Notice there's no mention of Y2K. I'll try to post the article.

http://www.prudentbear.com/markcomm/markcomm.htm Credit Excess, Market Meltup and the Illusion of Utopia

November 5, 1999

An historic stock market run continues, fueled by wild speculation and certainly one of the historys great short squeezes. Since lows from a week ago Monday,the Semiconductor index has surged 23%, the NASDAQ Telecommunications index 16% and the Morgan Stanley High Tech index 15%. For the week, the NASDAQ 100 gained 5%, bringing its year-to-date gain to 50%. The Morgan Stanley High Tech index and Semiconductors posted gains of 6% and 12%, as 1999 gains rose to 60% and 77%. The NASDAQ100 and Morgan Stanley High Tech indices have 52-week gains of 89% and 108%. The Street.com Internet index jumped 9%, increasing its gain from August lows to 80%, and 1999 increase to 100%. The NASDAQ Telecommunications index surged 6%,increasing its year-to-date rise to 57% and 52-week gain to 92%. Certainly exacerbated by a broadening short-squeeze, the small cap Russell 2000 gained 3% this week. Elsewhere, most of the blue-chip averages were relatively quiet. The Dow, Morgan Stanley Consumer and Morgan Stanley Cyclical indices were largely unchanged. The S&P 500 gained 1%, while the Transports and Utilities had losses of about 1%. The financial stocks came on strong, as the S&P Bank index ended the week unchanged and the Bloomberg Wall Street index gained 1%. The AMEX Security Broker/Dealer index gained 5% this week, and now has a 1999 gain of 61%. Today was certainly noteworthy for widespread panic buying, as many stocks with significant short positions had gains of 10% or more.

Few things in life have become as predictable as watching how market rallies incite a tidal wave of bullish analysis and propaganda. Today, with a bond market recovery quickly pushing 30-year Treasury yields back to about 6%, the perception has quickly developed that economic growth has moderated,inflation is, and will always be, non-existent and the Federal Reserve will feel no need to raise rates for months to come. In short, it is in the bag that inflation is dead and that Greenspan will orchestrate a "soft landing." Looking at the manic stock market, an historic rally has Wall Street and CNBC abuzz with thoughts of a truly perfect environment. Apparently, it is now indisputable that a technology-based "new era" economy has ushered in a period of permanent prosperity. Additionally, a new twist has developed in the bull case which states that even if economic activity doesnt moderate, strong profit growth will more than offset any negative effects from slightly higher interest rates. Amazingly, a very strong consensus has developed that believes there is virtually nothing that can go wrong to disrupt the current bullish scenario.

Well, we hate to "rain on the parade." Yet, it has never been clearer that the current stock market environment is a classic mania. And it is precisely during market mania-driven euphoria that sound and fundamentally based analysis is most critically important. Today, an historic credit bubble continues to feed a stock market and economic bubble. Massive credit excesses fuel dangerous real estate inflation and the unprecedented misallocation of resources. Wealth effects from an asset bubble, including financial as well as real estate and other asset prices, drive a reckless consumption binge and out of control consumer-borrowing fiasco. Moreover, historys greatest speculation has put a large percentage of our citizens at great financial risk, while completely distorting our systems ability to effectively allocate resources. Ironically, while the bulls fall increasingly under the illusion that there is scant risk of anything going wrong, the reality of the situation is that our financial system persists on a path of unavoidable disaster. And while the bulls celebrate a wild stock market rally as confirmation of bullish fundamentals, we, instead, see it as nothing more than unmistakable evidence of a hopelessly unsound financial system. Importantly, a stock market simply does not behave as it does today unless there is severe disorder in the underlying money and credit system.

Keep in mind, it was not many weeks ago that credit market liquidity was faltering, the dollar was sinking and the stock market appeared at the edge of serious trouble. Indeed, as September began, swap spreads were at the widest level in a decade, companies were having increasing difficulty issuing debt, and the asset-backed security market was demonstrating growing signs of stress. In many respects, it appeared that our financial system was heading right back into a liquidity crisis similar to that experienced last fall. Yet, almost miraculously, things started improving in early September. Swap spreads, having begun the month near 110, traded below 90 by mid-month. Also, mortgage and corporate spreads narrowed sharply. Suddenly, demand returned for fixed income securities and this has continued to this day. So what happened?

Well, there are a few clues to be garnered from recent credit data. Interestingly, we now see that the financial sector began borrowing aggressively in September and this continued last month. In fact, financial sector commercial paper borrowings increased $29.9 billion in September and $19.4 billion in October. This two-month $49.3 billion increase in borrowings compares to total commercial paper borrowings of $8.2 billion during the previous five months. Remember, it was unprecedented borrowings by the financial sector that rescued our over-leveraged financial system from last falls liquidity crisis and near financial meltdown. The financial sector, particularly the Government-sponsored mortgage institutions, borrowed aggressively in the money and capital markets and used these borrowings to finance the purchase of mortgages and other debt instruments. This powerful program, almost instantly, reliquefied the entire financial system and set the stage for this years historic stock market speculation, as well as stoking the already overheated real estate markets and general economy. Today, it is very apparent that something very similar has been replayed over the past two months.

Supporting this view, we now see that broad money supply (M3) is again expanded rapidly, having increased $95 billion during just the past seven weeks. This equates to an annual rate of more than $700 billion, or 11%. Also over the past seven weeks, money market fund assets have expanded $53 billion, a 26% annualized rate. This compares to growth of only $12 billion during the previous 21 weeks. In the past, this type of rapid growth in money market assets has been closely correlated with aggressive balance sheet growth from non-bank institutions, particularly Fannie Mae, Freddie Mac and the Federal Home Loan Bank system. At the same time, we see that the banks have also been doing their share to revive financial market liquidity. During the past two months, lending has accelerated sharply with "bank loans and leases" expanding by almost $48 billion, or at an annualized rate of 9%. Interestingly, real estate loans make up the majority of this lending, increasing $41 billion, or at an 18% annualized rate.

So, we will be the first to admit that our financial system has again succeeded in putting a Band-Aid on an unfolding financial crisis by simply administering another large dose of credit excess. This, however, is certainly not a cure. In fact, this is a most dangerous game that will end badly, much like an addict hooked on drugs. And while the bulls can today revel that this latest episode of gross money and credit creation again provided the fuel for an historic short-squeeze and speculative stock market melt-up, this only creates a larger crisis for later. No doubt about it, this historic financial and economic bubble runs out of control, growing larger and more problematic by the day. Sure, it can be ignored by the bulls and by the Federal Reserve, but that will not make it go away. As such, there is absolutely no doubt that this wild and dislocated stock market rally and historic speculative run will only stoke an already overheated and distorted economy. It certainly only adds to an already perilously unstable financial system. And while the bonds and dollar have rallied along with stocks, dont expect this to continue. When the dust settles and short covering is completed, the bonds and dollar will once again be acutely vulnerable. There is simply no way around the fact that a massive credit bubble works to weaken and eventually destroy the foundation of an economic system, corroding the real value of an economys financial assets and currency.

Simply stated, our financial system has become very adept at creating is own liquidity and fueling the bubble. Such efforts, however, are an increasingly maligning force, surreptitiously impairing the health of our financial system and economy. Actually, it is our view that the financial system is now trapped in a dangerous game of perpetuating the greatest credit inflation ever, as it is now clear that it takes almost exponential credit growth to keep the game going.

Admittedly, to this point massive credit creation has succeeded in creating the powerful illusion of endless liquidity and economic prosperity. The key point to recognize, however, is that this is a profoundly unsound and unstable situation. The comparisons are clearly the US in 1929, Japan in 1989, and SE Asia in 1997. In all situations, credit bubble-induced illusions of virtual economic miracles were quickly destroyed with the bursting of these bubbles. Importantly, in both the US in 1929 and Japan in 1989, stock markets made one final wild speculative run that proved the last gasp for the respective financial and economic bubbles. Clearly, we see something very similar at work today.

This has obviously been a very difficult period. We have worked diligently to control risk in an extraordinarily challenging environment. Looking forward, we remain quite convinced in the accuracy of our analysis and the inevitability of the bursting of this historic bubble. It has likely never been as difficult to keep faith in the bear case as it is today. We cant help but to view this as one more very good indication that we are indeed at an historic stock market top.

View Past Market Commentaries

More By David W. Tice

-- Gregg (g.abbott@starting-point.com), November 06, 1999

Answers

Thanks, Gregg. That was really informative.

-- nothing (better@to.do), November 06, 1999.

Yes Gregg - (with nothing better to do) - I agree. I am a dealer in the Australian market - we have a growth stock trading here called Computershare - trading at 100 times earnings. This market thinks that I am REALLY going to recommend to clients that they now buy this stock at this valuation. I have nothing better to do than not give advice - how can we? Best to be quiet and let nature take its course? The Australian Republic vote has been a great diversion - but it's over - and now it's back to business.

Happy Days to All Pamela J Lawrence

-- Pamela J Lawrence (pamela01@tpg.net.au), November 06, 1999.

Greg,

Thanks for this article. It was a real eye opener!!!

-- (Lurker@thisplace.com), November 06, 1999.

Another "Gary North"!! See his success!! "Someday",he'll be right.If he is,where will you be? You would have been better off to keep your money in a savings account. Some "Money managers" should get into other lines of work. Listening to this guy is like asking your baldheaded barber for advice on a receding hairline. http://quote.yahoo.com/q?s=BEARX&d=5y

-- cautious (inthemarket@ndup72%.com), November 06, 1999.

Didn't take long to delete the last post.Must be a shill for loser Tice.Here's another commentery on this guy "Tice" and his bear fund. Scroll down to bear funds read with your eyes open.

-- cautious (inthemarket@ndup72%.com), November 06, 1999.

Link did not take.Try again. http://www.thestreet.com/_yahoo/funds/deardagen/812196.html

-- cautious (inthemarket@ndup72%.com), November 06, 1999.

I am an owner of the Prudent Bear Fund and obviously agree with Tice. Nonetheless, he has a deeply vested interest (as do I) in these views.

-- Dave (aaa@aaa.com), November 06, 1999.

Well, Cautious, a fool and his money are soon parted and you'll be watching yours fizzle away before very long if you stay in the market.

-- cody (cody@y2ksurvive.com), November 06, 1999.

You have to remember that David Tice runs a BEAR FUND. He has been calling the market a "mania" for years. Maybe one of these days he will be right, but in the meantime, take a look at the chart of his fund, BEARX.

-- Rebecca Waldock (RWaldock@noemail.com), November 06, 1999.

Cody, I guess that also includes bear fund owners [see chart on bearx funds] plus gold bugs. As for me and my profits,its already converted to hard assets. #1 Rule is "The trend is your friend"---"Don't fight the tape" ---etc,etc. #2 Rule is "There are 208 bones in the human body,most of which are in the hands and feet." The lesson is that when you make a profit,take the money and run.THIS is the main reason that stocks go up and down. #3 Rule is "Be cautious"

-- cautious (inthemarket@ndup72%.com), November 06, 1999.

These types of articles are not new. If you will dig and do your own research you will see that there have been crash predictions since the market was below three thousand early in the 90's. It appears as though these stories of doom do have feet, they just have not found their way to the circular file yet. It's amazing how many people show up with gloom and doom when the market drops 100 points. It's been awhile since we've heard from Andy and his Prudent Bear Fund. If people had followed the advice of these neighbobs of negativity, they would still be making around the two to three percent returns and not much wealth would have been created. Good luck everyone. Look before you leap on advice from this forum.

-- jq public (jqpublic@usa.com), November 06, 1999.

jq public (perfect name for you) - Cody,

You two seem to miss the point of WHY we have high market. The credit influx of the last 2 months is EXPONENTIAL! = UNSUSTAINABLE!!!

But, you know best. If Tice had a BULL fund, would that change the FACTS as to WHAT and WHY we have a "Mania Market".

Several people in the last week or so have wondered "What's going on and why is the Market up?" Do you have any other explanation?

It's clear we are headed over the falls - a raft or a paddle will do you no good.

-- Gregg (g.abbott@starting-point.com), November 06, 1999.

Greg,

Good post, thanks.

I'm curious as to the negative side of all this borrowing. I don't see one.

>Admittedly, to this point massive credit creation has succeeded in creating the powerful illusion of endless liquidity and economic prosperity.<

Isn't a "powerful illusion" the very "non-thing" our dollar is backed by?

We are living in a time where "perception makes reality". Electronic money is "real" yet there aren't enough trees in the U.S. to actually print the currency to cover even a fraction of the "virtual money" stored in bits and bytes on the financial industery's computers.

As long as people don't attempt to "cash out" of their investments, all will be well because the money doesn't REALLY exist anyway.

If the numbers work, everything will be fine. But, should the ratio of electronic dollars to printed dollars begin to tighten, we will see a run on banks that will make the '29 crash and resulting depression look like child's play. This may already be starting, foreseen by Greenspan and why an "extra $50 Billion" was printed.

SPECULATING.

When the world figures out that the emperor (Alan Greenspan) has no clothes...it's going to get very ugly, very fast. The euro (backed by 15% tangible gold reserves) is backing us up against the mathematical wall.

Ironically, Y2K may turn out to be the only thing that saves us. I can see a scenario where Y2K wipes out the financial industry's "electronic financial records", reducing enough people's net worth (because they didn't get copies of their financial records, as we are NOW being told to, they won't be able to recover their financial assets in post Y2K...no "paper record" = SOL) to the point where the U.S. will be able to once again back the dollar (by 20%?) of gold we currently have in reserve, resulting in the dollar actually being STRONGER than the euro. If we attempted this now, the value of the dollar would plunge.

In a post Y2K world where people's assets were electronically wiped out, we WOULD return to a gold standard. We WOULD back our dollar by MORE gold than the 15% gold the euro is currently backed by. The only way to do this,and not plunge the value of the dollar, is to "bet on" millions of people being financially wipped out due to the Y2K bug causing their personal financial records to be "electronically lost" forever.

END SPECULATING.

Get copies of your financial records NOW.

-- GoldReal (GoldReal@aol.com), November 06, 1999.

Pamela: Do you like to mudwrestle?

-- King of Spain (madrid@aol.cum), November 06, 1999.

There are two forms of credit. One is "Keeping up with the Jones" type of credit,"My car is bigger then your car", "My watch is fancier then your watch" blah, blah,etc. The second type is "Investment credit" or "Wealth creation credit." If you or a Corp.borrows money and is able to generate jobs,positive cash flow,opportunity,a better way of life for others,then progress will continue.If you're going to invest in "something",you need to understand how things work and not depend on others to do your thinking for you.Of course the stockmarket could crash,no argument there,but the market could also go much higher. As far as an "exponential growth",as the base of new companies coming into the market grows,well, of course it's exponential.What else could it be? Your job as an investor/trade is sift out the bulls**t and don't ask the baldheaded barber how to grow hair. Good luck monday in the market.I'll be sitting flat,looking the scene over.

-- cautious (inthemarket@ndup72%.com), November 06, 1999.