Cramer Rewrites 'Why the
Game Has Gotten So Hard'
-- Part 2
By James J. Cramer
4/22/00 4:40 PM ET
Because we all collectively do so, the Fed is worried it
has a bubble on its hands. The single most important
worldwide, real-life case study here is the destruction of
the Japanese economy at the hands of its stock market
in the 1990s. That market, like the Nasdaq, went too
high and the nation margined to the hilt to play. (This is
a really, really important point. The speculative
bubble lasted for so long in Japan that eventually
you were a fool if you didn't margin up and buy.
Those of us who traded in that era can remember
clearly that brokers from Japanese firms would
come to you and say, "Well, you want to get long
the rails tonight, because we're taking them up and
you can sell them tomorrow." Or, "If you buy 50,000
shares of a fishery stock, we'll take you out up 10%
tomorrow.
After a while, when this happened, you'd feel like
a total dolt if you didn't do it in size. I remember at
38,000 on the Nikkei I didn't even want to know
what I was buying. I just wanted to be given the
profit the moment I bought it, instead of having to
wait overnight. I don't invest in irony, but at the top
in Japan they would basically give you a check for
the profits even if it didn't work because they
wanted to keep you in the game!)
In the end the loser was consumer confidence. Those
people bank at the First National Bank of Seely. (Too
obtuse? These people keep their money under
their mattresses because they're so fearful of
financial institutions. They're afraid of spending.
They have lost fortunes speculating in the stock
market.) We can't have that happen here. But beginning
with the Nasdaq runoff of 2500 that's exactly what we
had, and the Fed knows it. It knows it because the
margin debt soared just like it did in Japan. (These
margin debt numbers in this country are
completely out of control. It's quite obvious to me
that people feel as they did in Japan in 1986, 1987
and 1988, namely that you're an idiot if you don't
buy as much stock as you can because at the end
of the day it will be higher. There is no other
explanation for such high debt numbers. Many of
you, judging by the poll we had yesterday and by
your letters, think that margining is a conservative
philosophy. Some of you even used that term
several times in describing it to me. Wrong!)
As long as that debt hadn't taken off the Fed was OK
with the market. Remember, the Fed is anti-excess. It
rewards prudence and punishes profligacy. If there is
ever a place where too much money is being borrowed
to finance speculation, whether in gold, or land or oil, the
Fed's jackboot won't be far behind. That's why right now
the Fed wants this new market down. (They don't say
that point-blank because they don't want to attack
something directly then look foolish when the
market doesn't behave.)
It's also why, if it doesn't go down, the Fed will use its
tools to destroy -- wouldn't you know it -- the old market,
because the old market is based on credit. If you take
short-term credit up too high, it stifles the economy and
everybody from the airlines to the papers gets crushed.
(For the life of me this has to be the dumbest thing
Alan Greenspan has done as chairman, to wreck
the profitable economy to support the unprofitable
and profligate economy. He would rather ratchet
up short-rates that affect everybody, rather than
bump the margin rules to dramatically higher
levels -- even though it is completely in his powers
to do so. Why use nighttime saturation bombing
when you can take out the culprits with daytime
precision instrument bombing?
Senator Charles Schumer feels similarly but has
not been given his due by the Chairman of the Fed.
What a shame! It doesn't have to be that way. You
want speculation in stocks to dry up? Don't force
people to sell stocks by raising short rates to the
point that all stocks are unattractive. Just take
away the rocket fuel. Or tell the institutions to
ratchet up the amount of collateral you need to buy
stocks on margin.)
That's why every time the new market cracks we at
Cramer Berkowitz shift to the old market: Because the
old market will rally big if the Fed doesn't have to brake
the economy hard, and the Fed won't break it hard if the
new market behaves. (Don't believe me? Wednesday
of this week was a classic example -- a lot of the
Nasdaq names got hurt, led by Intel, (INTC:Nasdaq -
news - boards) while drug stocks roared. We
thought it best to get out of one set of high-risk high
reward names and into a group that does well
when the economy is softer, which it will be if the
spending boom cools because of the dot-com
decline. We continue to like the food and drug
stocks and dislike the whole new economy world,
which is why we have cut back on all sorts of tech,
fearing the lock-up expirations and coming
onslaught of selling by venture capitalists and
execs afraid the boom is over.)
On that terrible Friday we thought that the silver lining of
the collapse would be that the Fed would cease to be a
factor. But yesterday's rally made a mockery of that
theory. It destroyed it. The rally re-liquefied the
speculators and gave hope to those who want to see the
new economy continue its astronomical growth. (We
were possessed by Tuesday's market. It led me to
reintroduce Buzz because I was searching for
honest explanations for why the market went up
and couldn't find any. I liked Buzz's Marshall Plan
for mutual fund ne'er-do-wells much more because
this stuff does go on.)
Why do we even care about the new economy?
Because all of those little four letter jobbies with the
billion-dollar market caps fates will be determined by the
continual creation of new companies and their ability to
finance new hardware and software. You take away the
capital creation machine and you take away the
earnings (and potential earnings) of the new economy.
(How many start-up companies take delivery of
equipment and promise payment upon the
completion of the IPO? I would say they're in the
thousands. Don't forget that before the dam broke
there were tons of companies hoping to sneak past
the hordes of sellers and go public. Without a
public market to tap, many of these companies will
never make it into stocks. When these stocks were
at a high, we needed all of the companies to make
it. That's just not going to happen now.) So Friday's
selloff seemed to be the answer to the Fed's prayers.
Yesterday's rally was a crushing blow, though. (The
rally fizzled and the Nasdaq erased all of Tuesday's
gain by Thursday.)
If yesterday's rally continues, the new market will get
re-energized and the Fed will tighten even more
aggressively because the Fed must head off a Japan
bubble. It has to. Or Greenspan will go down in with
same terrible reputation that the Japanese central
bankers of the 80s now have. He will go down as the
man who financed the crash. He can't do that. (We are
not being conspiratorial. In fact, we are confident
that Greenspan will take rates up as far as he
thinks necessary to quell the boom. That's very
foolish, of course, because he is hurting the S's, not
the N's. You want the N's to come down? Here I go
again: Change the margin rules. Protect people
from themselves. That will hurt the levered part of
the economy -- the stocks that represent concepts
and can help take inflation up high -- more than
anything else.)
Oddly, because it is all connected, the only clue to what
will happen is the stock market itself! If the new
economy goes up, then we are in trouble. If the new
economy chills for a bit, then consumer spending
declines, confidence gets throttled back, the Fed wins
and we can have both good new and old markets. But if
there is no short-term chill, the Fed will engineer a long
one. (We now dread any strong macro number that
comes because the Fed could move quickly to
raise rates again. If we don't slow down these
numbers, the Fed will slow down the numbers.
Believe me, you take short-term rates up past 7%
and we will have a very sluggish economy on our
hands.)
No wonder it is so darned hard right now. It's supposed
to be! (And it is hard. We leave the office
exhausted, drained every single day. And it's only
April! What a year we've already had!)
thestreet.com
*******************
Very similar to this bubble.
Jack |
