Dear RM,
What worries me is for the first time since 1929-1932, American's personal savings are negative while real consumption has steadily gone up. So they are saving nothing, and debt levels are rising. I think people stopped saving because they "feel" wealthier, but Mr. Greenjeans easy money policy has expanded credit tremendously. This, in turn, has fueled our economic boom and thus consumer spending by raising nominal incomes and funding the rise in personal debt. If the economic boom slows, then consumer spending will drop. The Fed's loose money policy over the last few years has used credit to stimulate output. When people reduce savings, more of their resources go to current consumption. If people save, more resources go from the production of consumption goods to capital goods which will increase future output.
Don't you think many companies have used credit to hire labor and buy goods and services? These expenditures translated into incomes which were spent on consumption. When there is a rise in interest rates beginning in February, it will restrict credit, which won't be good for this market which has risen because of this loose money policy. If this market cracks, consumer spending will cease.
Haven't all major declines (ie-recessions and depressions) been created by massive credit expansion? When the Nikkei was over 38,000 and the average PE was about 70, the banks began to raise interest rates. The market reacted very little, and stock market analysts continued to say that stocks would go up. Finally, when stocks began to slide, real panic didn't set in until about a 30% correction. I know everyone thinks that there will always be a "buy the dip", but do you realize how many new investors are in this market only in the last couple of years? Tell me if the NASDAQ slides 30% there won't be true panic selling with not anywhere near enough money to "buy the dip?" Property values in Japan were also grossly overinflated, and when the interest rates rose and stocks crumbled, there was no money to pay back loans. Tell me there is not gross inflation in real estate in America right now. If stock options were included in wage numbers, tell me there is not gross wage inflation right now. I know there are major differences now in America, but some basic laws never change. The most basic of which is greed always turns to fear at some point.
Rising productivity does not curb inflation. Greenspan said there were "inflationary imbalances" earlier in 1999. He has been warning of a "bubble" for a long time now. I even thought of Warren Buffet as an old fool missing the new tech revolution. But, perhaps in the final analysis, he won't be so wrong in saying there are few companies worth investing in at current prices. The narrow range of stocks that have actually been carrying the averages higher is also very worrisome.
Put simply, how can consumer spending and stock market purchases based on borrowed money not end in a terrible mess? How many rate increases before we have a Japan-like reaction? -- 3-4-5? I'll probably miss a great bull-run because, as Voltaire has pointed out, fear has paralyzed me. I am open to change my mind, but right now I am not very optimistic. Tell me what I am missing. Thank you.
I remain,
SOROS
ps
" ''It's ugly,'' said Ralph Acampora, director of technical research at Prudential Securities. ''The advance/decline line is in freefall. It's been going down for 22 months.''
''But very few people really understand it. The public out there could care less about the advance/decline line. When the Dow's up 100 points in a day, they're happy,'' he said. ''But technicians can't do that. It's the old saying - you have continued deterioration in breadth, that will eventually lead to a bear market.'' "
"More stocks have been making 52-week lows than new highs. In fact, some 73 percent of all New York Stock Exchange stocks are in a bear market. Some 268 stocks out of the 500 that are components of the Standard & Poor's index are down for the year.
''I don't know how people can call this a bull market,'' Newman said. ''Sure, the major indexes are up, but this is total fraud.''
"The broadbased index is up 20.2 percent on the year, but virtually all of those gains are due to the 209.8 percent surge in Nortel and the 84.7 percent explosion in BCE. ''The breadth is very worrying because so much of the gain is concentrated in just those two stocks'' [Kate Warne, Canadian market specialist at Edward Jones in St. Louis, Mo.]"
...we have been confronted with the potential for our economies to exhibit larger and perhaps more abrupt responses... all asset values rest on perceptions of the future... history suggests... waves of optimism and pessimism that can be touched off by seemingly small exogenous events... the newer technologies... bull stock market... are also accentuating some accounting difficulties... that tend to bias up reported earnings... stock options overstated growth of reported profits according to Fed staff calculations by one to two percentage points annually during the past five years...
...stock prices... may not be of the same dimension in the future...
...when events are unexpected, more complex, and move more rapidly than is the norm, human beings become less able to cope.... induces fear and, hence, disengagement from an activity, whether it be entering a dark room or taking positions in markets...
...And attempts to disengage from markets that are net long--the most general case--means bids are hit and prices fall...
...the adjustments in asset markets can be discontinuous, especially when investors hold highly leveraged positions and when views about long-term equilibria are not firmly held...
...like a dam under mounting water pressure, confidence appears normal until the moment it is breached...
...Risk aversion in such an instance rises dramatically, and deliberate trading strategies are replaced by rising fear-induced disengagement...
...History tells us that sharp reversals in confidence happen abruptly, most often with little advance notice. These reversals can be self-reinforcing processes that can compress sizable adjustments into a very short time period. Panic market reactions are characterized by dramatic shifts in behavior to minimize short-term losses...
Whether Dutch tulip bulbs or Russian equities, the market price patterns remain much the same...
...Collapsing confidence...
...a bubble about to burst...
...a plunge in the prices of assets...
...millions of investors...
...ruptured confidence...
...periods of panic...
...stock market values and capital gains on homes are correlated...
...the issues that I have touched on this morning are of increasing importance...
...we have little choice...
Remarks by Chairman Alan Greenspan
New challenges for monetary policy
Before a symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming
August 27, 1999
"Economist Roger Bootle warns that the United States is causing most concern. ''You have had fantastic economic performance for several years. Some of which is genuinely based, but a lot of it is froth .. you've had a tremendous boom amounting to a bubble in the stock market, and when that bubble bursts it could have a serious effect on the world,'' he warns."
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