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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: PaperChase who wrote (64642)	7/15/1999 4:05:00 PM
From: Mike M2	Read Replies (1) \| Respond to of 132070

PC, I know it sounds absurd but this is the type of damage that occurs when bubbles burst. This market could decline 50% and still be one of the most overvalued in history. I don't know what the catalyst will be but I'll toss out a few ideas. US Dollar weakness from the trade deficit -there was a time when trade deficits hurt the value of the deficit country's currency. In addition, the trade deficit hurts the profits of US companies. The dollar has received a boost from the carry trade but with the extreme leverage involved it is only a matter of time before another LTCM scale accident which may not be so easy for the Fed to fix. The consumer has record high debt loads and record low negative savings rate -this trend is not sustainable. The global recession/depression will continue to spread. If, however, there was a global recovery ( doubtful IMO) then the foreign money flows into the US would reverse for investing in their home economies. We all now about record high valuation but not as many know about the poor quality of those earnings which overstate the true sustainable earnings power of US companies. The productivity miracle is a mirage due the the gov't use of chained dollar GDP calculation overstating growth if measured in real nominal dollars. What has really fueled the US consumption boom is excesses in credit- at some point balance sheets will be so strained that debt deflation is unavoidable . This touches on a few of my concerns -there are others as well. I have no doubt that a bear market of historic proportions is unavoidable but I cannot guess when it hits. The scope of participation in this mania is unprecedented to whom will they sell? Cash balances as a % of securities outstanding most likely at record low levels. Mike

To: PaperChase who wrote (64642)	7/15/1999 4:45:00 PM
From: Freedom Fighter	Read Replies (2) \| Respond to of 132070

Paper, If blue chip stocks were to fall to their mean level based on multiple of earnings, sales, book value, replacement cost etc.... that would take the DOW/S&P500 down more than 50%. Since fear generally causes overshoots in both directions, DOW 4000 is not impossible. Rather than speculate about the event that will cause it, I'd rather just make these points. 1. Mean reversion has been going on for 125 years in multiple countries. 2. The success of capitalism is based on the efficient allocation of capital. Since the usual relationships are so out of whack, either the world has been getting lucky for 125 years and the entire success and past relationships were an accident, the last few years are out of whack and we are in a bubble, or we are mismeasuring something now. Considering that every competent value guy I know thinks that earnings are more overstated now than in the past, I doubt it's the latter. The reason these things happen is that we do not have free markets per se. We have a fiat monetary system. When you have free market savings and investment, that which is saved and lent diverts money from somewhere else in balance. Under fiat money you can supply whatever amount of credit the loonies (g) demand regardless of the savings level. So you can generate low interest rates, high profits, high asset prices...you can have it all. But clearly the ability to print money and supply credit gives you no control over where it goes. It can also cause all sorts of miscalculation depending on where it is directed. Interest rates are lower than their savings based (free market)level and since we are supplying income streams in the form of credit that was not diverted with savings, profits are equally out of whack to the upside. We can similarly produce high asset prices with little or no savings. It's simply a matter of the credit excesses manifesting themselves in a way that can't be propped up. (inflation, extremely large trade deficit, overcapacity, everyone tapped out, other) It's different all the time. Or the Fed will have one of its rare feelings of responsibility and end it. Wayne