>H Blowoff Models

mcvjk@webfriend.com (eugene.leitl@lrz.uni-muenchen.de)
Tue, 21 Dec 1999 22:32:10 -0800

From: Forrest Bishop <forrestb@ix.netcom.com>

Transhuman Mailing List

Blow-off Models
December 21, 1999

1999, 1929 What is the same as then only more so:
Stock P/E (price to earnings) ratios of 40-60, or 1000, or even negative in
cases like amazon.com. Historical averages are around 15, while a ratio of 20
used to be considered risky. Record trading volumes and index highs (as with the
final weeks before the 1929 crash). A small and shrinking proportion of stocks
propping up what is otherwise a bear market, with insane valuations, e.g.
Microsoft has a market cap equal to 10% of US GDP. The broad indexes have been
in decline for well over a year now, a lot of very large companies have blown
off 30% or more of their market cap, as was the case in 1928-9. The ratio of
advances/declines (A/D) has been in negative territory for many months. Massive
and accelerating “liquidity” (a polite way of saying “printing temporary money”)
injections by the central bank (the Fed).
The percentage of middle-class Americans playing the market has two historic
highs- 1929, and a new, much higher high in late 1999.
A negative US savings rate. This has not happened since the Great Depression.
No shock absorbers here!
Skyrocketing real estate prices, c.f. Japan, 1989 (Japan has been in
recession ever since).
Total American stock market capitalization (the aggregate price of all the
stocks traded) has surpassed 200% of US GDP. This ratio hit 120-160% just before
the ’29 crash (depending on whose figures).
Product saturation: in 1929 there were 2000 automobile companies (according
to Warren Buffet), now there are a plethora of redundant .coms, many with
multibillion dollar market caps and essentially no earnings. The total
percentage of internet trade is still insignificant, except possibly in stocks.
Cascading defaults, external recessions/depressions. Large areas of the Earth
are already experiencing severe economic hardships, some countries such as
Thailand and FSU are in what can only be called a depression. A ripple of
“bailouts” from Mexico (actually to the American banks that underwrote the bad
loans, btw) to S. Korea to LTCM (this one apparently threatened to collapse the
entire system).
Rising profits (in some sectors, notably not in internet, electronics) and
productivity, but no rising standard of living.
Pyramid schemes: something of a footnote, this sign of the times has resurged
in the past few months, having disappeared in the late ‘20s.
Media cheerleaders. Try to find a sour note out there among the spinmeisters.
This will make any panic even worse.

Most importantly of all is the (American) public attitude, that we are in a
“New Era”, of “New Economics” where the old rules no longer apply. New
technologies (airplane, radio, car) and high-flying tech companies are going to
pilot us into a Long Boom of never ending prosperity. Unfortunately, we are
still propelled along by those old twin engines of human behavior- greed and

What is new or different:
No gold standard, floating currency exchange rates. Historically, each and
every time paper has been substituted for a precious metal the currency has been
inflated into oblivion within a few years or at most a few decades. The
difference in the current “experiment” is that this time the entire world is
running on paper or it’s electronic equivalent, with the $US as a reserve
currency, in amounts limited only by disk storage space (not by the amount of
available lumber as in the past).
Derivatives markets, bank exposures. There appears to be something on the
order of $120-200 trillion (depending on whose figures you use) floating about
the global marketplace. No one really knows what all is out there, how it all
works, the amounts or the due dates, since these instruments are not regulated.
US banks are exposed to the (official) tune of a cool $33+ trillion (Item: who
gets to bail them out?). Bear in mind the US GDP is about $9 trillion, World GWP
about $25 trillion. Much of this new paper was concocted by physicists cum Wall
Street rocketeers; I wonder how many of them studied sigmoid curves,
predator-prey equations and catastrophe theory?
Velocity of money. Today, $trillions are shuttled around the globe on a daily
basis, computers and the internet have taken the place of the old
electromechanical ticker tapes. This has been a boon for IPOs, a new record of a
nearly 1000% gain was recently posted in a few hours by a .com. The flip side
(and I haven’t seen this mentioned anywhere) is the potential speed and violence
of a crash when greed is eclipsed by panic, circuit breakers and shock absorbers
not withstanding. A busy signal might come to engender the kind of reaction in
ex-daytraders that airplane engines did to victims of the London bombing.
The US was a net creditor in 1929, today it is a net debtor. This trend has
been accelerating- today foreigners hold around 2/3 of US T-bills and other
instruments. If (when) the stock market crashes, it may cause a devaluation in
the dollar (this might take a few months or even a few years), making the
holders of outstanding debt anxious to convert it into something else. This
would create a positive feedback loop, driving the dollar (and perhaps all the
fiat currencies) into hyperinflation.

So this presents an interesting problem, which I have not seen addressed at
all: how to manage the “unwinding” of this multiplicity of exposed positions in
such a way as to minimize the damage to the world economy? Presumably the Fed,
the ECB, BOJ, etc. have some sort of war games rooms where they do such scenario
planning, but they haven’t been talking about it, besides, their objectives may
be different.

Some say we face a deflationary era, as with Japan, others say the above will
lead to (hyper)inflation as the US attempts to bail everybody out, including
themselves. Many trillions of dollars have been “created” at the stroke of a
mouse in the past few years (5-10 trillion?) by the Fed, these are currently
circling overhead in the stratospheric reaches of the stock, derivatives and
real estate markets. How and when these get turned into goods and services (aka
wealth) will have an effect on the inflation rate. This seems a natural starting
point for the model, as an American bear market is the imminent event and
potential primer for all the rest.

A few references:

US Stock Market Crash Index:
This mechanical index went on “Crash Alert” (-10) status Dec 19.

Pictures of a Stock Market Mania:

William Fleckenstein, The Contrarian:

Interesting articles, grain of salt required.

Interesting links.

Extraordinary Popular Delusions And The Madness Of Crowds
By Charles MacKay:
The entire text of this 1841 classic is online.

Forrest Bishop
Interworld Productions, LLC
Institute of Atomic-Scale Engineering

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