Re: 1929 deja vu

From: Forrest Bishop (
Date: Mon May 01 2000 - 04:49:15 MDT

From: Max More <>
Date: Mon, 24 Apr 2000 11:44:22 -0700
Subject: Re: 1929 deja vu

At 02:00 AM 5/24/00 , Forrest [Bishop] wrote:

>I agree that the current situation is not like 1929- today's bubblicious
>stock mania, massive credit creation excesses,

See for example:
"The fact that a dangerous real estate bubble runs simultaneously makes
this both an extraordinary period and one unfortunately quite vulnerable to a
financial accident."

Doug Noland has done some interesting analysis on money/cedit/debt creation
by GSE's.

My central thesis is that an unwinding in any of these highly leveraged
positions (e.g. stocks, real estate, hedge funds, and above all banking-
particularly gold banking) will cascade into the others.

Example 1.: A person uses a 125% ditech re-fi to invest in stocks, pulling out
profits to pay the mortgage. Stocks go down, mortgage payments missed, bank
is short on reserves, has to unwind some of its leveraged positions, such
as OTC currency hedges and stocks. Multiply by 10 million Joe Sixpacks.

Example 2.: The systemic risk to the global financial system *may* now be
great enough that a single actor can cause widespread collapse, similar
to Nobel Prize-winning LTCM- the "house of cards" argument. Say Soros cuts
a deal with the Chinese to supply several hundred tons of gold at price
(spot + X). China sell its US T-bonds to finance. Connect dots.

Here in Seattle we are seeing signs of financial stress- people I know or know
of that have lost *large* amounts in the stock market and a whole lot of
stiff upper lips- call it a mood index.

Prediction: Seattle will lead the nation on the downside.

> 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-

See for example:
This is the nastiest one. It can lead to a fundamental shift in the
monetary order. To the *rest* of the world, gold is money.

>bank derivatives exposures (ala LTCM writ large), and
>so forth ad nauseum make the crash/depression of 1929-1939 look like a speed

>I couldn't disagree more. The strictness of accounting standards is much
>tougher now than then.

Some significant amount (I don't have figures in front of me for this) of
corporate earnings in the past few years has come from playing in the stock
with other companies stocks. This works great on the upside (everyone is a
genius in a bull market)- but yields nasty fire-sale de-leveraging on the

Prediction: Many prominent companies will have horrific 2nd quarter earnings.

Also, please note the rash of companies forced to restate earnings- almost
always to the downside, often after the prior earnings report has "increased
shareholder value", i.e. jacked the stock price.

But what happens to Dell if its stock doesn't continue to go up and
up? The liabilities could be huge—say $3.1 billion in the other direction.
Is any of this illegal? Apparently not. Only professional athletes can't bet
on their own team to win. But the game of playing puts and calls, and
the inflated bottom lines that result, is just another example of the death
of good old reliable earnings reports.


>There are problems, but they are problems that
>probably understate* the value of companies. For instance, more and more
>value is in the form of hard to measure intangibles. There's a lot of
>literature on this that I could suggest. (Do a search for Baruch Lev for

The future is also hard to measure, I therefore have to assign a value
of *zero* to intangible assets such as goodwill, branding, IP, earnings
trends and so forth.

This sounds interesting, and is mainstream:
The Case for a Major Market Meltdown

  After analyzing 100 years of data, two authors say the chances for it are high

  very high 

A slash in the value of U.S. stocks by 50% -- or more -- isn't just a scary possibility, it's an economic likelihood. That's the startling contention of Andrew Smithers and Stephen Wright, authors of a new book, Valuing Wall Street: Protecting Wealth in Turbulent Markets. Smithers, chairman of a London-based economic consulting firm, and Wright, of Cambridge University, think there's a 67% chance of such a crash in the coming year. from: =========

>What is this about consumer debt loads?

The US household savings rate is well into negative territory for the first time since the Great Depression. Average home equity has been *decreasing* in spite of real estate price inflation! 2/3 of US GDP is created by consumer spending, funded by an increasing debt load. This cannot continue forever. The bond yield curve inversion is apparently signaling that the party is over.

Add to this the record corporate debt (as % GDP)- which is used to fuel earnings via the stock market! A nice Austrian School viewpoint:

========= To cite from a contemporary report by the League of Nations about this development: "The credit expansion after 1927 in the United States went largely to the financing of speculation. According to available statistics, no less than 86% of the total increase in bank credit was used for that purpose. Thus was laid the foundation for the stock-exchange boom which followed." from: =========

> You mean the $21 billion >dollars in cash held by MSFT, or the huge amounts at other companies? > Today >is also unlike 1929 in that Greenspan would never let the money supply fall >by a third as the Fed did back then, turning a stock market crash into an >economic depression.

This time we are not using money. If we run short of chits due to a recession, or stock market blow-off, or liquidity crisis, or banking crisis, or currency devaluation, or accelerating inflation, foreign debt holders (our creditors) will be happy to supply us with all the dollars we can eat. Remember, a Federal Reserve Note is ultimately an IOU. We (the US) owe them (the world) somewhere around $2 trillon (and accelerating) worth of "stuff". Here we refer to the 1970's, when offshore dollars (Japan, oil producers) were repatriated in fear of hyperinflation.

Prediction: Large US$ currency exchange rate swings dead ahead.

>>I find it rather simple. If a company loses money consistently (, >>, 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.

>Forrest, at least get your numbers straight. MSFT's P/E (*before* today's >17% haircut) was a mere 47. And remember, that's without backing out $21 >billion in cash holdings (Not to mention a similar amount in unrealized investment gains.)

A mere 47. So it only has to blow off another 60-70% or so to revert to the mean. The index P/E at the 1929 blow off top rose to a then unheard of 16.2. Nasdaq's is cruising around flight level 200, even after the April death march. If Mr.Parish is correct, then Microsoft's P/E is indeed, in the hundreds, *still*. I'm not a CPA, apparently he is.

Prediction: Microsoft no longer has anywhere near $21 billion cash reserves- several billion were vaporized covering its calls.

>Yes, Cisco is pretty expensive, but it's also positioned >at the center of the New Economy and continues to grow rapidly. Looking at >very high P/Es of a Yahoo in isolation is meaningless. It's forward P/Es >and PEG ratios that matter. If a young company has just made a small profit >but is growing rapidly, an astronomical PE can fall very fast looking ahead.

The "New Economy" slogan was coined in the '20's, and was much the same theory. Trend earnings assume that the rest of the economy will keep performing as it did *in the recent past*, and that the business cycle has been repealed.

>I disagree with most of the rest of your post, but that's all I'm going to >comment on for now. This thread would probably be best suited to the >Investing in the Future forum.

The topic is not whether to buy into the latest, but what is happening to the economies of the entire world, and what may occur. In my opinion this belongs on page 1. I urge you to at least give this some of your consideration.

Forrest -- Forrest Bishop Manager, Interworld Productions, LLC Chairman, Institute of Atomic-Scale Engineering

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