The Rude Awakening
Laguna Beach, California
Tuesday, May 8, 2007 ------------------------- - Distilling mixed messages from Mr. Markets,
- A record string of record highs…and the impending drop,
- Idiots, morons, dumbbells and other rich folk…
------------------------- Eric Fry, reporting from Laguna Beach, California… Another record high in New York yesterday…and in Toronto…and in Sydney…and in Shanghai…and in Brazil…and, yes, even in parts of the Old World like Paris (provided that one is counting in dollars rather than euros). But our colleagues over at the Daily Reckoning can't seem to reckon why share prices worldwide would continue soaring from record high to record high. Nor can they reckon why investors would continue piling into to these pricey global markets, rather than simply cashing out their gains and taking a few months off. From his Parisian perch, Bill Bonner frets, "Here at the Daily Reckoning headquarters, we continue to give out dire warnings. And yes, our Crash Alert flag still flutters. Not since the late '20s have we seen such a long stretch of highs, without a major correction." Meanwhile, from the Land Down Under, Dan Denning warns, "This all feels like the Nasdaq in 1999 - a headlong rush into bad investment decisions driven by too much money and too few brain cells. But it is global in scope this time…The whole world is in play." Perhaps if these two expatriates resided a bit closer to Wall and Broad, they would succumb to the hypnotic allure of CNBC and then to infectious mania for high-flying stocks. Alternatively, if these two sober-minded observers resided on the West Coast, they might simply take a break from their dire daily reckonings and examine the other sorts of record highs that occur outside the financial markets. They could even take a brief lesson from your California editor, who spent the weekend watching Kerri Walsh and Misty May close in on the all-time high for career victories in women's beach volleyball. True, such diversions will not yield valuable financial insights, but they do sometimes yield interesting metaphors. 
Once upon a time, Walsh and May won 50 consecutive matches. It never should have happened. They should not have been THAT dominant. Surely, they should have had an off day, a "correction." But they didn't; not for 50 consecutive atches. Then they lost a few matches here and there. But this astonishing pair of volleyball players continues to dominate their opponents most of the time…and continues to add to their near-record total of career victories. Some things just happen, even though the odds seem stacked against it. But alas, Messrs Bonner and Denning are wired observe the U.S financial pageant from afar - from a distance that invites sober, rational reflection, rather than euphoric, uninhibited participation. That's why these observers are incapable of buying richly priced stocks and then trying to sell them later at even richer prices. Indeed, they are incapable of silently standing by while OTHER folks buy richly priced stocks and then try to sell them later at an even richer price. That's why they reckon every day…because they must. Here at the Rude Awakening, we relish the daily reckonings of Bonner and Denning, and we sympathize with their financial acrophobia. Record highs also scare us…most of the time. --- Six Days Left ---
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By Bill Bonner Up is down. Left is right. Good is evil. Risky is safe.That's the message we are taking from the financial world these days. One commentator says the United States is entering a glorious new period of growth and stability, thanks to the entry of Asia into the world economy. The Dow must see it coming; it's hitting one new record after another. The Dow goes up, up, up - it's been up in 21 of the last 23 sessions, something that hasn't happened since just before the Great Crash of '29. One increase follows the next with no correction. What could be safer than buying an index that almost always goes up? But the gains in the Dow are peanuts compared to what you could get overseas. In China, the major indices have gone up almost three times in the last two years. So far this year, the CSI 300 Index, which tracks yuan-denominated "A-shares" listed on the Shanghai and Shenzhen stock exchanges, rose 75%. And in Europe, Germany is also booming…though at a much more modest pace. Investors may think they are getting rich, but as we noticed yesterday…even if Abby Joseph Cohen is right and the Dow goes to 13,500 this year, it will leave investors with an inflation-adjusted gain of only about 2%. An investor has to weigh his anticipated reward against his estimation of the risk involved. Anyone who stops to think about it would have to conclude that a gain of 2% ain't worth the risk. But apparently few people do think at all. They feel they are being conservative by buying U.S. stocks. Abby Joseph Cohen has told them so. It's true that the optimistic, albeit delusional strategist from Goldman Sachs (NYSE:GS) admits the economy is slowing down. But, "critically," she adds (they pay her big money for these neat insights), "it is also rotating." Like tires. And if the economy now seems to be spinning against the people who buy, finance, build and sell houses, don't worry your head about that. "Weak housing is unlikely to derail the economy," says Miss Eternal Sunshine of the Stock-tout Mind. You see, over there, commercial property is picking up. And over here, so are exports, thanks to the flailing dollar. And how do you like those consumers? They're still spending what they don't have on what they don't need. Personal consumption is supposed to go up by 3% this year. And, you want more good news? U.S. corporations are flush with cash. They're making money…and probably will make even more - which means, stock prices are going up too. Abby's model says the S&P 500 should hit 1,550 and the Dow should make it to 13,500 by the end of the year. And who knows? Maybe she'll be right; she usually is. She's got a nice gig over there at Goldman. Every year they pay her a lot of money. Every year she says stocks will go up. And most years stocks do go up. But readers are reminded that it is not by successfully foretelling the future alone that a gambler makes his money. Instead, it is by correctly toting up the odds…and figuring out how much he'll lose if he is wrong. Even if Abby is right, from here to 13,500 in the Dow is only about a 4% gain - and more than half that gain reflects nothing more than the effect of inflation. So, you would be putting your money at risk in the hope of making 2% net…less after taxes. If the dollar goes down, or inflation goes up, your gain is wiped out completely. And there is always the chance that Abby is wrong. Suppose instead that the Dow goes down 10%…or 20%…or 50%. Is it worth taking the risk for the hope of a 2% gain? The New York Fed provides some evidence to the contrary. It warned this week that hedge funds pose the biggest threat to investors since the LTCM crisis of '98. Back then the Fed organized a $3.6 billion bailout. But that kind of money is peanuts today. Another $60 billion was raised by the funds last year alone. Today, they are a $1.6 trillion industry; and they are much more leveraged than they were 10 years ago. Practically every one of them is walking around with dynamite taped to its belt. What makes the situation especially dangerous is that they all tend to show up in the same places at the same time. "Returns are increasingly correlated," says the Fed, which is the Fed's way of saying they are all doing the same thing. So, when one blows up…they might all blow up. And when they all blow up…it's likely to send a cloud of smoke and debris over the entire world's financial markets. And here is money manager Jeremy Grantham with more details on the risks investors face: "From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips - it's bubble time," he writes in his latest quarterly letter entitled "The First Truly Global Bubble." And when it pops, says Grantham, it "will be across all countries and all assets, with the probable exception of high-grade bonds. Risk premiums in particular will widen. Since no similar global event has occurred before, the stresses to the system are likely to be unexpected." It's a market for idiots, we conclude. If you are foolish enough, you can make a lot. But if you have any sense at all, you'll be content with comfy poverty. Only a moron could invest in China's go-go market today. Only a dumbbell would put money in most of today's hedge funds. Only a mental defective would lend to most of these high-profile private equity deals. Which is why the morons, dumbbells and mental defectives are making so much money! And we know what you're thinking, dear reader - that we're just jealous. Not at all. We're just flabbergasted and amazed…and amused. There is something thrilling about the whole spectacle. In an upside down world, the riskiest deals are said to be the safest. We'll see… Editor's Note: For more of Bonner's sardonic brand of humor and insights, have a dig around www.dailyreckoning.com . --- Special Wealth Protection Report --- Seven Shocking Lies How Washington Weasels, Wall Street Hucksters, and Media Lap Dogs Betray You… Cheat You… Lie to You… and Plan to Rob You Blind. In this report: The 7 Deadly Money Lies Destroying Your Wealth and Future Prosperity. PLUS… In This Report: The 7 Investment Solutions to Keep You Laughing all the way to the Bank! | 
