The Rude Awakening
Laguna Beach, California
Friday, April 5, 2007 ------------------------- - Speculating with the herd,
- The European value of the Dow,
- French snobbery's a hot commodity and plenty more…
------------------------- Eric Fry, reporting from Laguna Beach, California… "We need to preserve our 'snobbism,'" a young, female Parisian suggested during a recent ride through the French countryside. "It's part of our culture. We need to preserve it, you know, just like we preserve our cathedrals." "Hmmm," your editor replied, not thoroughly convinced by her assertion, "why do you need to preserve it? Do you think your snobbism is a kind of tourist attraction…just like your cathedrals? Is your snobbism a national reasure?" "Yes, of course!" she laughed. "Do you think we American tourists cherish abuse from the French?" your editor inquired. "Maybe…on some level," she laughed again. "What do you think?" "Maybe…on some level. But I'm pretty sure most Americans would rather visit Notre Dame, for example, than suffer abuse from a Parisian waiter." "But an unkind Parisian waiter is not being snobbish, just rude," she said. "I think of snobbism as merely appreciating the details of life. It's when you care about the 'petites qualitées' of the life you live. You appreciate how something is made…and so it is precious to you because it is made in a certain way. "A coke is a coke is a coke," she continued. "But every bottle of wine is unique. I recognize the quality behind a good bottle of wine. It's a rich detail. But maybe recognizing these small qualities of life seems snobbish." "Well it CAN seem that way," your editor agreed. "The heart of French snobbism is Paris," she explained. "There is Paris…and then there is the rest of France." "You mean; Paris is better than the rest of your country?" your editor ventured. "Well, sort of. It has the best quality of almost everything. I love Paris." "I'm pleased to see that your version snobbism would annoy most of your countrymen, as well as most Americans." "Oh, I'm not so bad," she smiled. "That's just how we are in Paris. That's what makes us so unique…and charming, n'est-ce pas?" Here at the Rude Awakening, we also like to retain the qualities that make us unique, if not always charming. We like to retain, for example, our profound distrust of frothy financial markets, of Wall Street "buy" recommendations, of erudite central bankers, of money that combusts near an open flame and of PE ratios with a very big "P" and very little "E." But we also retain our affinity for life's sublime delights…Like brilliant sunsets, warm sand, double espressos, money that survives an atomic blast and PE ratios with a very small "P" and lots of "E." These qualities are all part of our unique charm, n'est-ce pas? In the column below, our friend and psychic twin, Dr. Marc Faber, examines manias past in light of the mania present…and he does so from his characteristically unique historical perspective. ------ Special Housing Report ------ Urgent Alert: Get Ready for the Worst Property-Led Recession of the Last 76 Years Nobody's money is safe. The "Second Wave" housing tsunami of 2007-2011 is about to hit, and smart investors are already battening down the hatches. Protect your savings and investments - click here ---------------------------- An Epic Mania
By Dr. Marc Faber When I continually hear and read about "excess liquidity", "sustainable record corporate profits", "new highs", "Goldilocks economy", and that "central bankers today are smarter than in the past", I wonder whether the 19th-century economist John Ramsay McCulloch wasn't on to something when he wrote: "In speculation, as in most other things, one individual derives confidence from another. Such a one purchases or sells, not because he has had any really accurate information as to the state of demand and supply, but because someone else has done so before him" (J. R. McCulloch, Principles of Political Economy, 2nd ed., London, 1830). What McCulloch omitted to add is that speculators not only buy assets because someone else has done so in the past, but because they expect that in the future someone else will enter the market and purchase the asset from them at an even higher price, since "excessive liquidity" will surely push asset prices higher. Not since I started out in the glorious business of investments in 1970 have I seen so much conviction among investors that all asset prices will continue to increase in value based on "excessive liquidity" and "money printing". During my carreer, I have experienced four investment manias of epic proportions. By "epic proportions" I mean investment bubbles that, when they burst, caused serious economic pains to either an important sector of the economy, a whole country or an entire region. Those four investment manias were the parabolic increase, between 1970 and 1980, in the prices of precious metals, oil, mining and energy-related equities. The second "big" investment mania surrounded Japanese equities and real estate in the late 1980s. It culminated in Japanese stocks commanding a larger market value than the combined values of the US, British, and German stock markets. Then, in the 1990s, we had several rolling investment manias in the emerging markets, which ended with the devastating Asian crisis of 1997, and the Russian crisis and LTCM in 1998. In the fourth and last great investment mania, the object of speculation was the telecommunications, media and technology (TMT) sector on a worldwide scale, and we all know very well how that ended. At the end of each investment mania, investors believed in some sort of "excess liquidity" that would drive the object of the speculation forever higher. But as Albert Edwards so eloquently explained in a recent scathing report entitled "Lies, rhubarb, poppycock, bilge, utter nonsense, caravans and liquidity" (see Dresdner Kleinwort Global Strategy Report, January 16, 2007), "liquidity is the hocus pocus of the investment world. It means totally different things to different people but is often cited as being a major driver for buoyant markets". Most presciently, Edwards explains that with respect to investment manias, "when markets are rallying but seem expensive, when new issues fly out of the door and when fundamental analysis often appears to fail to explain events, the safe haven for the market commentator is often to rely on the explanation that there is lots of liquidity." I urge our readers never to forget these words! What is peculiar to the current investment environment is that liquidity is supposed to come from not just one or two sources, but from everywhere! From OPEC surpluses, from the US Fed and other central banks, from the Asian current account surpluses (excess savings), from the Yen and Swiss Franc carry trade, from the large size of money market funds and bank deposits, from rising asset prices, leverage, and a tidal wave of private equity funds, and from artificially low interest rates. It's no wonder that, given such beliefs, asset markets are all flying to the moon! Every epic investment boom lifted prices far higher than anyone could have. But once the boom comes to an end, most, if not all, of the price gains that occurred during the mania are given back. In 1992, silver prices were lower than they had been in 1974. In 2003, the Nikkei was lower than at its high in 1981. In 2002, in dollar terms, most Latin American markets were no higher than in 1990 and most Asian markets had declined to their mid- or late 1980s level. And in those manias where prices didn't retreat in nominal terms to the level - or, as frequently happened, to below the level - from where the investment boom had begun, prices retreated in inflation adjusted terms to those levels. Adjusted for inflation, in 2001 the CRB Index was far lower than it had been in 1971, while precious metals, oil, and grains were all either no higher, or lower, than they had been in the early 1970s. [Eric's note: Likewise, adjusted for the dollar's weakness since 2000, the "record high" Dow Jones Industrial Average is very far below record territory, according to Faber. In a recent issue of Barron's he gripes: "I don't understand why you measure the market's performance strictly in dollars. Since 2000, the euro has appreciated 60% against the dollar. The Dow Jones is at a new high, but it's down 38% in euros."] 
According to James Montier of Dresdner Kleinwort, his measure of risk appetite [in the U.S. stock market], "The Fear and Greed Index," has risen to new extremes. Montier's Fear and Greed Index is based on a simple risk-adjusted calculation of global equity performance relative to government bonds and yields similar results to other indicators of risk apetite. The track record of this contrary indicator isn't perfect, and nor does a high level of risk appetite (irrational exuberance) necessarily lead to a financial calamity. However, high readings in the past led at least to a minor correction (8% - 10%) in the S&P 500, such as occurred in 1997 (twice), and in 2004 and 2006. But in three instances, Montier's index's hgh readings - in 1987, 1998 and 2000 - led to more serious declines of 22% in 1998, 40% in 1987 and 50% after the 2000 peak. As Albert Edwards notes, "investors are at risk of a snapback. When risk appetite evaporates so too does liquidity. Poof!" I may add that asset markets, after having peaked out, frequently decline somewhat but then stabilize or even recover as investors and speculators hope for a recovery. But then, after several years, markets can still totally collapse. Should I be wrong in expecting…a severe correction in asset markets, the universal and all-encompassing asset bubble could continue to expand unabated, and without a meaningful price correction for some time to come. (However, in my mind, this is not a very plausible scenario.) But, in such a case, precious metals are likely to continue to appreciate substantially against the U.S. dollar. --- Out Of Stocks…And Into GOLD ---- Hulbert's Number 1 Financial Newsletter of the past Five Years Introduces… "Five New2 Gold Plays" Also included in this Special Gold Report is a way to insure your self against any downside while still remaining exposed on the upside. Perfect for first time and seasoned investors alike…Grab Your Gold Report Here --------------------------------------- | 
