http://www.gold-eagle.com/asian_corner_98/kutyn060998.html MONEY FOR NOTHING⦠A MODEL FOR ECONOMIC COLLAPSE exerpt When we examine the dynamics of financial analysis, all too often we look only at what we can see, and ignore the under-currents flowing beneath the surface. In 1989 Japan was experiencing an 8% growth rate and low inflation - while the Nikkei and real estate values were soaring to untenable record levels. Supremacy in manufacturing and technology made them the richest people on earth - and money was so abundant that they were exporting it as a "commodity" to the rest of the world. But things change. While most of the rest of the world has enjoyed substantial growth since 1990, the Land of the Rising Sun has managed to ike out only minimal growth, despite a large fiscal stimulus and 0.5% interest rates - the lowest on record of any country. Unfortunately, Japan has failed to comprehend the financial dynamics of its economy. Consequently, the Land of the Rising Sun will soon see the collapse of its banks, its insurance companies and, ultimately, default on its sovereign debt, followed by the Yen tanking. That the richest people on earth should sustain such a destruction of wealth during a time of great technological advancement and world growth is truly ironic and paradoxical. While the Japanese will bear the greatest destruction of wealth, many other countries will suffer similar fates. Subsequent to many years of encouraging growth, South-East Asian economies are falling apart at the seams. To fully comprehend the financial dynamics affecting these hapless economies, we must understand how debt affects national accounts . When an individual borrows to make a consumer purchase, retail sales increase - and we call it growth. When governments borrow to fund programs, government spending increases - and we call it growth. When corporations borrow to build a new manufacturing plant, capital spending increases - and is called growth. This type of growth is a direct result of an increase in debt. Within today's economic environments, growth is perceived when debt is increasing, and conversely, contracting when debt is decreasing.
2 Pages ago I posted a chart depicting the horrific levels of US debt and asked if the bulls among us can explain how we are to get around this mess. The chart has been viewed 35 times and I did not see any comment from the bulls on debt, just a lot of nonsense on PEâs. Talk on PEâs is just a futile pipe dream when we are faced with such unsustainable levels of debt. As many here have pointed out, earnings and valuations can easily be fudged, but debt cannot. And even if the earnings estimates were not deliberately fudged, they are just mere estimates, and real earnings are bound to collapse as the mountain of debt clears. Simply put, this level of debt = bankruptcy. In the years to come when the status of the US is reduced to that of a beggar, all delusions on earnings will disappear, and so will any respect for Mr Greenspan.
Even though I have been trading since 1980, I'm not smart enough to figure out if, and when the market will have an issue with the debt loads that you have shared with us. What I do know is that there are very solid companies out there with very real earnings power. As a result, I am trading the market based on what the market is telling me right now, not 5 years, 10 years, or 25 years from now. Sorry bud, but the market is in an uptrend. For now, that is all one has to know. That is all that counts.
I've mentioned the consumer debt issue so many damn times. But even according to your chart, it just keeps growing and growing. One would think that after 1987, consumer debt would have experienced a correction. Another interesting observation is that even during 99-00, when interest rates were still at highs, credit was given out left and right. I know, I fell into the credit trap. Now, we have rates at lows and same exact situation. Whats the deal? I'm baffled. But here is the thing with consumer debt. BKs have been growing and growing, yet they barely affect the top CC companies. Thats because the whole write-off process and debt charge-off is done with accounting tricks. Plus, by the time you get to the uncollectable point, the CC company has already jacked you for quite a nice amount. The debt is charged off which allows for write offs. The jacked up balance is then sold off to a collection agency. The sale to collection agencies at a ridiculous discount allows the collection industry to be profitable even if they only collect half the debts. So its a nice chain that really just entraps the average consumers in a debt trap. Then there is the credit report and thats just a whole nother discussion. The only real concern is that this growth is just based on debt, cheap money and cost cutting. The trick seems to be finding true growth companies. I am personally investing in some of these. There could be a lot more of them or very few, who knows. This rotation at the current moment will decide all that. I wouldnt be surprised if this market goes pretty much sideways for the rest of the year. Actually, I just care that the uptick rule is gone soon and then it really wont matter to me either way.
And there lies the problem with the US: everyone in a position of authority seems to be just looking at today without a care in the world as to the future. Look, I merely posted the chart, which I extracted from a recent Bill Goss article, to add food for thought to the wildly optimistic expectations on earnings over the next 12 months that you cited. Like you, I have not fought the trend and have had my best year by far since going full-time 3 years ago. This past month I did become a little nervous and so closed all my longer-term positions, but still trade the long side (and short) in the short-term as opportunities present themselves. In 1987 we had strongly bearish technical signals weeks before the crash, which are not present at this time. Hence, I also see no point in shorting this beast until such time as it shows its hand. Any other approach can be ruinous considering all the credit excesses that Geenspan has so foolishly created and which are clearly evident in the broad based advance that we have experienced. I say foolish because the downside when it comes, if we use history as a guide, may well eclipse the party that we are having, and the commencement of this downside may not be more than a year away judging by how the dollar has been falling. So I personally cannot get excited enough about earnings expectations to make any long term investments. Although there would be many good companies out there with strong earnings, they will be sold at give away prices when all the excesses start to clear because much of the other over-priced junk out there will not be saleable at any price.
I think we need to pull back alot more than this before any serious new money will pile onboard. But then again.. if enough people believe all the hype anything can happen. Trade carefully all
One cautionary word about the Mother Teresa of the Bond Market, Bill Gross: This guy has been incredibly wrong regarding the direction of the equity markets. If he actually traded the equity market like the way that he speaks, he would have been bankrupt within 6 months. Secondly, Gross's economic idealogy is based on a strict adherence to the multiplier effect, crowding out and other post-Keynesian concepts . . . he does not come from a neo-classical, supply-side or Austrian viewpoint. As a result, I wouldn't put too much weight in what Bill Gross has to say about the equity market. And finally, I would argue that there isn't any hype about earnings estimates. My guess is that such talk most likely comes from traders in their 20's or early 30's that have only been around since 1998. The fact of the matter is that sell-side analysts are way more CONSERVATIVE due to all of the liability and fallout of the last Dot.Com crash. Furthermore, with the long list of CEO's finally being held accountable by attorney generals like Eliot Spitzer and the SEC having a mandate in the way of Sarbanes-Oaxley, I would say that earnings estimates if anything, are on the low-ball and conservative side. As for the technical condition of the market, it is interesting to note that the cummulative A/D line is at its highest level since 1998. Yet, you never hear the bears talk about this cause it ruins their theme. And as for the dollar, who's to say that it doesn't bottom somewhere in here ( G7 meeting this weekend in Boca Raton, by the way ) which would lead to a tremendous amount of support in our market by foreign investors.
If you check the Fed model for stock and interest, the market is undervaluate and could have a 33% go up before to match the equilibrum, but this is only a model!
A bubble is defined as a market whose pricing is based on the greater fool theory and speculative momentum, and whose valuations cannot possibly be explained by rational fundamental analysis and valuation criteria. My alternative definition of a bubble is a market which, even if it fell significantly (e.g. 50%), would still be overvalued. The current market does not fit either definition. People may be overvaluing the market, or making mistakes in their analysis of the future fundamentals, but in most cases they are not blatantly ignoring fundamentals in order to make money via the greater fool theory. Valuations are not so high that a large fall would still leave us with an overvalued market.