No free lunch at Le Metropole Cafe. On Menu: Crack-up Boom, Veneroso Medley.
Bill Murphy who is the Chairman of GATA (Gold Anti Trust Action)
located at gata.org also has a pay per view web site
that includes all economic areas, including the gold market,
for viewers with an interest in obtaining the opinion of other
persons that Bill Murphy deems suitable to exchange for money
in exchange for their views to help keep and make money.
I have no connection to this for profit web site and only mention
it here because many on this thread have asked the question about
bubbles and their nature to be created, expand and pop.
Currently a FREE 2 week trial membership can be had.
Bill Murphy, Le Patron, Le Metropole Cafe lemetropolecafe.com
The Hemingway Table
Discussion du Jour: US Financial Markets
David Tice
The Prudent Bear Fund
ticed@prodigy.net
December 22, 1999
Crack-up Boom - Day 39
Today was day 39 ... an historic period of wild speculation.
...never imagined that our financial system would be allowed
to run so out of control, but it has. So far this week...
...we have been fascinated with a particular paragraph from
Ludwig von Mises' The Theory of Money and Credit.
The boom can last only as long as the credit expansion progresses at
an ever-accelerated pace. The boom comes to an end as soon as additional
quantities of fiduciary media are no longer thrown upon the loan market.
But it could not last forever even if inflation and credit expansion
were to go on endlessly. It would then encounter the barriers which
prevent the boundless expansion of circulation credit. It would lead
to the crack-up boom and the breakdown of the whole monetary system.
To gain a better understanding of what Mises meant by a crack-up boom
we consulted Dr. Frank Shostak, a leading Austrian economist and Chief
Economist at Ord Minnett in Sydney Australia, who said, According to
Mises, whenever people are..... This Mises calls a crack-up boom.....
...Consequently it is not possible to conduct monetary transactions.
The monetary system breaks down.
Well, it is our guess that when Mises considered credit excesses
inciting a flight to real goods he never could have imagined today's
stampede into stocks. All the same, it certainly appears to us that
there are indications of something very akin to Mises crack-up boom.
Seeing the buying power of money sink daily against the.....
...crowd dumps cash and borrows aggressively to buy.....
the explosion of derivative trading that is adding.....
...the indirect borrowing that has made its way into the stock market
from an increase in..... and other debt for the household sector
...as well as unprecedented borrowing to finance stock buybacks from.....
...it can only be described as panic buying and a crack-up boom.
...excesses that will greatly surpass anything seen to this point.
Also from Anders' article, an..... Such massive increases in perceived
wealth are poised to feed something similar to Mises' crack-up boom,
a very dangerous situation that we believe the bond market is beginning
to recognize. In fact, we suspect a truly extraordinary occurrence is
now in process, and we see this completely out of the Fed's control.
But as Mises stated, The boom can last only as long as the credit
expansion progresses at an ever-accelerated pace. Well, over the past
14 weeks our already over-leveraged financial sector has increased
commercial paper borrowings by..... with interest rates destined to.....
...with $28 trillion of interest rate derivatives outstanding.
...in regards to stock market leverage, this game only works with
rising prices. When prices falter, there will be forced deleveraging
and it will not be pretty. But, lets say that we are incorrect and credit
does continue to expand at an ever-accelerating pace. Well, we see this
as only exacerbating an unavoidable ****** crisis.
Despite all the bullish chatter of how the world has an insatiable
appetite for US investments..... And with our crack-up boom scenario,
we fully expect huge demand for foreign goods until.....
We are certainly of the view that out of control trade deficits will.....
...we will have the onset of a vicious cycle and serious ****** problem.....
Actually, we think there is much more here than meets the eye. We would
argue that if not for the credit excess-induced asset bubble at home and
the global financial and economic crisis over the past couple of years,
massive US trade deficits would have months ago weakened the dollar.
Indeed, we suspect that the leveraged speculating community has been the
driving force in recycling the tidal wave of US dollars back to US
financial markets, particularly over the past two years. And while this
has kept the US financial and economic bubble going, this has led to
only greater financial and economic distortions.
Today, there is no doubt that the ******, ********* and the US economy
combine to form one massive bubble; a bubble that is acutely vulnerable
as excesses go to new extremes i.e. a crack-up boom takes hold. And, most
unfortunately, the big loser here is the real economy. We see as the big
surprise for **** the recognition that we have squandered massive
resources and are left with a maligned economy hopelessly unable to
produce enough to satisfy domestic needs, let alone able to begin to
produce goods to reduce the mountain of debts owed to our trading
partners. Sure, we know this sounds insane in the current environment.
But that is exactly our point: never has there been such a wide gap
between perception and reality. And when this historic bubble breaks
and reality is forced to be reckoned with, it is going to be quite a shock.
But for now, we will simply state that a crack-up boom is now taking
hold, while truly unimaginable impairment of our ********* system and
******* unfolds like never before.
The Dos Passos Table
Discussion du Jour: Guest Speaker
Frank A. J. Veneroso
Venoroso Associates
lizsummit@aol.com
December 22, 1999
Some Studies On the High Tech Stock Market Insanity
Over the past year, the US stock market has gone schizophrenic.....
The US stock market overall is a bubble.
But now we have a bubble within a bubble, and the bubble within
---high-tech--- is perhaps without historical precedent.....
. Neither the US market in 1929 nor 1968-69 were "bubbles".
Price/Earnings multiples in 1929 were reasonable compared with today
and there was no significant fringe of large cap issues with
insane valuations as there are today. The same can be said of.....
...multiples on the order of one thousand and even many thousand.
We know of no historical precedent for such an extreme except for the
Persian Gulf OTC market in Kuwait---the Souk al Manakh.
...recent pieces on the US high tech stock market insanity for you.
June 14, 1999
US Economy
Internet Insanity Part II
The Impossibility of Being Earnest
Is Amazon.com Actually Amazon.bomb or Amazon.con?
Executive Summary
It is widely recognized that valuations of Internet stocks are insane.
We have argued that competitive pressures on the Internet may make
profits for most internet companies unattainable. Most Internet
companies may not have viable business models. The ease of access to.....
...has increased competition, impeded business discipline, and increased
the likelihood that most Internet business will never profit and survive.....
...What is less well appreciated is the horrible state of accounting
in the Internet industry. Conditions are worse than they seem. The
Internet industry may be rife with fraud. In many ways the Internet
industry resembles a Ponzi finance scheme. A flood of.....
...Soros-type reflexivity, internet business (advertising revenue, hardware
purchases, e-trading, day trader traffic, etc.) will deteriorate.....
...when the Internet stock bubble bursts, outright stock fraud
may be exposed on a wide scale. Cynical herding institutional.....
...A proliferation of Internet company IPO's masks this underlying
weakness by facilitating Ponzi-like financing schemes which inflate
revenues, reduce losses, and occasionally generate reported
profitability. Yet, the IPO market, long the life-blood of the industry,
is showing signs of fatigue. Could this be the beginning of the end?
During the 1980's, there was much discussion of the 21st century
becoming the Pacific Century, led by the Japanese economic juggernaut.
Flush with low-cost capital, a booming equity market, and an
ever-appreciating currency, the Japanese economic model appeared the way
of the future. Although meager returns on total capital and equity were
a predominant feature of the period, the Japanese bulls invariably
proclaimed that these were short-term considerations. Japanese companies
were said to be largely indifferent to profit in the near term, as they
worked to increase market share and re-invest for the future (in
contrast to their allegedly short-sighted American competitors). The
reality, of course, was that the collapse in the country's stock and
real estate markets invariably exposed Japan's corporations to a much
more hostile operating environment, in which the consequences of
excessive capital investment, bloated cost structures, and.....
The very worst, however, which can be said about these Japanese businesses
is that though they were inefficient and deployed cheaply acquired capital
raised from banks and/or a continuous stream of warrant and convertible
bond issues wastefully; they were not, as a general rule.....
...have actually deployed the kinds of infamous accounting procedures
that allowed Japan to sustain its "growth" for so long."
This analogy is actually unfair to Japan. Although publicly quoted
companies in Japan did adopt accounting standards at variance with those
of comparable American companies, in many regards Japanese accounting
was far more conservative than US accounting. In particular, Japanese
firms have always used depreciation and amortization schedules that are
much more conservative than their American counterparts. Yes, it is true
that the Japanese Ministry of Finance did sanction questionable practices
(e.g. Valuing bonds or equities at book or cost, whichever was the lower),
which overstated the financial strength of the life insurance companies,
banks, etc. But these examples of questionable accounting treatment were
no more egregious than those tolerated by the Federal Reserve in the early
nineties with respect to the manner in which America's banks and Savings
& Loans accounted for losses on their respective bond portfolios.
Internet Accounting Abuses and Internet Fraud
The Internet companies employ many of the "new" accounting practices
of US firms in the 1990's, which.....
Another area of abuse is the failure to write off the cost of employee
compensation through stock options..... inflates Internet company earnings
by more... and the failure to expense employee option related compensation
distorts reported profits or, more likely, losses to a greater degree.
These accounting abuses of the Internet companies are similar to their
S&P counterparts; they are only employed to a more extreme degree in.....
...What is amazing is that virtually all Internet companies now report
so-called "pro forma" results and that in many cases these pro forma
results turn large losses into profits. To quote Inferential Focus again:
...when ******, Inc., reported its earnings, the company issued
public statements on its Web site and elsewhere saying that it had
enjoyed a profitable second quarter and had 'pro forma net income of
$**** per share'. But at the bottom of its public announcement, in small
print, the company admitted: '[These financial statements] do not
purport to be financial statements prepared in accordance with Generally
Accepted Accounting Principles [GAAP].' Given that the Securities and
Exchange Commission requires the use of GAAP.....
in the official SEC filings, ****** admitted
that in actuality it had suffered a second-quarter loss equal to.....
Even the use of the term "pro forma" is terribly misleading. It implies
some form of uniform, recognized standard within the industry. The truth
of the matter is that no such standard exists. It is, in reality, a.....
A House of Cards
Other accounting tricks which have thus far not been deemed illegal
include techniques to build "sales". A recent article in The Pulpit
illustrates the means by which newly established Internet Service
Providers (ISP's) work with Internet equipment vendors in order to.....
"We'll start with a contract for say, $10 million worth of equipment.....
...This is where things start to get complex.....
By keeping the purchase to less than 5 percent of my company, there is no
legal requirement to report the transaction. Not even analysts, much
less the shareholders of the vendor or the Securities and Exchange
Commission need to know the deal has even happened.
...And the equipment vendor books a $10 million 'sale'."
...The foregoing example is interesting in that it illustrates that
liberal accounting techniques are not limited to fly-by-night Internet
companies. Respectable growth companies such as ************* and ******
************ employ such practices. In effect, they.....
...market gravy train. As these equipment vendors increase their
revenues in this manner, and "manage" their quarterly earnings,
their stock prices go up, facilitating paper acquisitions of
other companies, thereby inflating earnings further.
The seemingly endless expansion of the Internet enables this Ponzi
scheme of finance to continue indefinitely. Yet no capital is actually
generated from any of these Internet businesses - another stunning
contrast with Japan's bubble-era companies which, at the very least,
were producing highly sought-after merchandise, the evidence for which
was reflected in the nation's ever-expanding trade surplus. One could
argue that excessive valuations were being attached to such businesses,
but the reality is that most of these companies were actually generating
cash profits of one form or another. Not so the Internet. Hoping to rid
themselves of the addiction to stock market finance, Internet companies
have tried.....
...to block all ads from reaching the user's computer. Are such
ad-avoiding software packages being used? Apparently so. One such
product - AdGuard---was the fourth best selling software package
in the country in a recent month.
...looked closely at its numbers, it discovered serious flaws in.....
"Hackers had evidently written software (now freely available on the
Internet) that could mimic the behavior of a site visitor and trigger
virtual responses on the click-through counters. Dan Clemats, Banner
Brokers' vice president noted, 'We thought phantom clicks accounted for
under 10 percent of our traffic, but it turns out to be anywhere from.....
...we remarked that the whole phenomenon was a Ponzi
scheme funded by IPO's which would end when the Internet stock market
bubble burst and there was no next round of chain letter suckers to keep
the game going. When the IPO funds are exhausted, advertising and
marketing expenses will fall. In turn, so will Internet ad revenues as
well as the meager cash revenues from products sold by many Internet
companies.
Wall Street: Accomplice to Fraud
The use of the Internet is expanding daily, but competitive pressures
are rising even faster, placing greater and greater strains on Internet
commerce. The evidence for this.....
A suspension of disbelief is typical in this business. Credit Suisse
First Boston's Lise Buyer concedes that "at some level, the attempt to
rationally explain the valuations of Internet securities is an exercise
in futility." Paul Noglows at Hambrecht and Quist expects the big
Internet companies with "good business models to be recognized and
recover soon", but later concedes that "my job at the end of the day is
to tell people what stocks are going to go up. My job is to make our
clients money" (even if this does entail an abdication of one's
analytical responsibilities).
Conclusion
We have said it again and again. The Internet mania represents.....
...This is tantamount to saying that there will be no more money
from the last round of suckers to keep the chain letter going.
...who on the Street will be the first to shout the emperor has no clothes?
Veneroso Associates:
All portions of this work, copyright 1999, all rights reserved.
November 18, 1999 |
