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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Don Lloyd who wrote (11609)	12/6/2001 2:48:39 AM
From: Maurice Winn	Respond to of 74559

Thanks Don and that process is underway somewhat: <At this point, the companies that are struggling to handle heavy debt loads will no longer reap the benefits of a continuing slide in the purchasing power of the repayments that they are obligated to make. As these companies go into default, and possibly into bankruptcy, the debts that they owe to the banks become worthless and can no longer be claimed as bank assets. The banks must immediately retrench, reducing their excessive leverage by increasing the level of their fractional reserves. Now the next level of marginal companies have both lost customers to bankruptcy and are unable to get the banks to roll over their loans, and may fail themselves. How far this goes, and the degree of bank failures, is unpredictable. However, the large reduction of outstanding credit undoes the original expansion and is equivalent to a large reduction in the money supply, reducing the money prices of goods (and company revenues and profits) across the board, and increasing the purchasing power of the continuing repayment obligations associated with the remaining outstanding debt, making them increasingly difficult to meet. Under this scenario, it is the banks that are causing deflation as they de-leverage, and there is little that the FED can (or should) do about it. > It's what I've worried about for 5 years now, but I decided that the Fed would in fact be able to manage the situation inasmuch as a domino-theory implosion would be avoidable. My greater concern was a very rapid credit collapse due to margin calls crashing markets precipitating huge stock price drops and very rapidly causing economic collapse too. That process is clearly not going to happen given the nearly two years that people have become accustomed to being financially mauled in the dot.bomb explosion and telecosmic collapse. That process caused general sharemarket malaise on the "telecosm sucks, therefore sell the Dow" principle whereby when a portfolio is pummelled, there isn't enough left in the dot.bomb and telecom.bust shares to cover the margin calls, so something else gets sold, [or the person prefers to keep the beaten down stock as being a better prospect for revival]. Now, we have got Enron, Global Crossing, Globalstar and other indebted companies in trouble [Enron being huge compared with the piffling debts of Globalstar]. Those will feed the process you mentioned. So far, the process seems so slow that there seems no real threat. Enron's, Globalstar's and Global Crossing assets will be sold to some new owner and they'll continue to function. Because of that deflationary process you described, the Fed can print money to their heart's content, giving GeorgeW and Congress huge stacks of banknotes to finance US needs from the war on Osama to judicial needs, police, road construction and the vast amounts of other stuff they like to spend money on. Despite all that printing, there won't be inflation because of that deflationary process you describe. Then, when things get burbling along again, the money supply can be dried up and interest rates increased to avoid irrational exuberance. At this stage, things do seem steady enough. At P:Es of 30, that's 3% which is more than enough reward for deferring spending [in a zero inflation environment]. The historic returns on investment are not laws of nature and the idea that things will revert to historic norms in the absence of a driving mechanism is false. When people live a short time, or life is dodgy, there's little incentive to save so high returns for investment are needed to get people to save and invest. But when life expectancy is high and investments are easily secured by spread portfolios to avoid risk, lower rates of return are sufficient to provide investment incentive. I'm still saving and investing, not spending capital. So is Jay. In my opinion, money is now as risky as shares. Maybe more so, because I can imagine people en masse abandoning US$ and other government currencies for a yet to be invented cyberspace currency, free from the irrational whims of mob rule democracy [which is what underpins currencies such as the US$]. Therefore, shares should yield LESS than interest rates when such a currency looms. Being markets, we try to guess the future and get there early - the early bird gets the worm. Meanwhile, I think Uncle Al is doing well in managing the transition and I'm not seeing much sign of a big collapse [though Enron shareholders didn't either until they woke up one day, already kaput]. Mqurice

To: Don Lloyd who wrote (11609)	12/6/2001 3:22:11 AM
From: Maurice Winn	Respond to of 74559

Speak of the devil. Wharton's email list sent me this today. <Enron's Collapse: Who Else Goes Down and How Soon? As Enron spiraled into bankruptcy this week, some observers worried the shock wave from the Houston energy trader's crash would set off a domino effect in the financial markets, just as the collapse of Long-Term Capital Management, the giant Connecticut hedge fund, did three years ago. Actually, it's probably not that bad, or, as one Wharton professor puts it, the Enron debacle "is not going to turn out the lights anywhere I know of." knowledge.wharton.upenn.edu > I'm with the 'no lights out' contingent. Mq