Bears Throw in the Towel

The great show goes on.

Yesterday, 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 (more below)…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.

Bill Bonner
The Daily Reckoning
London, England
Friday, June 22, 2007

More news:


Addison Wiggin, reporting from Charm City…

“The Blackstone Group – one of the world’s largest private equity investment firms – goes public today. Its initial offering is a whopping $4.75 billion – the 6th largest IPO in history. Not to be outdone, rival group Kohlberg Kravis Roberts announced it too might be traded publicly in the near future.”

For the rest of this story, and for more insights into today’s markets, see The 5 Min. Forecast


And more views:

*** But let us not forget the plot…and our role in it.

Unless you are able to get in on some of this bubble loot – by starting up your own hedge fund, for example – you’re better off staying away. Because, while there is some potential profit on the upside, there is probably much more risk in the other direction. There are already several big leaks in the U.S. housing bubble. And there are dozens of pins poking up everywhere.

Markets that are at epic highs, typically, pose more of a threat than an opportunity. And investors – if they are smart – do not really put their money into expensive investments hoping that a greater fool will come along tomorrow. A professional speculator might. A billionaire might make a careful calculation…betting that the bubble will grow for another two years. He might put a few million into a wild gamble. If he wins, he is richer by millions more. And if he loses? It will have little effect on his standard of living. His children will still be able to go to college. He’ll still be able to take a vacation and retire when he wants.

The more you have, the less each additional increment is worth. By the time you get beyond a few million, the value of each additional dollar is minimal. It is only valuable in an abstract sense…as a way of keeping score. Soon, extra dollars are just “play” money – you use them just to prove a point…or to show off…or to gamble with.

If you’re in that situation, and you want to take a gamble on this bubble getting bigger – then, why not? Give it a whirl. Have some fun.

But here at The Daily Reckoning headquarters, we’ll continue to fly our ‘Crash Alert’ flag…and sit tight.

*** The International Herald Tribune reported on the “World’s Most Livable Cities,” yesterday. We were shocked. Our hometown, Baltimore, didn’t make the list. But then, neither did Philadelphia…or New York…or San Francisco. In fact, the only American city to make it into the top 20 was Honolulu.

People who do these rating services tend to have a grudge against automobiles…which puts American cities at a disadvantage. The United States has the best cities in the world – no question – from a car’s point of view.

At the top of the list was Munich…followed by an assortment of the usual European cities. Also among the top 20 were two cities in Australia – Sydney and Melbourne…and two in Canada – Montreal and Vancouver.

Paris, France, from which we are currently estranged, was listed – but not at the top.

What makes a city livable? Some of the things are obvious. You don’t want to worry about getting shot when you walk around. You want to be able to go to nice restaurants. You want things to look nice. And you want a certain amount of convenience.

What dooms American cities is that they tend to be dangerous. We haven’t looked at any figures on the subject in a while, but we’re willing to believe that Baltimore is much more dangerous than Geneva. American cities also aren’t very pretty. They have pretty parts to them, but if you look out your car window at any given moment, you’re as likely to see something ugly as something attractive. In a city such as Paris, by contrast, almost anywhere you look, you will see something that is pleasing to look at. Even bad neighborhoods have pretty buildings. Even the people tend to be more attractive in European cities than in the typical burg in the United States. People tell us what a great city New York is. But in our experience, it is rare that you see something fetching in the Big Apple.

As for what you eat, in a big American city, you can get some of the finest food in the world. But in the typical American restaurant, the middle-American chain eateries, the emphasis often seems to be on quantity rather than quality.

It is difficult to generalize about infrastructure; there are so many particularities. Swiss cities tend to be very well organized, small, clean, and efficient. You can get through the Zurich airport, on a train and to the downtown area, for example, in just a few minutes. In Paris, when there is no traffic, connections are easy too. But during rush hour, you can spend a couple of hours stuck in traffic. London, on the other hand, is a sprawling place. Its airports are frequently on the verge of pandemonium. Just yesterday, for example, travelers were warned to expect breakdowns in the airport security and passport control systems this summer…including long waits and long lines.

*** Last night was the shortest night of the year – in the northern hemisphere. It is also the night of St. John throughout Christendom…and the “Fete de la Musique” in Paris. Bands set up on street corners. The party goes on all night long. In our lonely exile, we weren’t able to participate, but our son Jules sends this report:

“Stay away from the Latin Quarter. It’s just too crazy. Too many people. Too much noise. Bands compete with each other. I was there last year; it was awful. The type of music varies by neighborhood. Up in the old Jewish quarter, for example, they have techno and heavy metal. Where we live [in the bourgeois 16th arrondissement] the music wasn’t so bad…there was a jazz band across the street from the Chinese restaurant where we had dinner. My friends were going down to the Latin Quarter late at night, but I couldn’t face it. I just went home and went to bed.”


The Daily Reckoning PRESENTS: Brace yourself – there is another “new era” in town, and it is determined to stick around. This budding form of capitalism thrives on transactions, as the upper echelon of society seems to buy assets faster than you can say “hedge fund”. Bill Bonner explores…


Things are seldom what they seem,
Skim milk masquerades as cream;
Highlows pass as patent leathers;
Jackdaws strut in peacock’s feathers
– Gilbert and Sullivan

“We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism,” writes Martin Wolf in Tuesday’s Financial Times. Oh no! Not another New Era…we have seen so many already. Once we get the hang of one, along comes a new one and we have to start all over again.

Capitalism is prone to New Eras, as Wolf notes. Left to its own devices, it does to established institutions approximately what Sherman did to Atlanta. This New Capitalism, though, is different. It is unlike any other capitalism in every way – except the essential one. Like a drunken boat, it rocks and rolls on the great waves of money and politics…it drifts along with the market currents…gets blown this way and that by heaving gusts from mobs, manias and monetary madness and…and then…it sinks.

Mr. Wolf maintains that this New Capitalism is much more financial and much worldlier than the old one used to be. The old model of capitalism used to be focused on economic output. This new model concentrates on buying and selling the capital assets themselves. McKinsey Global Institute reports that the ratio of the latter to the former – that is, the value of capital assets to global GDP – has more than tripled in the quarter century ending 2005. Europe, a bit slow to get in on the trend, now has capital assets worth 303% of its GDP. For the U.K., the figure is 359%…and for the USA it is over 400%.

Today’s most successful capitalists tend to earn money not from producing things, but by financing capital transactions. Or, as Wolf says, “finance has become far more transactions-oriented.” Deals, deals, and more deals! There are more players in the financial world; they play harder; and they have more to play with – hedge funds and private equity funds, for one thing. In 1990, there were fewer than 1,000 hedge funds; today there are thought to be more than 9,000. And derivatives barely existed 20 years ago. In 1987, the total notional amount of interest rate and currency swaps was approximately zero. Today, including property derivatives, the total notional traded value is over $500 trillion, according to the International Swaps and Derivatives Association. That’s roughly ten times global GDP.

Another thing that is different about this capitalism is that it is more cosmopolitan than its predecessors. Companies are often multi-national. Many hedge funds and private equity groups will take money from anyone, regardless of what passport they hold. Deals tend to cut across borders faster than illegal immigrants. And big investors are rarely flag wavers; they’ll go where the money is good. So, now, the whole world can get into the game. The Chinese won-ton vendor…the Indian sari merchant…the Colombian drug dealer – everyone can now enter the great casino.

But what is it, really, that makes this New Capitalism new? Mr. Wolf does not mention it, but the main new ingredient is new money itself. On August 15, 1971, Richard Nixon “closed the gold window” at the U.S. Treasury. Previously, the world’s money system rested on a foundation of gold. No currency could float too high, because the gravity of the gold in the basement would bring it back down. But after 1971, capitalists had a very new money system to work with. Henceforth, the nations of the world would look to the dollar as a reference. And the dollar, what would it look to? The dollar looked left and looked right. Seeing nothing to hold it back, it slowly took off!

With no gold to restrain it, the United States puts out, effectively, as much paper money as it can get away with. And it can get away with plenty because the last thing any nation wants is for its own currency to rise against the dollar. Americans, after all, are the biggest spenders in the world. If a nation’s currency rises against the dollar, the price of its goods and services will rise too. And then, the Americans will buy from someone else. So every foreign central bank wants to avoid a falling dollar in the worst possible way – by increasing the quantity of its own currency!

In no time at all, the whole world is awash with more cash and credit than it knows what to do with. More dollars, more yuan, more yen, more Swiss francs, more euros, more pounds! More credit. More bonds. More derivatives. More debt. More speculation. As long as foreigners continue to give each new dollar the same warm reception they gave to the last one, the dollars will keep turning up. And now, the whole world is bobbing in a sea of liquidity. Look at practically any stock market on the planet. You will see a sharp upward bend to it. Property – especially in major market centers, such as New York, Hong Kong, and London – has gone up too. Things like art, watches, yachts, and executive airplanes have shown even steeper increases. Just this week, a painting of Waterloo Bridge by Claude Monet sold for twice what experts had expected – 17.9 million pounds. This week will probably be the biggest week in art history – with more money changing hands than ever before. And many of the buyers are, naturally, hedge funds managers!

While the few rich admire their Monets, the rest of us have to content ourselves with glossy prints, offered on Wednesday by The Daily Telegraph for free. Most people have no choice but to accept the paper’s generosity. New Capitalism has put them so deeply in debt, they have no free cash to buy anything. In the ten years up to 2005, UK households increased their debts from 108% to 159% of GDP. Americans’ debts went up by about as much – from 92% of GDP to 135%.

That’s the dark side of the financialized globe. But not to worry. One thing about the New Capitalism…it is no more permanent than the capitalism it replaced.


Bill Bonner
The Daily Reckoning
June 22, 2007

Editor’s Note: Don’t forget – you can hear Bill (along with all of your favorite DR editors) speak at this year’s Agora Financial Investment Symposium in Vancouver, British Columbia. This year’s theme is “Rim of Fire: Crisis & Opportunity in the New Asian Era” – and it’s your first look at investment opportunities, global market concerns, and the best investment bets across the globe.

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

Empire of Debt