JKG wrote a piece for Monday's NYTimes OP-ED page:

http://www.nytimes.com/yr/mo/day/oped/12galb.html

(free registration required)

A few quotes:

"In the long speculative splurge in the late 1920's and thereafter in the Great Depression, the record of official Washington was far from compelling. So it is remembered in history: the amiable indifference of Calvin Coolidge; the repeated assurances by Herbert Hoover, as the Depression deepened, that it was really over; the many statements that the "fundamentals are sound."

Though this is not good, it may be much better than what solemn historians will say about these last few months in Washington. The worst economic crisis of recent times, certainly the worst since World War II, has been in the making. This has been reasonably evident. History will tell that Washington was supremely indifferent. Both politicians and Washington commentators were overwhelmingly, some will say exclusively, concerned with sex.

There is some reason for this. Economic policy and associated actions require knowledge and thought. On sex, ordinary or illicit, everyone has an equal start. No tedious study or discussion is required..."

He goes on - "...The fragility is the natural product of a long period of speculation in the stock market, in related financial instruments and in real estate. Prices of securities went up because investors, small and great, thought, or were encouraged to think, they would go up. From that belief came further purchases, pushing prices higher -- the classic speculative bubble.

The end, over the centuries, has always been the same; there suddenly comes the painful correction, as it is now called. Exposed again is the extreme susceptibility of what is called the financial mind. And as we learned in 1929 and after, the speculative correction has further effects. Those suddenly poor or less rich curtail their purchases, and businesses curtail their investment. Then comes the recession or depression.

All these are matters that call for attention and not least the measures that would ease the human effects of the speculative aftermath..."

He concludes - "My own concern for those who have been caught up by their insane errors of expectation is somewhat less than acute. There is a useful role as regards financial aberration and its sponsors for what the economist Joseph Schumpeter, somewhat unsympathetically, called creative destruction. It is good that they go.

But the larger economic effects, including the ways to minimize suffering for the innocent and for maintaining the flow of consumer and investment demand, should now be the subject of the most intense discussion in Washington. Alas, I do not have great hope. From all outward evidence, the central subject will still be sex. Coolidge and Hoover will continue to look better."

Overlay our ongoing Y2K fears and ...well...we can all draw our own conclusions...

-- pshannon (pshannon@inch.com), October 12, 1998

Answers

No surprizes here.

-- Paul Davis (davisp1953@yahoo.com), October 13, 1998.

A speculative bubble, certainly. But one fueled by the greatest CREDIT bubble of all time, fostered by- TA DA!: the famous Fed, sworn enemy of inflation, yet like some fiscal Dr. Frankenstein, the bubble's secret creator. And how, pray tell, did the Fed get away with it? Why, with the complicity of Congress AND the Executive Branch as well. AND with the willing if unwitting acceptance of the greatest part of the American public, who stood bovinely by as what was once real money was destroyed, made fiat, converted into a mere shadow of its former self.

Well, the game is just about up. And the correction, when it comes, will be far from merely painful.

It will be agonizing. I wish it were not so, but it seems to me inevitable at this point. If you are wise you will prepare for the Bear as well as the Bug. Guess which one will be bigger???

Prepare how? Pay off all the debt you can and certainly own your refuge/residence free and clear, get as liquid as you can, get your assets as "real" as you can in useful tangibles (stored food and barterables, 'insurance' silver and gold, redundant heat and light sources, means of self protection, etc), get rid of real estate that's over and above your daily living or business needs. If you have extra assets beyond that, you must find an investment vehicle or vehicles that will transport those assets safely over the next couple of years at a minimum and deliver them at least undiminished on the other side of whatever is coming (likely massive deflation, a huge liquidity crunch, among other things). At this point return OF capital is more important than return ON capital.

nemo... (Disclaimer: never been an economist, never even played one on TV, this advice is worth approximately two post-1983 copper-clad zinc cents-no, they're NOT copper any more-, if you risk more than that you're on your own. Guess what- YOU'RE ON YOUR OWN ANYWAY. Nobody's gonna bail you out of this one... you are not too big to fail, the IMF or the Fed doesn't care about you. Neither does your Uncle Sam. Get used to it.)

-- nemo (nemo@deepsix.com), October 13, 1998.

Disagree - stock prices went up becuase 15-35 million "baby-boomers" looked around and found out they had to start putting their someplace - they the money now, they had several tools (401K, pension plans, and IRA's, life insurance money from their policies that the insurance company's have not cashed in yet, etc.) that all was targetted to the "best investment in town".

Too much money pushing the stock prices for the same (approximate) real value of the same companies means inflated stock prices.

Same thing happened in tulips in Holland - until evrybody tried to sell tuplis at the same time. The real value of the stock market should be based on 3-5% percent growth since maybe mid-early 80's. Give or take an assumption or two, say about 6000.

Anything above that is speculation, not value.

-- Robert A. Cook, P.E. (Kennesaw, GA) (cook.r@csaatl.com), October 13, 1998.

I agree with the wave here. A recession is coming, at a minimum. I am currently looking to buy a house well below our means in case the bottom falls out of one of our jobs. It is notable that the FHA interest rate increased by almost a full 1% late last week (still 1/2 of what they were a little over 10 years ago). I think the financial ride is going to be a big one and, the month for inertia to take over the roller coaster, so to speak, is commonly October. Happy Halloween.

-- Slick (slick@hucheemama.com), October 13, 1998.

My .02 worth for this posting.. I do remind everyone that Galbraith's book on the Stock Market Crash of 1929 is must reading... 1. 49.7% of ALL households in the U.S. have some type of investment in the stock market as of January 1, 1998. 2. Commodities are depressed severely, some at historical levels. Ask any friends who are in agri-business today. They are IN a depression already. As is the seafood industry. And the list continues to mount. 3. Brazil, Venezuela, and Mexico will collapse. This is the first of two events which will trigger the recession then depression in the U.S. 4. Y2K is the second shoe to drop. I have a friend who works in the MIS department at one of the top 5 transportation companies in the U.S. 80% of their staff is working on Y2K. They will not even begin testing until April 1999 or maybe even May at this point of time. No one is looking at the numerour embedded systems yet either. He also stated that there is no effort to coordinate testing with their various vendors as "they are just concerned with keeping their systems up and running"....Think about this. Two years of productivity down the drain. Millions of dollars which could have been used in modernization and capital improvements trashed because of a MIS VP's short sightedness when this subject was first broached in 1992(he's long gone by the way, the VP that is). My friend is leaving also as he does not want to go down with the Titanic. He is looking for another company which will pay him a much larger salary for his talents: An original COBOL systems programmer... I doubt he'll have a problem finding that job and making more money. But I also doubt that this company will get our groceries to the warehouses for distribution in a timely manner either. Guess it pays to be paranoid and stock up on food....and ammo. Have a nice day:)

-- John Galt (jgaltfla@hotmail.com), October 13, 1998.

Right on Robert. Any time the valuation in the market gets the average P/E ratio above 15 or so - its time to get out or bet on falling prices. Looking at stock screener today on Yahoo - saw some outfits at nearly 300 P/E. What is the sense of that?

-- Paul Davis (davisp1953@yahoo.com), October 14, 1998.

I love those JKG quotes. Read the initial post twice - yummy!

-- Bingo1 (howe9@pop.shentel.net), August 09, 1999.