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Strategies & Market Trends : The Millennium Crash -- Ignore unavailable to you. Want to Upgrade?

To: xray who wrote (4203)	5/19/1999 6:14:00 AM
From: Arik T.G.	Read Replies (2) \| Respond to of 5676

xray, Both charts represent an extreme condition. The high consumer confidence leads to the zero savings rate, where households use all available income to consume, and the rising stock market provides them with the illusion of wealth. The danger is that any stock market decline, after a minimal period of time (5-6 months?), would turn the wheel around and create a positive feedback between decreased consumer confidence, increased savings rate, shrinking credit ,halt of spending, economic slowdown, lower equity prices and so on into a Big Depression created by the bursting of the equity bubble. The households have no cushion, and fund managers do not provide any themselves. When a bear market begins, it won't stop until the overshoot will be completed. Households that have no cushion will need to liquidate some funds, fund managers will have to sell stocks, and the market will decline more. Consumers that now rely on their stock portfolio gains as supplementary income will have to halt all spending to pay the bills. Some of them will go bankrupt. Domestic demand, the big engine of the last 4 years growth, will cough. As the market declines,IPOs will cease, and options plans will lose their glamor and reverse the wealth effect. Internet companies will have to pay their employees with real money. Some of them could not afford that and will need to cut back on their staff. Unemployment will rise (tens of thousands of stock brokers will also lose their jobs), and credit will shrink, as the savings rate will rise, as it always does in bad times. The two charts I posted show a bubble. When a bubble bursts it is always bad. In Japan there was the most orderly deflation of a bubble ever. It's been 9 years and domestic demand is not improving. A burst of the US bubble will surely create more mess, including a rise in crime rate. ATG