Milne: A warm glass of milk for Flint

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Subject:From Nobel Prize Winner Milton Friedman
Date:1999/09/05
Author:Paul Milne <fedinfo@halifax.com>
  Posting History Post Reply

Pictures of a Stock Market Mania,
 
In our view, sentiment continues to imply extremely negative consequences for the market. Despite the lip service paid to the bear case by many participants, there is little or no actual fear displayed in the arena. We believe the move by the Fed to lower rates three times in the fall of 1998 was expressly designed to "save" the stock market, on the precipice and possibly even ready to crash. The consequence of the Fed's targeted action has completely taken away the rationale for bears to play the short side of the market. The assumption is that even if stocks begin a rapid slide into the abyss, the Fed will step in and save the bulls (or the market) again. The last three corrections - all minor in nature - have witnessed less and less bears. This is strong evidence that participants feel there is little or no reason to play the downside. As a result, we can infer that more and more players are compelled to turn bullish and play (read leverage) the upside. Despite a stock market priced many times what it was seven years before, corrections are met with yawns by those who might otherwise be bears. Bears are truly a vanishing species.
 
 
It is easy to infer that a huge increase in stock prices could enable the creation of an enormous amount of household debt. This is the wealth effect in action. Keep your money in rising stocks instead of spending it. Better yet, take on more debt and buy more stocks! Simple, isn't it? But we wonder if the chart we show below now shouts "Danger!" Stocks as a percentage of household financial assets peaked in 1968, concurrent with an inflation adjusted high in the Dow and the end of a broad based secular advance in stocks. Although larger "nifty-fifty" type issues continued higher into 1972, the secular bull market had already ended for most stocks. The worst recession since 1929-1932 ensued. Today, household debt compared to Gross Domestic Product is far higher and would appear to indicate that investors/speculators will have far less room to maneuver debt service if the stock prices break significantly. Under those circumstances, another deep recession like 1973-1974 is probable, and an even worse scenario is clearly possible. 1929? Although we hesitate to make the obvious comparison, we are amazed that the mania underway continues to be glossed over at every opportunity by those who have the power to expose it - the media, economist and market analysts.
 
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In the fianl analysis, at the end of every mania, "everyone" thinks it can only go up. This is a very good sign that the end of the mania is close at hand.
 
We are at nosebleed levels right now. It is only a matter of time.
 
http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=001Lxm
Paul Milne



-- a (a@a.a), September 06, 1999

Answers

You know, a, whatever I may think of Milne's world viewpoint, he does come up with some damn good articles. I'll give him credit for that.

-- Peter Errington (petere@ricochet.net), September 06, 1999.

More and more experts are sounding the alarm.

Their strong warnings should be heeded by stock investors.

But greed causes deafness and loss of common sense.

-- Randolph (dinosaur@williams-net.com), September 06, 1999.


Once again, I've never said the market wasn't way overinflated. I think it is. Once again, 'a' is trying to mock me for something I never said. 'a' must be really desperate to silence the last contrary voice in this asylum, but this technique is surely beneath him.

-- Flint (flintc@mindspring.com), September 06, 1999.

No, Flint, I am just curious as to how this situation fits into your classification of y2k as a 2 on a 10 scale.

-- a (a@a.a), September 06, 1999.

'a':

OK, I'll treat that as a serious question, because it raises what I consider a difficult issue -- how to extricate y2k impacts from what would otherwise have been normal (if unfortunate) economic trends. I've noticed, and I'm sure you have too, that we're seeing more and more economic articles pointing out that the market is overheated. Greenspan says so, most Wall Street economists think so, PE ratios are way out of line, usually-reliable models say the Dow should be at maybe 8000-9000 right now, and so on. Milton Friedman is saying we're overdue for a major correction.

You'll also have noticed that of all of the many "we're due for a big drop" analyses, only Yardeni even *mentions* y2k as a factor. And then, y2k is a trigger, the gentle push that's all that's needed to force the economy over the edge into the land of the Big Correction.

From my perspective, this correction is coming anyway. But how can we really determine to what degree (if any) y2k contributes to it? By timing alone? IF it just happens to come within the next (say) 9 months, it *must* have been y2k that caused it, guilt by association? Or should we look for explicit trigger events -- say, major economic players experiencing big hiccups for reasons that are beyond question y2k glitches?

And even if y2k *is* this trigger, since we agree this big correction is coming anyway y2k or not, how much of the total economic dislocation should properly be attributed to y2k, as opposed to y2k just accelerating the start of the downturn (if it does)? For a long time the Great Depression was called the Hoover Depression, although most economists don't think Hoover caused it or could have done much to resolve it. He just happened to be in the hot seat when it hit. Maybe y2k will be in Hoover's role this time, and we'll call this the Great y2k Depression, even though actual computer malfunctions had little (if anything) to do with the final economic toll?

Anyway, I'm trying to separate the y2k part from the normal economic correction part. I expect the correction. I don't think y2k itself will be much more than a pimple on the elephant's butt.

-- Flint (flintc@mindspring.com), September 06, 1999.



But the pimple will fester and turn gangrenous.

-- Randolph (dinosaur@williams-net.com), September 06, 1999.

Flint, We will see Y2K in action in the market and know exactly what it is because companies will not be making any money. Profits, if there is any distribution and any manufacturing or services will be down so significantly due to the Y2K mess that any post-bubble market that remains will plummet way below the 8000 or 9000 that it might currently be justly priced. I

n other words, the Y2K effect will be measurable below, say, 8000. If we drop to 3000, then that 5000 drop will be Y2K. If we still have a stock market, we will have made it through relatively well, in my opinion, because the structure will have held.

-- Mara Wayne (MaraWayne@aol.com), September 07, 1999.


Flint's Folly
Sigh, Once again, Y2K is the excuse. On both sides I must say one word:
Pathetic.
The truth to the argument hit me at home 8 weeks ago when I sold out of the market. I was in the Houston airport and the shoe shine entrepeneur asked me for a stock tip. I asked him why. He said that his mutual funds were going dry and he asked every "suit" what they thought. I mulled that over on the plane ride, and decided right then to liquidate. It was a good call. At another client the maintenance crew were overheard (by me) discussing a bad day in the market. Any moron (not a flame, Flint, et al...), should know that when over 40% of American households are in the market, it is doomed. And even the P.O.S. phoney we have in the White House can not defend the inevitable downturn. Y2K will be the proclaimed "reason" yet not the actual one. The contraction in liquidity will occur for other reasons. Read your history books. Then reply to this post. Otherwise, Shut Up.
John Galt

A name which history will soon remember:)

-- John Galt (jgaltfla@hotmail.com), September 07, 1999.

Paul Milne is the voice of reason.

-- bardou (bardou@baloney.com), September 07, 1999.

Flint:

Your analysis sounds OK. However, let me use a medical analogy. While bronchitis and asthma are both manageable, taken together they can be fatal. Whether Y2K and the bubble could pack an amazing 1-2 punch; they may prove greater than the sum of their parts. (This discussion, of course, is independent of the possibility that we all just die from one of the many causes discussed regularly on this forum!)

-- Dave (aaa@aaa.com), September 07, 1999.



Of course the paranoid of the bunch would say it is a set-up, and 010100 is just a beginning.... the beginning of the end...

barkin' loudly,

The Dog

-- Dog (Desert Dog@-sand.com), September 07, 1999.


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