic for “Dubai Tower”, had exceeded Taiwan’s Taipei 101 which is 508 metres tall, to become the tallest building in the world.

When I read about the Burj Dubai, an unsettling feeling came over me. I don’t remember when or where, but at some point in my life it was pointed out to me that economic calamity soon followed the construction of very tall buildings or Towers. I was anxious to determine if there truly was a relationship between the construction of “towers” and market peaks, so I pulled up the ever-so-handy Wikipedia to do a little homework. Wikipedia was enormously helpful because with every building on the list it also listed the buildings that it surpassed and was proceeded by in height. Here is the link to the Empire State Building page. (I figured you could start in the middle and work your way in either direction.)

Let’s take a look at how the stock market performed after the construction of a new “world’s tallest tower”. (I didn’t include communications or tourist structures such as the Eiffel Tower, the Tokyo Tower or the CN Tower. Also, I didn’t include the Petronas Twin Towers in Malaysia because only the Antenna was taller than the World Trade Center – not the roof.)

Building Years Build Height Stock Bear Mrkt Stock Mrkt Returns*
Metlife 1893 - 1909 50 Floors 1906 - 1907 - 49%
Woolworth 1910 - 1913 55 Floors 1911 – 1913 - 15%**
40 Wall Street 1929 – 1930 282.5m 1929 - 1932 - 82%
Chrysler Building 1928 - 1930 282m/274m 1929 - 1932 - 89%
Empire State Building 1929 - 1931 381m 1929 - 1932 - 89%
World Trade Center 1966 - 1973 417m/413m 1973 - 1974 - 49%
Sears Tower 1970 - 1974 442m/412m 1973 - 1974 - 49%
Taipai 101 1999 - 2004 449.2m/439.2m 2000 - 2003 - 48%
Burj Dubai 2004 - 2009 555m ’07 - TBD TBD

* Stock market returns are calculated as the percentage changes in price for the Dow Jones Industrial Index or the S&P 500 index.

** Stock market was shut down for 4 months during this period for fear of another 1907 Crash.  Had the market not been shut down, a crash would have likely ensued. 

What I found remarkable was just how well the “Tower” indicator predicted secular bear stock markets. I was surprised to discover that not a single building taller than the Empire State Building was built during the nearly 40 years between the two secular bull market peaks in the 20th century. Furthermore, not a single “tower” was constructed in the 30 years between the two most recent secular bull market peaks (1968 and 2000). Another item that I found interesting was the number of “Towers” built at secular bull market peaks. Both the World Trade Center Towers and The Sears Tower were started within years of one another and finished at essentially the same time. And three “Towers” were started just prior to the market peak in ‘29. Not a single “Tower” was started from ’29 through ’66 - 37 years - and all of a sudden they put two up. And not a single tower was started from 1910 until 1928 - 18 years - and all of a sudden they put up three. Ironic!

Just for kicks, I thought I’d check out if this indicator worked in foreign markets as well. I was curious to know when the tallest tower was built in Japan and what sort of time proximity it had to the Nikkei crash in ’89. From 1988 – 1991, the Tokyo Metropolitan Government Building (also known as “Tax Tower”) was built in downtown Tokyo and was the tallest structure in Japan until 2006. From 1990 through 1993, the Nikkei lost 60% of its value as Japan fell into a decade and half deflationary accident. And the Nikkei is still 60% below its peak 18 years later! (The Midtown Tower became Tokyo’s tallest structure in 2006. The Nikkei was practically the only major stock market to depreciate in 2007!)

Whether you accept the Jewish/Christian Bible as Truth or not, it’s hard to ignore the seemingly strong relationship between market peaks and “tower” construction. I haven’t studied the world’s other religions as much as I’d like or should, but I believe that the theme of “pride before a fall” is fairly common in all religions as it is in Christianity. So regardless of your religious beliefs (or lack there of), it might be wise to take an objective look at your investment strategy and insulate yourself from a possible fall in equity prices. If you would like to better understand the current market cycle in order to make an objective determination about how invested you should be, you might read my Market Outlook along with my Market Research page to find out how protect your Wealth during the current secular bear market. Both have been pretty “spot on” in explaining why the markets are behaving the way they are.