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I have been reading on the history of financial manias and panics, to
understand the mechanisms that will cause this market to eventually
fall.
The lesson I take from history is that overleverage is the cause in
almost every case, either on a personal basis (margin calls in 1929 and
later) or an institutional basis (Japan).
Do we see signs of overleverage? I don't yet, but I am concerned with
two.
One was humorously expressed today in the FT, where a columnists
predicted a severe bear market in 1999 caused by some nameless guy who
decides to retire at 55 based on the value of his equity-based
retirement assets, and starts selling. His friends and neighbors do the
same, and soon we have DOW 6,000. The facts are supporting a decrease in
normal savings in the US, which is offset by the greater investments in
stocks.
Another route to disaster is based on the actions of corporations, who
may take advantage of low interest rates to improve earnings by
increasing leverage. This works as long as the after-tax interest rate
is less than 1/PE. And if you can manage to survive in business. Some
won't, and interest rates will begin to reflect more fear of things
going wrong. So will stocks.
Comments and discussion invited
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