Note: I don't subscribe to extropians right now, but saw
this reply in the digest.
> From: email@example.com
> Date: Fri, 21 Apr 2000 16:49:50 -0700
> Subject: Re: 1929 deja vu
> Forrest Bishop forwards from http://www.contraryinvestor.com/mo.htm
> On the other hand, at 9 days into the 1929 series above the index was
> down 30%, while NASDAQ is only down 20% over the previous nine days.
> That's a pretty significant difference, especially in terms of market
I agree that the current situation is not like 1929- today's bubblicious
stock mania, massive credit creation excesses, consumer and corporate
debt loads, current account deficit, real estate inflation, surreal
government statistics, fraudulent accounting practices in technology
firms like Lucent, Intel, IBM, Microsoft, etc., gold banking implosion-
in-the-making, bank derivatives exposures (ala LTCM writ large), and
so forth ad nauseum make the crash/depression of 1929-1939 look like a speed
> Also, although the NASDAQ gets a lot of publicity, the Dow
> industrials have not followed the above pattern very closely at all.
> The Dow is down only about 4% over the last two weeks. Those big
> industrial companies add inertia and stability to the economy as a whole.
> > 6. Are all the contrarian signs there for a meltdown in the
> > groups? YES History shows that there has NEVER been an
> > instance where a financial mania or asset bubble has ended in any way
> > badly. There are no soft landings for asset bubbles.
> Two things: first, it's not clear that this is an asset bubble.
Well, that is Federal Reserve Corporation's party line. It is
all you will hear on their media. Let's have a look:
> are trading in these companies in the hope of near-term gains, yes.
> But underlying these hopes, investors see long-term prospects for future
> technology growth. Those companies that are blazing the trail into
> new technologies are the ones which investors hope will be the market
> leaders of tomorrow.
> Calling it an asset bubble is really a matter of
> second-guessing the market, the collective opinions of all those people
> investing out there. That's not an easy trick to pull off.
I find it rather simple. If a company loses money consistently (amazon.com,
biotech.com), cooks the books (Lucent, Microstrategy, etc.), has a P/E
in the hundreds or thousands (Yahoo!, Cisco, MSFT, etc.)- meaning it
will require hundreds or thousands of years to pay for itself, then
that company is grotesquely overvalued.
> Second, as far as hard landings: through most of history there has not
> been the understanding that we have today of macroeconomics.
In our vast understanding of macroeconomics we have lost sight of something
rather fundamental: What is money? Let us ask our master:
Responding to a question by Congressman Ron Paul (Rep., Tex.), Federal
Reserve Chairman Alan Greenspan spoke to the subject of the nation's
money in his Humphrey-Hawkins testimony on February 17, 2000:
" By definition, all prices are indeed the "ratio of an exchange
of a good for money." And what we seek is what that is. Our problem
is we used M-1 at one point as the proxy of money, and it turned
out to be a very difficult indicator of any financial state. We
then went to M-2 and had the similar problem. We have never done
M-3 per se because it largely reflects the extent of expansion of
the banking industry. And when in effect banks expand, in and of
itself, it doesn't tell you terribly much about what real money is.
" So our problem is not that we do not believe in sound
money. We do. We very much believe that, if you have a debased currency,
that you will have a debased economy. The difficulty is in defining
what part of our liquidity structure is truly money.
We have had trouble ferreting out proxies for that for a number of
years. And the standard we employed is whether it gives us a good
forward indicator of the direction of finance and the economy.
" Regrettably, none of those which we have been able to develop,
including MZM -- has done that. That does not mean that we think
that money is irrelevant. It means we think our measures of money
have been inadequate. And, as a consequence of that, we, as I have
mentioned previously, have downgraded the use of the monetary
aggregates for monetary policy purposes, until we are able to
find a more stable proxy for what we believe is the underlying
money in the economy.
Question by Dr. Paul: "So it's hard to manage something you can't define?"
Answer by Mr. Greenspan: "It is not possible to manage something you can't
> Yes, there
> is still much to be learned, and people do not always behave predictably.
Mobs, such as the 50% of American households invested in the stock market,
(as opposed to 12% in 1929) are fairly predictable, not as to timing,
but as to reaction. They *will* panic.
> But at the same time we can't deny the effectiveness of the US Federal
> Reserve over the last two decades in moderating the business cycle and
> keeping the economy on a generally even keel.
This sounds so much like the rhetoric of the late '20's that you
frighten me. Do you work for the Federal Reserve System?
> Stock prices may fall and even crash eventually, but we should not expect
> a 1930s style depression as a result. The economic policy mistakes
> of the time are well understood today.
Yes, I agree. And those 'mistakes' have been repeated in spades. This
is what makes the current period so similar to the Twenties. It is as
if the '20's were a test of how to jerk around an entire economy
and leave the bankers seated when the music stops. As for whether this
leads to depression, that is entirely up to our owners- the Fed.
> There may be a slowdown as
> the excesses of the boom times get cleared from the system, but there
> is no reason to expect it to be particularly severe or long lasting.
> The demographic factors which are driving investment today will remain,
Huh? In the US? It will require 2 workers just to support each Social
Security recipient within ~ 20 years, if there still is SSI, which I doubt.
> and progress in new technologies will not stop. There is still every
> reason to expect significant, possibly unprecedented, economic growth
> over the next few decades, based on technology.
I agree, there will be unprecedented growth- just not in the US.
> Ultimately that can
> support very high valuations.
> > 7. Is the stock market rational? From a long term perspective,
> > is YES. Short term movements are anything but rational. The
> > market is an exercise in crowd behavior. Today, it is simply an
online study in
> > human nature.
> What is "short term"?
The past five years and the next few months.
> The stock market has been overvalued by
> conventional measures for years. Fed chairman Greenspan started
> expressing alarm about 1995.
And then proceeded to create "money" at historically unprecedented
rates, thus feeding the bubble.
> It's tough to square allegiance to market
> rationality with the belief that for 5+ years the market has been
> foolishly caught up in an asset bubble.
The current market players include a vast number of irrational suckers
caught up in what they consider to be a casino, one in which a
"greater fool" will always be on hand to purchase their worthless stock.
My position on this, though correct, is not a pleasant one
to be in. I hope that this has helped someone out there.
"The fate of the world economy is now totally dependent on the
stock market, whose growth is dependent on about 50 stocks, half
of which have never reported any earnings."
--Former Fed Chairman Paul Volcker, Sept, 1999
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