What David Tice has to say about the bailout:
(what a sharp sort)
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WEDNESDAY, SEPTEMBER 23, 1998
Federal Reserve Chairman Alan Greenspan is certainly Wall Street's favorite central banker of all time. From his very first months at the helm of our nations financial system back in the fall of 1987, he has acted publicly to protect the stock market. The day after "Black Monday" in 1987 he stated his willingness to flood the system with liquidity if necessary to protect investors. He won great kudos, especially from Wall Street, for leading a quick recovery in stock prices that ensured a boom in the global economy in the late 1980's. Unfortunately, this boom also led to a boom and bust in real estate and junk bonds that led directly to the S&L bailout and the US recession in the early 1990s. Importantly, the late 1980s global boom also led to the Japanese bubble that, even today, a decade later, jeopardizes the global financial system. But Mr. Greenspan came to the rescue again in the early 1990s, with an unprecedented drop in interest rates down to 3%. The economy did recover but our financial system has never been the same since.
In response to Mr. Greenspan's low interest rates, many small investors took their money out of bank savings and CDs and sent them into mutual funds or bought stock directly. It became popular to buy mutual funds that invested in emerging markets such as Mexico and Indonesia. At the same time, many banks, hedge funds, and investors like Orange County decided to aggressively speculate, borrowing at low short-term rates and lending at higher long-term rates. Born here was huge leveraged speculation and the popularity of derivatives. Unfortunately, when a strong economy forced the Fed to raise rates in 1994, many of these speculative trades, with Orange Country's bankruptcy filing a memorable example, blew up with huge losses. When these speculations were forced to unwind, interest rates shot up. This was particularly damaging for billion of dollars that had gone to speculate in Mexican stock and bond markets. As capital tried to flee, the Mexican currency and financial system faltered into a severe crisis. Here, Mr. Greenspan again saved the day with an unprecedented bailout that protected the speculators.
Not only did Mexico recover, the US stock market and economy boomed like never before. It is hard to believe that the Dow began 1995 at about 3,800 and the NASDAQ 100 at 400, and hardly took a break until this year with the Dow and NASDAQ 100 topping at 9368 and 1485, respectively. The US financial markets and economy become uncontrollable bubbles. Euphoric investors and speculators, much encouraged to take risks after the Mexican bailout, also flooded money into SE Asia, Russia and Latin America leading to massive financial and economic bubbles, a massive boom that is now a terrible bust. Indeed, today's severe global financial crisis is the predictable and inevitable result of such excess. Each time Mr. Greenspan intervenes to protects the market, he only encourages even more senseless excesses leading to an only larger boom and inevitable bust. Not surprisingly, today's global crisis, one that is really much the product of an overheated US financial system, is impacting the US markets and, inevitably, the US economy. Markets now teeter close to financial collapse.
Bullish investors and analysts, however, believe that Mr. Greenspan can guarantee the continuation of the bull market. Today, markets rallied strongly as Greenspan made it quite clear that he now sees heightened risk to the US economy and financial system and he is willing to lower rates and take other actions to ensure continued US prosperity. All he is really doing, however, is ensuring even greater excesses and a more catastrophic bust. Just look at the wild speculation in the internet stocks. Gains so far this week include Yahoo up 30%, Excite 42%, Broadcast.com 55% and Amazon.com 31% as the Internet index surged 10%. Strong gains also for the Dow, gaining 3%, and the S&P500 up almost 5%. Huge gains are seen for technology stocks as the NASDAQ 100 and Morgan Stanley High Tech index gained 7%. Financial stocks also boomed with the bank and broker indexes also up nearly 7%. With this Greenspan rally, mutual fund companies are also reporting huge inflows as investors see the Fed Chairman as making stocks "a sure thing."
It is just so unfortunate that today's acute global financial crisis is seen with such amazing complacency. While investors should be very worried and acting aggressively to reduce risk and protect capital, they have instead been trained to trust Mr. Greenspan and mindlessly buy stocks. This is a tragedy. We certainly don't believe that this the proper role of the Chairman of the Federal Reserve.
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IS THE CURRENT STOCK MARKET "A BUBBLE"?
"Bubble" - a light hollow ball, Webster's II. The stock market is a "bubble" looking for a pin. The purchase of a securities at one price may be an investment, at a higher price - speculation, at an even higher price - irrational exuberance, and today, 2500 points above "irrational exuberance", the greater fool theory.
Everyone is investing in the market. People buy at high prices and expect to sell at ever-higher prices. The overall stock market is selling at the highest valuation in more than seventy years. People have forgotten that in order to "buy low, and sell high", you have to sell.
It is extremely rare for a Federal Reserve Chairman to warn investors about the stock market. This has happened only twice before in this century (1929, 1965), and in both cases, a severe bear market followed that required more than twenty years to breakeven after inflation. Alan Greenspan chooses his words very carefully. Yet Greenspan referred to the stock market as "a bubble" in a prepared speech when the Dow was about 6000.
Only in a bubble can a stock like At Home Corporation be worth $2 billion on its first day of trading when it posted revenue of only $2 million and lost $23 million for its previous six months. Slow-growing companies like Procter & Gamble and Coca-Cola are posting sales growth of 4% and 2%, respectively, yet are selling at 31 and 41 times earnings. Normally, the P/E's of stocks sell closer to their growth rates. These companies have been posting earnings growth slightly faster than sales, but not by much, and this never lasts forever. In the 1960's, people justified paying-up for great companies that would continue to grow, but look at their market returns from 1973-74 - (Coca-Cola -70%, Walt Disney Co -85%, PepsiCo -67%).
So why can't I wait until the end gets closer? "Times are too good now for the bubble to burst yet", you say. I only wish it was this easy. People always ignore history. They fail to realize that markets always get the most overvalued when times appear to be wonderful. The view is always clearest at the top. But it "feels so good" when the economy is strong, and everyone is making money "hand over fist" that people ignore the perils of a ridiculously overvalued market. Stock market moves nearly always precede economic events, and therefore people rarely predict the event which might cause a market decline. But in a bubble, they always think they can. When times are the best, all you have left is risk.
Stock markets never go up forever. It's not as easy as Wall Street would like you to believe. It isn't typical for money to be given away on Wall Street, but with the Dow Jones average increasing at a 19% rate since 1982, it seems like it. Consider the recent warnings of Greenspan, Buffett and Templeton. Think more about preservation of capital and less about greed. Expressing caution today is like being against motherhood and apple pie. History does repeat itself, so to protect yourself and your family's future, don't invest in a "bubble".
IMHO - this guy knows how to hedge! Said he is buying HM & NEM.
rh |
