"We have a dysfunctional global currency and economic system, in which the whole world is set up to sell to the American consumer."
July 30, 2002 4:44 PM   Subscribe

"We have a dysfunctional global currency and economic system, in which the whole world is set up to sell to the American consumer." As stocks collapse and banks take hits for their Enron complicity, market skeptics like Prudent Bear's David Tice are getting attention. Bears love ripping into herd euphoria and shady Wall Street practices, but deny any joy when businesses fail. Try the Credit Bubble Bulletin, which points out Enron-style vulnerabilities at institutions like J.P. Morgan, then move to the great 401(k) hoax, the myth of accounting reform and Thailand's so-far successful anti-IMF economic strategy. Things will soon get much worse, promise the investors who sneer at "a fascinating intellectual environment where weak analysis continues to dominate discourse."
posted by mediareport (27 comments total)
Regarding 401K , how is your pension plan going on ? I'd like to know, I'm sick of well-timed "we told you it sucked and you didn't believe us, now buy our book when it's too late" articles (referring to the 401k link of this post).
posted by elpapacito at 4:54 PM on July 30, 2002

I'm not an economist (and welcome input from those who have more training than me), but I found this timeline of bearish warnings about J.P. Morgan's derivatives exposure interesting:

"For Americans raised by their parents to always abide by an unbendable code of honor and integrity no matter what, the activities of [J.P. Morgan] in helping corporate crooks effectively steal the retirements of a generation of Americans by fraud is absolutely repulsive."
-- "JPM Derivatives Monster Crashes," July 26, 2002

"The more that I ponder JPM’s utter dominance of the US banks’ derivatives markets, the more amazed I become that more professional institutional investors and analysts aren’t at least a little concerned that the unprecedented Morgan House of Derivatives may be far overextended. I am also amazed, especially after the exceptionally ugly Enron implosion, that the OCC and other Federal regulators are apparently not at all concerned about a single company somehow juggling an exceedingly tangled web of derivatives worth over $30 trillion in notional value terms. Talk about systemic risk!"
-- "JPM Derivatives Monster Grows," January 4, 2002

"...JPMorganChase’s mind-boggling exposure to the high-leverage high-risk global derivatives market..."
-- "The JPM Derivatives Monster," September 7, 2001
posted by mediareport at 4:58 PM on July 30, 2002

true bears love it with when companies die.

Because they sold short. The orgional "bear" market refered to 'bear skin' market where people would sell bear skins before actualy going out and getting them.

So when corps go down, bears make shitloads.

Bleh, I wish I had a little cash in play in order to profit off all this tradigy... *sigh*
posted by delmoi at 5:03 PM on July 30, 2002

"Did I hear you say that there must be a catch..would you
walk away from a fool and his money...sooooonnnnnny"
posted by elpapacito at 5:51 PM on July 30, 2002

style question. mediareport, how many of those fourteen links do you expect people to read?
posted by raaka at 9:44 PM on July 30, 2002

[Good question, raaka. MeTa?]

I guess I expect people to read as many of the links as interest them, and figure most jittery Web monkeys looking to skim the surface of market skepticism will stop after the first or second. I can see how the length of the post on the front page could be the problem, but is it wrong to give folks a ton of meat in a post about a topic that doesn't come up here very often? What percentage of front page links do folks read in general, anyway?

But, ok, 12 links in one front page post was probably over the top; I guess I try too hard to be exhaustive or something. I could have gone with six or eight and posted the rest inside. ;)

Sure do like those contrarians, though.
posted by mediareport at 10:56 PM on July 30, 2002

It's the beginning of The End.
posted by Down10 at 12:21 AM on July 31, 2002

Once the predators are finished with their nasty work the second tier starts tearing at the bag of bones until only scraps are left for the little creatures. Standing on the remains of what was once a magnificent complex machine they scream into the dark, and soon dawn and another day...
posted by Mack Twain at 12:30 AM on July 31, 2002

Just a reminder... fourteen links is nothing.
posted by nath at 12:48 AM on July 31, 2002

It's the beginning of The End.

I fear that you are right. Look around you, everyone you know or talk to has no idea. Everybody fears the worst. And those who would normally lambaste you as a socialist worrywort can no longer manage anything more than "Quit being such a 'Chicken Little'. Trust it. We've been telling you to 'Just Trust the Free Market' for years. Now's no time to stop!"

I think I might go rent Titanic tonight.

I wonder if it really has already burst and they're just propping up the levee with every last bit of domestic issue dollars to keep chaos at bay and military state in quiet preparation.

Only wondrin'.
posted by crasspastor at 1:05 AM on July 31, 2002

What's everybody's over-under on a W recession?

mediareport, Screw MetaTalk. This isn't a big deal.

You can see big differences in the two examples you offered and this thread here. In the Epitonic thread, six of the eight links are a straight-forward list of band webpages on a site that's the purpose of the whole thread. In the memorial thread the linked sites are not only paired opposing views but source material.

This post links to, what, four, five different sites? Topics range from Prudent Bear's opinion on the situation we're in to the IMF to derivatives -- which are so esoteric a topic probably only a tenth of the population even knows what they are.

This post would be so much better if it was solely about Prudent Bear. The rest of it is material for another day.
posted by raaka at 1:18 AM on July 31, 2002

Regarding 401K , how is your pension plan going on ? I'd like to know

Mine is now a 201K. I'm thinking on investing my Social Security money too!

[slightly o/t]
Anyone seen the bull/bear TV commercials? I really love the bear dissing the bull.

Deregulation is da' bomb! Literally it would seem. The lessons learned during the Great Depression must be relearned. Greed is why deregulation and supply-side, trickle-down economics won't work. Our founding fathers were very well aware of the risks of corporatism, market fundamentalism and a permanent aristocracy of wealth.

Is it time to say Ayn Rand is wrong? I think I heard her star pupil Greenspan say so.
posted by nofundy at 5:14 AM on July 31, 2002

Guess what? The market goes up, the market goes down. We have a tendency to think that our current situation is the most profound ever. Everyone was elated when the market was going gangbusters, and people were deluded into thinking "It's never going to go down again!" Now everyone is jumping ship and acting as if the entire market is going to collapse. But the market's been there for decades, and has been through far worse and far better than anything in recent memory. Wise investors know that, over the long haul, the market has a very acceptable rate of return.
posted by pardonyou? at 6:14 AM on July 31, 2002

and damn, today's gdp figures are punkass. 1.1 gdp growth in the second quarter, 1q revised down to 5%, 2001 revised down to 0.3 %....all with the lowest interest rates in 40 years. i'm usually no bear, but those figures are just plain unimpressive for this economy.
posted by zoopraxiscope at 6:35 AM on July 31, 2002

Speaking (selfishly) as someone who has over 30 years to go before retirement, it's actually good news for me to see the stock market going down. My 401(k) stocks bought in the last 5 years were overpriced. The ones I'm buying now are better values and should show a greater long term return. If the market continues to drop over the next few years, I'll be picking up more and more bargains. As pardonyou? points out, you have to look at things over the long haul. When I get to within 10 years of retirement, I'll start moving my money into more conservative investments to protect against a bear market. In the meantime, the bear is working to my advantage.
posted by tdismukes at 7:14 AM on July 31, 2002

"We have a dysfunctional global currency and economic system, in which the whole world is set up to sell to the American consumer."

the trade deficit i think is what's most commonly held out as the achilles' heel of the economy. basically i guess it's like spending is financed by foreign capital attracted to the US because of its pro-capital stance (higher productivity, lower taxes, freer trade, greater labor flexibility, deregulation, transparent accounting, etc.) which was fine as long as it was true, but because all that's in question now the deficit all of the sudden is seen as a problem and the clearing mechanism seems to be the exchange rate...
[repost! :] there's also the scenario where japanese institutions unload their sizeable treasury holdings for whatever reason, but namely to meet capital requirements i guess (last time i checked the nikkei was below 10,000 again). i think it might've even happened on a small scale after the feds started cracking down on bank accounts that potentially could have been put to terrorist use. i would surmise a lot of middle east money residing in the US went into euros and francs at that point, but i have not seen any studies... and i kinda doubt there'll be any forthcoming?

what i thought the article neglected, was the widening and deepening of the european bond market as a result of the euro, which i don't think should be underestimated (nor recent US trade protectionism for that matter :) another interesting datapoint, too, is that apparently street changers in russia have supposedly been exchanging euros for a premium/dollar discount for quite some while now. apparently their de facto 'dollarized' economy is now becoming euro-sized! maybe the mafia finds it more convenient?

also i came across this bit recently. there's some discussion going on in china as to whether it might be a good idea to shift some of its foreign currency reserves (predominantly in dollars at present as i understand it) and into oil futures contracts in a bid to become more established in world oil markets, as it is now a strategic consideration for them it seems. i guess it'd basically be like an implemention of a commodity reserve currency, or a so-called 'commodity buffer stock' as benjamin graham called it, to "improve the overall quality of its assets and diminish exchange-rate risks." don't know how seriously it's being considered, but interesting nonetheless, i think! that and OPEC possibly moving to euro-size :)
gold seems to be hanging in above $300! i think it makes a good "panic" indicator :)
posted by kliuless at 8:10 AM on July 31, 2002

elpapacito: I think the biggest problem Wolman and Colamosca identify with 401(k)s is that many employers aren't giving employees a wide enough range of choices to protect themselves from major downturns. That seems like an important red flag as workers pick up the risks (along with the benefits) of 401(k)s, even if some of the rest of their intro reads a bit Chicken Little-ish.

tdismukes: Watch out for those "bargains." Tice is fond of pointing out that a stock trading at one-third of what it once was, but still at a ridiculously inflated P/E ratio, can hardly be called a bargain. He routinely skewers analysts who push "bargain" stocks that are still overvalued. Btw, what percentage of your 401(k) portfolio is in the company you work for? And does the company match? They could pull all matching contributions tomorrow, I'm sure you know. And if folks like Tice are right, and the global economy is increasingly based on U.S. consumers' willingness to use credit to keep buying stuff, and huge banks are increasingly relying on credit derivative shell games that expose them to huge risks, the "bargains" you're picking up now may sink instead of rise before you decide to go bearish 10 years before you retire.
posted by mediareport at 8:13 AM on July 31, 2002

What is an acceptable p/e ratio? I've always heard 14/1 is the long term market average but is that a good indicator to compare against?
posted by nofundy at 8:27 AM on July 31, 2002

This isn't a big deal.

Now I'm confused. Then why mention it?

This post would be so much better if it was solely about Prudent Bear. The rest of it is material for another day.

Thanks for the input; I'll keep it in mind. Trying to give a broad sense of the skeptics' world and point to rich sites for anyone who wanted to explore further seemed like a good use of MeFi to me. It still does, except that I probably used too much space on the front page. And I threw in the anti-IMF and 401(k) links precisely because I knew the topic makes a lot of folks' eyes glaze over.
posted by mediareport at 8:31 AM on July 31, 2002

nofundy, fwiw the historical market average for p/e's is somewhere in the range of 14-17. today (depending on who you ask) even after the recent market downswing the p/e for the s+p 500 stands somewhere in the 25-40 range.
posted by zoopraxiscope at 8:44 AM on July 31, 2002

The Motley Fool folks have what they consider a better calculator than simple P/E ratio: The Fool Ratio. They divide the P/E ratio by the growth rate (figuring both out is explained at the site) and come up with this:

"Tend to buy stocks when their P/E's are half their growth rates; tend to sell stocks when their P/E's equal their growth rates; tend to sell short stocks when their P/E's exceed their growth rates by 30% or more."

Here's another David Tice story from last September 3; scroll down for his prescient take on AOL's accounting. Then take a look at AOL's stock performance since September.
posted by mediareport at 9:11 AM on July 31, 2002

the caveats on that Fool ratio sure point up its limitations, though:

"We ignore the Fool Ratio (and generally these stocks as well) for the following industries: airlines, banks, brokerage houses, leasing companies, mortgage companies, oil drillers, and real-estate companies"

"The Fool Ratio also has nothing to say about companies with negative earnings"

"And finally, the larger the company, the less we rely on the Fool Ratio to guide us"

which is not to say that it might not be useful (and undoubtedly p/e as a measure has serious limitations as well) but it sure can't be applied universally in any sense.
posted by zoopraxiscope at 9:22 AM on July 31, 2002

The thing to take from this whole set of links is that you should always listen to the skeptics and cynics. They're often right. Take Enron: shortsellers were talking about it as a top short candidate way before it all hit (although the situation was 10x worse than their initial expectations).

Short sellers aren't always right, no one is, but they do incredibly detailed and hard-nosed work. They're a smart bunch, and even if you disagree with a short thesis, you should make sure you can understand and refute the short thesis in a heavily shorted stock before plunking your money down on it.

btw - if the dark side is of interest to you, "The Art of Shortselling" by Kathryn Staley is the semi-official bible, or at least introductory bible, for shortsellers. It's also basically a rogues gallery of the Enrons and Worldcoms of the eighties.
posted by fluffy1984 at 10:12 AM on July 31, 2002

short the dollar! and buy gold :)

it's also a good idea to compare PEs with the interest rate environment. like if interest rates are low then PEs should be relatively higher. or more formalized, a widely used measure for the "fair value" stock market PE is the reciprocal of the 10-year treasury yield. so if it's 4.5% then a good ballpark PE for the market would be 22.2, or say 20 to be conservative.

then you just need to multiply it by the 'E' to get a fair value estimate for the stock market. one way to do this is to use S&P earnings estimates as a proxy for market earnings, which if you're looking ahead to 2003 (as the market is a discounting mechanism and using top-down reported earnings to be conservative) is about $45.

using 20 as a PE then, gives you a conservative fair value estimate for the S&P 500 of 800, or about 11% downside from here. or if you use 22.2 straight up (say if you think accounting scandals are temporary and we're not headed for the dreaded 'double-dip' recession) then you could reasonably expect to hit a target of 1000 sometime this year, or about 11% upside! all in all i think it's a pretty good measure :)
posted by kliuless at 11:27 AM on July 31, 2002

it sure can't be applied universally

Be sure to let us know when you find an indicator that can. :)
posted by mediareport at 11:58 AM on July 31, 2002

mediareport, I do have such indicators which will ASSURE your personal financial SUCCESS. just visit my website and sign up for my $500 lifetime plan and I will REVEAL the SECRETS that will UNLOCK your personal FORTUNE.....
posted by zoopraxiscope at 12:24 PM on July 31, 2002

mediareport - None of my 401(k) is in my company's stock. I'm a firm believer in diversification. Many of the individual stocks in my portfolio now may not pan out, but what I'm counting on is the long-term historical growth of the market. I do agree with you, though, that many stocks are still overvalued. That's why I'm happy to see them correcting back down to something approaching rationality. (And yes, we may have a ways to go on that.)

BTW, I'm curious about the claims of people's retirements being wiped out by drops in the stock market. As I'm seeing it, investing for a comfortable retirement should be done over the course of 30-40 years. Someone who started in 1962 investing 5+% of their weekly income in a highly diversified range of stocks should still be doing ok today, despite the recent drop in the market.

Of course, it might be nicer if our companies guaranteed pensions for all of us, but a) how many of us stay with the same company for life any more? and b) how are (old-style) company pension plans any more immune to corruption/bankruptcy/stock market crashes than our own plans would be?
posted by tdismukes at 1:42 PM on July 31, 2002

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