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I wear two hats, one managing long term personal investments and the other
as a futures trader who trades long or short in whatever contracts provide
an opportunity to make a buck. I'm not by nature a pessimist and while
extremely cautious and concerned regarding the equity markets, I have
remained in the bullish camp through all of the recent corrections and to
this day, while concerned by technical deterioration in the equity markets,
I have no evidence that the next bear market lies at our doorstep - just
look at a monthly chart of the S&P. Frankly, it is both perilous and
impossible to forecast the end of a mania or bubble. That does not mean that
I have long term funds invested in US equities - I have none invested
because I do not consider the risk/reward at all favorable and I am mindful
of the tremendous speed and devastation with which bubbles end - I have
previously posted some of my historical retracment charts to this list. Last
fall when Asia appeared to be a bottomless pit, I made very large
commitments to what I viewed as very low risk investments in Asia mutual
funds and cashed out about a month ago with 70%+ gains - I had planned on
staying several years but grew wary of excessive enthusiasm for Japanese
stocks and Yen. I have no compunction about paying taxes and sitting in MM
funds until the next opportunity arises.
In principal, while I attempt to keep abreast of world markets, I try not to
dwell on the negative and a gloom and doom thread is unlikely to prove
terribly rewarding so I'll avoid any prolonged debate. However, you asked a
fair question i.e. what is "speculation" and "bubble". As a student of
market history and technical analysis, I tend to view things by charts and
relative measure across the dynamics of periods long enough for popularity
to ebb and flow. According to the relationships which have meaning to me
including earnings/tbill yield, log rates of price change, historical share
of GDP, and PE's as multiple of earnings growth rate, the US equity markets
are excessively popular and overvalued - the mirror image of what they were
in the mid-thirties. I see financial asset inflation in the relative wages
required to purchase a unit of the major averages such as the S&P and large
increases in housing costs driven by stock market profits. I see the same
excesses in IPO's now as I saw in the mid-60's when I was in the process of
taking my computer company public. I see the debt, not in direct margin
borrowings, but in all manner of other borrowings used to finance equity
purchases ranging from credit card debt to 125% loan to value mortgages.
Other basics are not hard to see: a government which is unable to put money
away when times are good, "earnings" which are managed and then written off,
earnings banked from "over-funded" pension plans flush with extraordinary
gains in stock market gains, a manufacturing base which has been largely
replaced by a service economy, and trade deficits which testify to unrivaled
consumption. I also look with increasing concern on consolidation in every
major industry (under the mantra of cost efficiencies) which is in large
part intended to regain lost pricing power. Does this mean that the plat is
full of dung? Of course not - the US has long harbored remarkable ingenuity
and entrepreneurship not to mention a democratic system of government which
still manages to function. In every age of significance there have been huge
leaps in technology and improved quality of life and I believe we are in
such a period now. That does not mean, however, that I believe in a new
paradigm where cycles in economics and mass psychology have been repealed.
Earl
----- Original Message -----
From: BruceB <bruceb@xxxxxxxxxxxxx>
To: Earl Adamy <eadamy@xxxxxxxxxx>; RealTraders Discussion Group
<realtraders@xxxxxxxxxxxx>
Sent: Tuesday, October 05, 1999 8:11 PM
Subject: Re: FOMC meeting?
>
> > AG is responsible for guiding the monetary and interest rate policies of
> the
> > US and this includes managing and preventing excessive speculation and
> > consumption whether it be in banking, real estate, credit, or stock
> markets.
> > Allowing bubbles to build and then explode wrecks the economy for
> everyone,
> > not just the irresponsible speculators - clearly an area where
government
> > has a responsibility to act.
>
> Earl, what is you're definition of "speculation" and "bubble?" I think
most
> people (myself included) define these terms as meaning asset prices that
> have been artificially inflated through the use of margined or borrowed
> money. If you agree to that definition, then there is simply no evidence
> for your claim. Over the past 5 years (since the stock market first began
> to take off), the amount of stock purchased on margin as a percentage of
all
> stock outstanding has actually FALLEN. In absolute terms, the figure has
> grown significantly, but as a percentage of the whole market, it's down.
> Where's the bubble?
>
> > Early in his career, AG wrote some papers on
> > the crash of 29 which criticized the central bankers for allowing
> excessive
> > speculation and credit to grow unabated.
>
> And I agree with him. Back then, investors (speculators) only had to put
> down 10% of the face value of the stock in order to buy it, and even that
> rule was rarely enforced (the SEC hadn't been created yet...). This led
to
> massive leveraging in the market, and eventually the crash. Today margin
is
> limited to 50%, and US investors as a whole haven't even come close to
using
> that amount (no margin allowed in IRAs and 401Ks).
>
> Just because people are placing a higher value on US stocks doesn't mean
> they're speculating (by my definition...). As I said in a post on the
Omega
> List over two years ago, the money flowing into the stock market is "real"
> money. It is not borrowed or leveraged. Once again, where's the bubble,
or
> the 1929 scenario here?
>
> > Just a few years ago, AG had it
> > right when he spoke of "irrational exuberance", however he was unwilling
> to
> > pay the (probably very substantial) political price of raising interest
> and
> > margin rates to head off the bubble.
>
> I personally wouldn't be opposed to higher margin rates (as long as they
> don't apply to S&P futures, of course...), but raising interest rates is a
> bad approach to subduing the stock market. You mentioned earlier how
> innocent people get hurt when bubbles burst. Well, nothing hurts innocent
> people more than higher rates (higher car and mortgage payments) in the
name
> of punishing speculators. Isn't that kind of like destroying the village
in
> order to save it?
>
> > Nor have our central bankers and
> > politicians been willing to bring an end to the import of endless cheap
> > goods which have held inflation in check and spurred consumption while
> > exporting a major portion of the US manufacturing base and building an
> > incredible trade deficit.
>
> Big economics question here, maybe too off topic so I'll skip it!
>
> > Consequently, by most historical measures, US
> > equity and credit markets have bubbled to the point where a prick of the
> > bubble poses a serious threat to not only the US economy, but the world
> > economy as well.
> >
>
> Once again, your definition of bubble comes into play, but if 1929 is one
of
> your "historical measures," we're simply nowhere close to that...
>
> Bruce
>
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