Fleckenstein's implosion comments: "Yesterday we reported that long-term Capital Management blew up. Last night there was a big rescue plan whereby banks will own 90 percent of the company. The Fed seems to have been the chief engineer behind this plan. We must not forget that David Mullins is an ex-Fed vice-chairman.
Now we have a new moral hazard in this country whereby certain hedge
funds are deemed too big to fail. First we had banks too big to fail in the 1980s, then the entire S&L Industry in the early 1990s. Then when Mexico went belly up, we saved them, which gave us the last horrific leg of the bull market (go check a stock chart). Next we tried to bail out Asia and Russia. It didn't work, so now we are reduced to bailing out the first hedge fund (AKA: leveraged investment partnership).
This is the complete and total socialization of risk. In the end, we
will print money no matter what, to save anything that we deem too big
to be disruptive. The Fed has no problem fomenting a gigantic bubble,
but when things stop booming the Fed finds itself in the bubble
management business. They don't want to let the consequences of the boom assert itself. They will be unsuccessful.
I know I have said that this is a stock market bubble, which is a very
pejorative term. Let me try to substantiate that claim. What has been
going on during the last five years has nothing to do with investing in businesses - this has been about speculating in stock prices. Here are some numbers, courtesy of Net Davis.
Since 1990, the S&P Industrial average is up 247 percent, while revenues are just up 34 percent. The S&P Industrial price-to-sales ratio has gone from .66 to 1.72 (compared with the 43-year norm of .8). Stocks are twice as expensive as on average. We have managed to grow sales at 3.8 percent per annum, in what some people consider the "best of all worlds." Yet in that same period stocks have soared on average 17.4 percent.
At the end of the day, stocks have gone up because we have had a giant
chain letter. As long as the public was sending Wall Street $3-5 billion each week, so they could wake up rich in 20 years, we could have a rip-roaring stock market. It had nothing to do with fundamentals. The battle cry was, where is all the money going to go? - implying stocks must rise forever. Guess what? We didn't have too much money, we had the ILLUSION of too much money caused by MASSIVE leverage. It has been a bubble, which began to unwind last year.
We haven't even had great earnings growth, let alone great profit
growth. The profit growth that we have seen is a result of creative
accounting, like RECURRING non-recurring write-offs and stock options. This has been an exercise in financial engineering and a mania."
See stocksite.com for total
article. |
