Booms, Busts, and Recoveries Message Board

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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: Erik T who wrote (262)	10/26/2000 4:27:23 PM
From: quasar_1	Read Replies (1) of 74559

Reality Check... Except that if stocks continue down there is a risk of less liquidity. Why is that? Where does the liquidity go? Does it just vanish? There are a lot of companies that will need more financing or risk going out of business. This includes many new-era techs as well as some more stodgy old-economy ones. Good, this is very bullish. In a capitalist environment the capital should go to the successful and not to the weak. This almost guarantees higher productivity. The high-yield corporate bond market has been devastated of late... That's great! Many of these bonds are junk in junk companies. That is why they carry such high returns. Nice to see the free market get something right. and if this continues then the lower stock prices will have an effect on "reality." This is the core flaw in many arguments. Reality is not asset prices. It is not how much your investments are worth nominally. It is reflected in true wealth creation. The best way to view this is in standard of living increases. My contention is that the standard of living is constantly increasing worldwide, even if punctuated by bubbles or crashes in nominal asset values. If you don't believe this consider the life of a 'rich man' in 1500 vs. the life of a 'poor man' today. Now this is the real 'long wave' bull market. I would also submit that the rate of change of this standard of living is growing faster than it ever has, almost exponentially. The only thing that can stop it now is global thermonuclear war or environmental destruction. I agree with most of what you say. There are companies that are undervalued by just about any metric, but they have been pushed aside for all the new-era companies. And I agree with some of your observations. But there are many new era companies that are very cheap right now. Look at the chip and chip equipment sector. The other thing is that some of the 'old-era' stocks are being transformed by deregulation and new technology. Look at the utility sector As you say just because they are "undervalued" does not mean they are going up anytime soon. Short term always implies psychology. One can never predict the herd... These companies have been unable to go up during a period of investment euphoria. That is because of the huge concentration in investment decision making into very few hands. People have relegated investments to funds and institutional portfolio management. This is a very small universe of gurus and wags. It gets fueled by the CNBC and Bloomberg megaphones which holler 'the truth' minute by minute. Add this to the overwhelming naivete in the market's marginal traders. All of the T/A gurus and fast buck super traders who have profited from the piggish bull market have no clue about working in a difficult environment. I was here at the beginning of this whole mess (1980). I sounded like a lot of you here then...K-wave...debt crisis...etc. I could make much the same arguments. All of these arguments (predicting the future, looking for 'known' cause/effect) didn't make me a dime. Now here we are 10x higher on the DJI and its the same old same old. If sentiment changes direction, these same "undervalued" companies may become even more "undervalued." Sentiment has already changed direction. It is bearish NOW. That is why we are 40% off the highs. As for the Euro, it is just about time for the central banks to intervene again. That is the worst thing they can do. If they intervene they are asking for it to go lower. This represents bids to hit. The best thing they can do is NOTHING. To get the Euro to stabilize they need to cut interest rates in Europe (that's right...cut!) They need to cut high tax rates. They need to eliminate trade barriers. They need to become more capitalist and less socialist with economic policy. That will cause a stunning rise in the Euro. Will they do it? Probably not. Friday seems to be a popular day for that sort of meddling in "free markets." So I look for a pretty good up day tomorrow. I agree with you, there are no free markets. As long as central banks control the value of money through the pegging of interest rates or currency intervention, the nominal basis of all assets is ambiguous. This 'pretense to knowledge' fundamentally undermines all attempts at free market commerce. Thanks for your thoughts! Q

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