The great show goes on.
Last week, the Dow bounced a little. Bonds fell – leaving the 30-year Treasury with a yield of 5.28%. The collapse of Bear Stearns derivatives funds sent “shockwaves” through the CDO (collateralized debt obligations) market, says Bloomberg. And a pair of hedge funds in Dublin went bust.
Meanwhile, Chinese stocks are back in the news – hitting record prices. And China’s neighbor, Japan, incidentally the second biggest economy in the world, is growing faster than expected. And like China, it is accumulating dollars. Exports rose at a 15% rate over the last year, adding $3.2 billion to Japan’s dollar surpluses in the month of May alone.
The speculators speculate. The reporters report. The pundits pund.
Often the hardest thing for investors (and spectators) to do is to remember the plot. There are so many clowns on stage… so many doors slamming… so much greasepaint roaring… such smelly crowds.
So let us try to recall what has happened.
The U.S. stock market now stands at its highest level ever. By most measures, it is as pricey as ’29, ’68, or 2000. The correction that began in 2000 was washed away by huge new waves of liquidity, which now slosh over the globe and lift up everything – including a lot of trash and debris. Upon this sea of easy cash and credit, practically every stock market on the face of the planet floats higher and higher.
Meanwhile, the captains of the financial industry never had it so good. They’re earning billions by doing deals…which is essentially transforming this huge flood of credit into debt, equity, property and consumer items for the rich – such as luxury yachts, sumptuous estates, snazzy airplanes, and various objects of ersatz art and genuine ridicule.
At the Paris Air Show, for example, one of the Bass brothers is shopping around plans to build supersonic executive jets at $80 million a copy. Heck, why not? Think how much more productive an executive could be if he could get from New York to London two hours earlier. Then, he could get back to New York in time for dinner. Think of all the deals he could do! Besides, it saves picking up the phone.
Of course, a supersonic jet is not a necessity. It is a vanity. But vanity plays an important role in this performance. Like a Greek tragedy, our protagonists are victims of their own vanity; they think they can get away with anything! And spectators and speculators can’t help themselves. They see our heroes – the hedge funds, the private equity funds, the bankers, the lawyers, the math geniuses and derivative impresarios – making fortunes. They see them in the newspapers, gloating over their billion-dollar paydays. They see them in Architectural Digest in front of their Greenwich mansions. They see them in the society pages – giving millions to charitable causes. And they see them at Christies and Sotheby’s holding up their hands to bid millions for some abject oeuvre by some no-talent hustler. Seeing all this, how can others not want to join them?
Even some of the greatest and most experienced market observers, and here we think of Richard Russell, have finally given up fighting ’em. They’ve decided that this really is a New Era of New Capitalism…and that this is the time to join ’em. This worldwide bubble is more worldly and more bubbly than any in history, they say. It may get much, much bigger. And they have good reasons to think so. All those billions of Asians…all those trillions of new money…all those new hedge funds…all those new investors…all those reserves of dollars…all those new financial instruments. How can they help but blow this bubble up even bigger – so big even the moon will have to get out of the way.
But wait…isn’t there an old market adage: The bull market is over when the last bear throws in the towel?
Are there more bears still out there?
We don’t know. But there can’t be many of them.
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