Forum Archive Index - April 2000

[ril <ril99_99@yahoo.co.uk>]

I don't know which way the market is going to go on Monday but there is
nothing amusing about it (as one of the previous posters seemed to
think).

Interestingly, Cramer at TheStreet.com got it wrong almost everyday this
week with his pre-match commentaries.

On Monday the bloodied bulls and the ravenous bears go head to head. I
suspect the market will open down and then perhaps rally but no-one
really knows. What people do know is that they have been playing the
bigger fool theory and making money for a few years now.

Monday may be about institutions. Will the level of mutual fund unit
redemptions outweigh the cash to buy in their kitties. All over the US
this weekend people will be talking about what to do. They will be
sitting by the barbecue or at the local McJunk Food restaurant pondering
about this surprising development. They will look at their kids stuffing
greasy fries into their corpulent little bodies and they'll think; no I
can't risk this little persons tertiary education. The family will
waddle back to the RV and on Monday morning the redemption orders will
go in. But who will be the bigger force in the market. I don't know and
we won't know till Monday.

Last week I said to cash up and also the month before that. I hope at
least some of you listened. As regards the NZ market your tech sector is
a joke and they will sooner or later be worth their NTA's less a
liquidation cost. The NZ tech sector came about very late in the piece
and it was a result of a few Auckland wide boys with good PR connections
thinking that this whole thing was too good to miss. And they were doing
well. 

Your industrials are owned in majority by foreigners - the big ones at
least. If the foreign institutions need the cash they will sell and push
the value of NZ industrials down. Becasue NZ'ers do not save there is no
counteracting buying firepower in your local institutions to stop the
decline in values. The common belief that the NZ market is not
overvalued at these levels is false. We are talking risk premia of 1% -
10% over Government stock; say 8% to 17%. Thus with static earnings
TEL's P/E should be around 12 and the others down from there. The
reasons the earnings horizon is static to negative I will explain
shortly. Eventually, after a crash the fundamental values will emerge,
albethey at different earnings levels.

There is a much bigger bogey out there than a stockmarket crash.
Actually, the problem emerges from a stockmarket crash.

Never before in the history of man has the level of borrowing been as
high as it is now. This is the everest of all credit cycles. The credit
is both corporate (through an unprecedented and raging bond market) and
personal through credit cards, mortgages and so on. The supply of credit
fluctuates. When it is cheap i.e. low interest rates a lot of money
chases securities, be they equities, bonds, real estate etc. These
comprise the capital markets and are called collateral securities.

When the supply of credit is high/ cost of credit low, underlying
collateral values rise: share prices, real estate prices and bond prices
go up.

People and corporates leverage. However, when a bubble forms in
collateral values people and corporations keep borrowing to buy mostly
because the people involved are uneducated, young, wet behind the ears
B.Com graduates with no grasp of history (that is another story). 

When the collateral value cycle turns as in a crash or for what ever
reason the debt levels stay the same but the securities don't; they go
down. Securities are sold to pay debt and the whole thing can descend
into a vicious cycle. It is also very sad because people and businesses
are destroyed.

Now, I am sorry to take so long to reach my point, but never before in
man's history has the credit cycle reached this peak. Not to finance
wars, not to build the New World; nothing.

Thus one can conclude that this crash, whether it comes next week or
next year is going to be catastrophic.

The credit cycle did not have to go the way it did. It was caused (and
you are in the top 1% if you understand this) by interference by central
banks in free markets. As we know the government always screws up
whatever it touches. Central bankers through controlling inflation have
created an artificially low cost of borrowing environment where lenders
are happy to get inflation plus a few percent (except in NZ where
lenders are mean and required and extra 5%!). Now credit was cheap and
easy around the world and so the process of collateral inflation (which
doesn't form part of the CPI) began. That was years ago. Now the
chickens are coming home to roost.

And that in a nutshell is why I think we are in for the biggest
stockmarket collapse in history - don't know when though.

When it happens watch your debt levels - as I said last week -  and
watch which financial institutions you put your dough into. In first
world countries they have deposit insurance to a certain level but not
in NZ where the government may just be nasty enough to let a bank go
over.

These things can happen quickly. One week you can have assets of $600K
and debt of $200K with the kids at Christ's and a short time later you
can be unemployed, a net worth of $200K and the kids relegated to a
state non-education. Worth bearing in mind.

I am sorry if I have been flippant but that is my warped personality
coming through. I also apologise to Mike Hudson and Co. if I have stated
things too aggressively or forcefully but unfortunately that is also my
personality. I additionally apologise in advance for any sexist, racist,
heterosexist, homosexist, statist, first worldist, third worldist,
intellectualist, pragmatist, private-schoolist, junk-foodist, anti-
American comments I have made in delivering my humble opinion on the
future of the markets.

Cheers

RIL

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