Content-Type: text/plain; charset=US-ASCII Content-Transfer-Encoding: 7bit A very insightful and incisive analysis about the state of the economy, provided courtesy of GATA: > WAKING UP THE BEARS > > By BARRY RILEY > Financial Times > www.ft.com > April 8, 2000 > > Even the ringing tone of the telephone seemed unusual: > low-pitched and rasping. I picked it up with a degree > of instinctive fear -- and rightly so, because it turned out > to be a call from Mortimer Duhm, the arch-bear. > > Bears are forced into hibernation for long periods; > then they burst out of their caves with renewed energy. > In Mort's case, though, it was a cold wind from the > markets that woke him up, not spring sunshine. "I see > that the London Stock Exchange has shut down," he > hissed, referring to this week's computer glitches. > "You remember that the last time it happened, after the > October 1987 hurricane, was only days before the global > stock market crash." > > Wall Street was wobbling badly, I agreed, but there was > still plenty of resistance. After the 500-point > collapse in the Dow Jones Average on Tuesday and the 11 > pe cent crash in the Nasdaq index, the markets bounced > straight back again. > > "Yes, the manipulation continues for the moment," > snapped Duhm. "It was suspiciously similar to the > dramatic recovery in October 1998. Wall Street now > believes that the U.S. government and the big > investment banks will always organise a rescue, helped > by the occasional Saudi billionaire. But moral hazard > is piling up and time is running out. > > "The bull run has become ever more intense and > concentrated, finally climaxing in an eccentric > technology bubble. The old economy had plainly become > overpriced, so the concept of the new economy was > invented by Wall Street and Alan Greenspan, with stock > market ratings justified by ever-rising prices. But it > has become a vast Ponzi scheme." > > I was aware, I said, of all the conspiracy theories > about the role of the U.S. authorities in fueling the > great bull market, which had done so much to restore > President Clinton's popularity. But why, then, was the > U.S. government threatening to break up Microsoft, the > biggest technology company of them all? > > "It's simple," snapped Duhm. "The financial and legal > sides are just not working on the same wavelength. The > whole bubble has been pumped up by the U.S. Treasury > working in cahoots with the Federal Reserve. It began > in the mid-1990s as an idea for boosting economic > growth. Then it got out of control, and has regularly > had to be propped up through liquidity injections and > interest rate cuts." > > It was certainly interesting, I replied, that bodies > like the Institute of International Finance were > accusing the Americans of generating economic fragility > and encouraging wild volatility in asset prices. The > current account deficit had hit $28 billion a month. > You could add that an incredible binge by American > consumers was in progress and the U.S. was mopping up > the world's savings. The surge in the oil price was an > early warning signal; but that was easily presented by > politicians as the fault of greedy sheikhs rather than > the American love of unnecessary off-road gas guzzlers. > > I remembered that the last time I talked to Mort Duhm, > he was obsessed with alleged similarities between > Thailand, which crashed in financial ruins in 1997 > after a currency collapse, and the United States. All > that had happened since, though, was that the United > States had boomed ever more strongly, hitting a 7 > percent economic growth rate by late 1999. Even so, > Duhm insisted: "We are getting very close to the edge. > Being the world's biggest debtor is safe only when you > have complete political mastery. > > "The Asian problem was solved by transferring the > financial imbalances to the United States itself. That > is a patch-up, not a solution. The Americans have > squared the circle temporarily by persuading foreigners > to invest in U.S. technology. But now, that illusion is > collapsing. The United States depends on foreign > governments being willing to keep piling up dollar > assets -- especially Asian countries and oil producers. > > "True, the United States deliberately left Saddam > Hussein in power in Iraq to keep the Saudis and > Kuwaitis frightened and submissive. That's recently > helped to buy the Americans time over the oil price. > But now they face China, which, through its massive > trade surplus with the United States, has acquired an > economic weapon: It can attack the dollar as part of > the political battle over Taiwan." > > "Hold on," I replied. "You could also argue that China > has acquired a big stake in the dollar and needs to > keep it healthy. I'm rather more interested at the > moment in the internal risks. Investors have chased > ever more risky investments, in a classic mania. Safe > companies have collapsed in price. As we have seen in > the past week or two, the risks of equities have > increased. Logically, the prospective return must go up > to compensate, which is another way of saying the > market must begin again from a much lower level." > > "Yes," said Duhm, "and it will wipe out many investors > in the process." I could just imagine the rare smile on > his face. "Watch those hedge funds, in particular. > Julian Robertson, who has just shut down Tiger > Management, was not typical but he demonstrated the > level of instability. This was an orderly withdrawal. > Just imagine what will happen when real disaster > overwhelms some of the others who have been leveraging > their positions in technology stocks. This week there > have already been signs of forced selling by small > investors financed by margin debt, but, when the big > funds collapse, the impact will be much greater." > > Perhaps so, I answered, but should we be so afraid of a > stock market crash? Admittedly, the 1987 collapse had > hurt quite a few investors, but the underlying > economies had continued almost unaffected. The worst > aspect was that the central banks had overcompensated > by cutting interest rates at the time, which had proved > inflationary. > > The line began crackling and Mort became more and more > difficult to hear. "Irresponsible credit growth and > stock market gains have fuelled this U.S. consumer > boom. There's a 20 percent growth rate in real estate > lending," he snapped. "When the bubble bursts, there > will be colossal bad debts and a slump in demand. But > the Fed won't be able to cut interest rates because the > dollar would tumble and inflation, so far suppressed by > cheap imports, would soar. My new web site has the > detailed arguments." > > The line got worse. > > "Disaster.... derivatives.... depression...." He finally > faded out. I didn't complain to the telephone company. > > Mort certainly provides a challenging alternative to > all the bullish talk that comes out of the stockbroking > fraternity. Sometimes, I think that, if he didn't > exist, I would have to invent him. > > -END- > > ------------------------------------------------------------------------ > Get a NextCard Visa, in 30 seconds! > 1. Fill in the brief application > 2. 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