The last bears throw in the towel

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

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*** When the last bear throws in the towel…floating high on the giant swells of liquidity…

*** Too many clowns on stage…market risks are only worth it if you're already rich…

*** Moments of beauty don't make a city beautiful…a report on sorely missed fanfare…and more!

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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.

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."