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from bill fleckenstein's column:
A Collapsed Soufflé, the 1929 Way
Turning to my expectations for the stock market, I have made no secret of my belief that we will see a dislocation at some point. I've been wrong as to when it might occur. Nevertheless, I feel more strongly than ever that given the speculative edifices erected on top of so much dept and so much disregard for risk, this scenario can only end in a dislocation.
Thus, I thought it quite interesting that Justin Mamis, in his weekly letter and conference call today, started talking about the parallels between 1929 and now. This is a new analogy for Justin -- one that I've never heard him make in the 15 or so years that I have read his service. In any case, he likened the big investment trusts that were constantly being floated back then to today's private-equity funds. (Justin noted that he'll have more to say about these parallels in the coming weeks.) Also, I thought that extracts he shared from John Kenneth Galbraith's book "Money: Whence It Came, Where It Went" were particularly interesting:
"Prosperity began to fade in early 1929, although the public did not begin to realize it until after the sensational stock-market crash in October." I would make the argument that our economy began to weaken last summer -- which, of course, has been ignored thus far.
Whole Lotta Sowing Going On
Galbraith noted how much the problem was the responsibility of the Fed: "The underwriting of securities in the 1920s was extensively financed by the commercial banks. . . . The speculative purchases of securities by individuals was similarly financed. . . . Much of this, in anticipation of gains, was done on margin. . . . The commercial banks that were lending money for these operations were, in turn, borrowing substantially from the Federal Reserve. Thus, the Federal Reserve system was helping to finance the great stock-market boom. It would be wrong to say that it was the cause; men and women do not speculate just because they have the money to do so. But the Federal Reserve system did nourish the speculation, and did not stop it."
Galbraith's comparisons with today are so obvious as to need no further editorializing. What I would say, however, is that the Fed is the cause -- because without the wherewithal and the belief in the Greenspan/Bernanke "put," speculation wouldn't have gotten as far as it has. So, while Galbraith is slightly inclined to let the Fed off the hook for the 1920s, I'd be more inclined to say that it's the primary culprit.
No Dodging This Bull-et
On the other hand, the fact that speculation is once again a national pastime -- after the last stock mania -- means that when this current one unwinds, today's speculators will have no one to blame but themselves. Sadly, the people most in line for hurt are those just trying to make ends meet, but who, through no fault of their own, will be caught in the crosshairs of this manic paper-shuffling.
A Collapsed Soufflé, the 1929 Way
Turning to my expectations for the stock market, I have made no secret of my belief that we will see a dislocation at some point. I've been wrong as to when it might occur. Nevertheless, I feel more strongly than ever that given the speculative edifices erected on top of so much dept and so much disregard for risk, this scenario can only end in a dislocation.
Thus, I thought it quite interesting that Justin Mamis, in his weekly letter and conference call today, started talking about the parallels between 1929 and now. This is a new analogy for Justin -- one that I've never heard him make in the 15 or so years that I have read his service. In any case, he likened the big investment trusts that were constantly being floated back then to today's private-equity funds. (Justin noted that he'll have more to say about these parallels in the coming weeks.) Also, I thought that extracts he shared from John Kenneth Galbraith's book "Money: Whence It Came, Where It Went" were particularly interesting:
"Prosperity began to fade in early 1929, although the public did not begin to realize it until after the sensational stock-market crash in October." I would make the argument that our economy began to weaken last summer -- which, of course, has been ignored thus far.
Whole Lotta Sowing Going On
Galbraith noted how much the problem was the responsibility of the Fed: "The underwriting of securities in the 1920s was extensively financed by the commercial banks. . . . The speculative purchases of securities by individuals was similarly financed. . . . Much of this, in anticipation of gains, was done on margin. . . . The commercial banks that were lending money for these operations were, in turn, borrowing substantially from the Federal Reserve. Thus, the Federal Reserve system was helping to finance the great stock-market boom. It would be wrong to say that it was the cause; men and women do not speculate just because they have the money to do so. But the Federal Reserve system did nourish the speculation, and did not stop it."
Galbraith's comparisons with today are so obvious as to need no further editorializing. What I would say, however, is that the Fed is the cause -- because without the wherewithal and the belief in the Greenspan/Bernanke "put," speculation wouldn't have gotten as far as it has. So, while Galbraith is slightly inclined to let the Fed off the hook for the 1920s, I'd be more inclined to say that it's the primary culprit.
No Dodging This Bull-et
On the other hand, the fact that speculation is once again a national pastime -- after the last stock mania -- means that when this current one unwinds, today's speculators will have no one to blame but themselves. Sadly, the people most in line for hurt are those just trying to make ends meet, but who, through no fault of their own, will be caught in the crosshairs of this manic paper-shuffling.
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