LINK

Here Comes the End of the World

Recessions aren't inevitable. They have causes. Pessimists have been looking for the cause of the next one for years, so far without success.

Inflation was the initial fear. Then deflation had its day. A few years ago Federal Reserve Board Chairman Alan Greenspan coined the term "irrational exuberance." That was about 3,000 Dow points and 1,500 NASDAQ points ago - irrational exuberance was mild amusement compared to what followed. More recently oil prices have brought back inflation fears.

Why should you care? What does this have to do with Internet commerce? The fact is that, in a fast-rising stock market, the creation of money is put in private hands. The Fed's machinations - a nip of borrowing here, a tuck of interest rate hikes there - look paltry next to what we can do in our own companies. We have become the Fed.

When Cisco rises from $50/share to $150/share billions of dollars in new money is created. When VA Linux goes public and acquires Andover.Net more money is created. It's real money, it happens all the time, and it's the miracle of the age. Investors can cash in stock for real Samoleons, which are then spent on boats or houses, or plunged into new start-ups. This is called the "wealth effect." We rich get richer, while those who cut our lawn and clip our hair stay employed.

But this "Confederate Money" boom rests on faith. Most Cisco shares don't trade regularly. If just 10% of the shares wanted to sell now, the impact on their price would be catastrophic. The same would be true at VA Linux or any of 1,000 other tech companies. When this happens at a few firms or within a single industry the process is called "rotation" and the game moves on -- from Amazon to Chemdex, from Microsoft to Red Hat.

The question is what happens when this becomes a general thing? Consider that, as in the late 1920s, stock gains are far bigger than bond gains. Many people are borrowing money to buy stocks. Others are borrowing on the stocks they've already bought to buy more stocks, which is called a "margin loan." Others are borrowing cash based on the value of their stock holdings. When the stock market reverses - when the lenders accept it as fact - you get a "margin call" and the selling accelerates.

An accelerated bear market is also called a panic. (Before we had deposit insurance and stock market regulation the panic was real because there was no bottom to it.) When panic sets in someone has to play Mr. Potter ("I'm going all out in this crisis"), and the only one who can play the role convincingly is the government.

That's precisely what did not happen 70 years ago. When the money put into RCA etc. went to Money Heaven, the government feared throwing good money after bad. It acted like everyone else. Even FDR, for all his alphabet soup, didn't really attack the economy's liquidity crisis in the 1930s. He was, like his Republican opponents, too afraid of debt to take Keynes' medicine. Hitler forced everyone to demand weapons - those jobs ended the Depression.

What happens after the next panic - and panics are (unlike recessions) inevitable -- will determine whether our children are rich or poor. If you want to protect the gains of the Internet Economy, ask your politicians what they'll do when push comes to shove. That's the Y2K bug you should really be worrying about.

The end of the world is not at hand, but this market cycle will end. How we deal with it will determine the long-term fate of Internet commerce.

-- canthappen (n@ysayer.com), February 26, 2000

Answers

The NASDAQ is the remaining *stronghold* of Wall Street. I anticipate greater highs before the final blow off. Next week we will witness much financial turmoil and fantastically large stock rotations.

William Fleckenstein has been logging these absurdities in the *Mania Chronicles* section of his Contrarian Rap, found at www.siliconinvestor.com

-- dinosaur (dinosaur@williams-net.com), February 26, 2000.

I was interested to hear Bob Brinker (today) say that the bear market of '29 to '46 lasted 17 years, then there was a bull market from '46 to ''66.....a period of 20 years.

Following that, a bear market from '66 to '82 (16 1/2 years), followed by a bull market from '82 to '99.....for 17 years.

Interesting how long these cycles have lasted. Of course, we don't know if the current bear market will last as long, or merely be a correction, but the above is food for thought. As a seasoned citizen, I question whether I will ever risk the market, again.

Something else Bob said was that a lot of people got out of the market, before the crash, in '29, but after the crash, many of them put money into it again---too early. After that, it went down, again....and stayed down for a long time.

-- Jo Ann (MaJo@Michiana.com), February 26, 2000.

For those of you who have not yet met the Fiend (bear) I suggest you point your browser to:

http://www.fiendbear.com/

For some of the best links and commentary on the Bear side of the market. And yes he is a real(1) person who maintains this site!

-- Helium (HeliumAvid@yahoo.com), February 26, 2000.

And for those who liken to '29 do visit:

http://www.urbansurvival.com/week.htm

George has been predicting the crash longer than gary predicted Y2K. Even a stopped clock is right twice a day!

-- Helium (HeliumAvid@yahoo.com), February 26, 2000.

What about the Plunge Protection Team (PPT) we hear rumors about, folks? If the Fed can be the "lender of last resort", then why can't it also be the "buyer of last resort" for the stock markets? Mr. Greenspin keeps talking about his desires for a "soft landing" for the markets; with the Fed's apparently bottomless pockets, perhaps it can do exactly that.

-- bz (beezee@statesville.net), February 26, 2000.

Here's a couple more Bearish websites to add to your favorites:

http://www.fallstreet.com/

http://www.itulip.com/

-- Zdude (zdude777@hotmail.com), February 26, 2000.

bz,

According to Dr. Goldman the "Plung e Protection Team" is a Myth. I personally feel though that push come to shove the Fed would step in to prop the market up before they let it crash and burn.

-- Zdude (zdude777@hotmail.com), February 26, 2000.

"If the Fed can be the 'lender of last resort', then why can't it also be the "buyer of last resort" for the stock markets?"

Scary thought:

Think of the implications involved if this fell in to play. Would it be possible for the government to become the "major shareholder" of corporations, having the ability to dictate to the board of directors in regards to hiring, production quotas, pricing, allocation, trading partners, vendors, etc.?

What would the government do with the dividends if the companies it assists shows a profit? And what about corporate taxes...would the goverment have the right to reap the dividends, tax the workers, and still tax said corporations as well?

Would it be beneficial for the government to keep the stock indefinitely, or would it be sold back to the public?

The attornies and the bureaucrats could have fun with this.

-- Tim (pixmo@pixelquest.com), February 26, 2000.

bz,

I think you are seeing a plan develop in which the US Treasury monetizes the national debt by:

a. Issuing less Treasury bonds.

b. Buying outstanding T-bonds in the market by trading printing press fiat for the long bonds.

This appears to have been initailly opposed by the FED, Greensapn, and Wall Street bond traders; but it seems that Mr. Greenspan's recent comments indicate that some inflation may be an acceptable alternative at this time.

The result of monetizing the debt will be Inflationary as the increased dollar supply weakens purchasing power. Price increases will become a way of life and critical for astute managers to stay ahead of or at least even with the inflation rate. The real loosers will be the middle class and poor who cannot achieve wage increases to pace inflation and hence become poorer or at least must devote a larger portion of their incomes to basic neccessities.

For upper middle class, corporate America, governments and others that can keep approximate pace with inflation; they will be able to pay off debts with cheaper dollars.

Lasr summer, the Y2K fiscal debate was whether Y2K would be deflationary (cash as king, bank runs, stores offering discounts for payment in cash, your future purchasing power of 1USD greater than current value) or inflationary. Given the huge cash infusions (that have found their way into the stock markets), it appears to me that TPTB have mandated that our future will be ruled by a steady erosion of the dollar's purchasing power due to inflation so it will take more dollars tomorrow to buy an equivalent good than today.

This is a concern to producers of real goods like OPEC who see their oil traded for a paper assets that looses value. It is a concern for the foreign investor who is hit with a double whammy in higher interest rates lowering their principal and weaker dollar exchange rate reducing their return in their home currency.

The BIG PROBLEM is runaway, out of control inflation aka hyper- inflation as seen in post-WW I 1920s Weimar Republic of Germany where the currency became virtually worthless. Some of TPTB may seek hyper- inflation as the final blow to replace currency with a truly cashless society using smart cards and digital balances of cyber cash.

End of the World? Not necessarily, but a threat to wage and price stability.

-- Bill P (porterwn@one.net), February 26, 2000.

Bill P.: I agree with your comments. However, I don't believe that the Saudis have accepted fiat money for their oil for many years. I have heard that (these days) they only accept silver in payment.

-- Y2kObserver (Y2kObserver@nowhere.com), February 26, 2000.

Bill,

Monetization of the debt implies that the fed will buy back the long debt by increasing the supply of money (ie, with inflated dollars). I have heard no one indicate that this is actually the plan.

In the past, we paid taxes. There were not enough dollars after the tax was collected to pay all our debts, so we borrowed money by issuing bonds. Today, there is money left over after paying all the taxes and paying all the bills. We plan to use some of this money to pay off the loans. What is inflationary about this approach?

Are you saying that we can only increase the national debt, never decrease it? That every decrease in the national debt must be inflationary? If this is so, then would it not also be true that every increase in the national debt should be deflationary?

If this is what you believe, you will have to come up with more arguements than you have so far, because your contentions are counter to common sense. Indeed, I believe that deficit spending is inflationary, quite the opposite from what your theory predicts.

Seeking Enlightenment,

-- Uhhmmm... (JFCP81A@aol.com), February 27, 2000.

I have a question if anyone would answer it I would greatly appreciate it. One poster above said in the case in inflation the wealthy would pay off their debt with inflation money and the middle class and poor would suffer because their salaries will not rise.

I am one of those that will suffer according to this comment if inflation does happen. I would like to understand what I can do to not suffer.

What is it the wealthy do to get their incomes to go up that the middle class and poor do not??

If in inflation the wealthy have enough money to pay off their debts then where do they get the extra money? This may seem like a dumb question but I do not understand. I am the only income in my home and do not want my family to suffer.

What can I do to be able to pay off my debts like the wealthy? What exactly do they do to get their available cash to increase? Yes I understand they pay off their debts but if we all continue on with the same salary why do they have more money than the rest of us to pay off their debts and we don't? I hope this makes sense as I truly would like to know.

thanks

-- single incomer (wouldyoumind@tellingme.com), February 27, 2000.

The PPT or CPT is not a myth. Do a search on usenet, limiting the groups to misc.invest.* Several newspaper articles have been posted about the PPT including one from the Washington Post.

-- Dave (dannco@hotmail.com), February 27, 2000.