Contrarian Chronicles
When the bubble's over, the pain really begins
As prolonged as this stock-market train wreck has been, the economic aftermath is likely to be excruciating. Contrarian Chronicles looks to the past -- Japan's, America's and our own -- for guidance.
By Bill Fleckenstein
This week, Contrarian Chronicles is programmed to "rewind" mode. First, we'll reverse to October 1999, to a speech I gave about the dangers of our runaway mania. (It's worth noting that from the date of the speech to the March 2000 peak, the Nasdaq ($COMPX) nearly doubled.) From there, it's back to Japan's bubble in the 1990s and America's in the 1920s. Luckily, we have the "history books and musty archives" that our Fed chairman said were of little use in understanding bubbles to help us navigate the tough times ahead. Of course, living in the past has its limits, especially when one finds the old bull-market "investing" tricks no longer work.New features
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A (clickable) link to the past
To avoid getting hurt in the post-mania aftermath, it is not enough just to acknowledge that we had a bubble. Almost everybody realizes this now, though acceptance was slow in coming, and in fact was disputed until recently. What's necessary, and I can't emphasize this enough, is that people understand the ramifications of our bubble as the inevitable aftermath winds on. To that end, I'd like to share with readers a speech I gave in October 1999 at the Contrary Opinion Forum. It's titled "Spinning Financial Illusions: The Story of Bubblenomics," and you can access it by clicking here. Hopefully, the speech will help readers to better understand the bubble that occurred and have a better sense of what to expect. Regrettably, the prolonged economic troubles that followed the bubbles of the 1920s and Tokyo are models for what we face, in the aftermath of the biggest mania in the history of the world.
Two czars are born
Turning to Japan, there may yet be hope for its market, thanks to a business consultant by the name of Takeshi Kimura, whom the government has appointed to a task force to deal with the bank-loan debacle. Kimura appears to have the right idea about allowing bad credit to go bust and finally letting the markets clear. Further, Japan's new "economic czar," Heizo Takenaka, seems to be of a similar viewpoint.
This will, no doubt, cause a fair amount of pain in the short run, witness the spanking in their market last week, but dealing with the problem head-on may ultimately set the stage for recovery. Sometime in the next three to six months, it may actually be possible to buy Japan, knowing the worst has been seen. It would even be better if our market was at last flushed, and we could get that event behind us, as well. In any case, I intend to keep watch on how events unfold, with the hope that something positive develops there in the not-too-distant future.
Paradigm lost
Shifting to the perennially-asleep-at-the-wheel department, last week's Wall Street Journal reprised a Greenspan speech in a story titled (and extended by me in brackets) "Derivatives Growth Has Helped Banks [Cook the Books]." Sir Al is quoted as follows: "These transactions represent a new paradigm of active credit management, and are a major part of the explanation of the banking-system strength during a period of stress." He forgot to say, "So far." In my opinion, what these derivatives have done is to postpone and hide the problems, so that it appears things are OK when they are really not, and then somewhere down the road, they blow up.
I think Sir Prints-a-Lot is patting himself on the back prematurely, since he was leading the charge to give financial institutions the freedom to use derivatives as they saw fit. As we've seen with every other speech, this clueless saxophone player will probably come to regret his words, and I would guess sooner, rather than later. He has a bad habit of extrapolating a trend into the future, just at about the time the trend is set to end.
The stock sopranos
Now for a step back to last week's Contrarian Chronicles, in which I talked about the bull market "rules" that people found so helpful. This week, I'd like to share some thoughts on why they no longer work. There seems to be quite a growing chorus of people who want to buy stocks because they've been down so much, or they've been down so many weeks in a row, or because sentiment measures are in a certain place, or because Treasury bonds yield so little. These people are "professionals," and they have certain tricks that they expect to work.
But the people on the other side of the trade are the masses. And just as none of those types of rules working in the opposite direction slowed the mania down one iota on the upside, as the public poured money into stocks, none of those tricks has been successful on the downside, as the public has slowly withdrawn from the equity market. Remember, to get the Nasdaq to 5,000, we needed billions of dollars flowing into the mutual funds every single week. Now those flows have clearly turned the other way, which makes it very difficult for the market to rally, especially when stocks, in the aggregate, aren't cheap. So, I provide that as food for thought as to why the tricks aren't working.
William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column for TheStreet.com's RealMoney. At time of publication, William Fleckenstein owned none of the equities mentioned in this column. Positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC on MSN Money.
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