“Irrational exuberance” and “Bubblenomics”
April 26, 2000
There are two rules of behavior in the stock market:
Rule no. 1 is all participants want all other participants to follow: DON’T PANIC!
Rule no. 2 is each participant must be careful to follow: PANIC FIRST!
The Federal Reserve Chairman A. Greenspan once has warned in the congressional hearing that the upsurge in the stock prices, especially technology one, would be an irrational exuberance for the average investors and history will judge whether the expectation of sharply higher profits for technology companies that has driven the gains in their share prices was prescience or wishful thinking.
Another conventional economists have coined the new word, bubblenomics that the stock market becomes irrationally saturated with bubbles where earnings and price considerations take a back seat to mouse clicks and momentum buyers.
Bottom line is that most of the investors know the unprecedented upsurge in the tech-stock prices is artificially propped up, and since everyone has been making so much money no one wanted the music stop in the game of the musical chair, until recently the money managers for the mutual funds, big investors and hedge fund traders who were egged by the Feds pull the plug on NASDAQ when these specialists who manage hundreds of billions of dollars have feared that too much capital was drained from old economy (Dow Jones Industrial blue chips and S&P index companies) into the new economy (over-inflated internet stocks) where the prices to earning ratio were running up to 200 times compared to 30 times earning for the S&P 500.
Nobody wanted the party to end although the investors have known clearly that 80 percent of 350 companies that have gone public under the guise of the Internet are not showing profits. Take Amazon.com for example…which is a distribution company that typically generates 2 percent profit margins. Broadcast.com, which produces nothing itself but simply plays (streams) low-quality audio and video generated by other companies, had revenues of $11.4 million in the first nine months of 1998 placing them in the category of small-to-medium-size businesses, a group of generally struggling firms. The firm spent $23.1 million in the same period, a figure twice the size of its revenue. The most of the company’s revenue is from short-term advertising on its website, radio and TV.
In other words, the companies are young, small startup facing immense risks and uncertainties, and the skyrocketing stock price is entirely speculative.
It is the conventional wisdom that the stock market raises capital for investment. In fact, it does not! Most of the trading in the stock market is of existing shares, not newly-issued ones, and the fluctuation in the stock prices are overwhelmingly manipulated by the institutional investors, particularly pension funds, hedge fund companies like infamous George Soros, and major Securities Brokers like Morgan Stanley Dean Witter and Goldman Sachs, not by the small investors like Tom, Dick and Harry who would collapse instantly when the brokerage firms demand additional deposits from them on the margin calls.
That is why it is good reason to believe that neither the sell-off nor recoveries were simply the result of the blind operations of the market. The last week’s loss of NASDAQ was due to the major Wall Street movers have orchestrated the sell-off to drive down the value of vastly over-priced Internet stocks, wiped out mid-size and smaller investors, and redirected cash flow to the more established and profitable technology companies as well as traditional old economy stocks.
Usually, there were no lack of reasoning why the stock market fluctuates suddenly and unexpectedly… the scholastic pundits and financial analysts have a field day to analyze and predict the market with the various index and figures that officially sanctioned by the establishment…consumer price index, inflation rate, Feds interest hike, profit margins, and so on.
However, nobody would dare to mention what has been going on the behind the thick door of the boardrooms where bankers, big rentier investors, and portfolio managers gather, initiate, and checkmate with strategy that balance their portfolio in every nook and corner in the stock market.
There was a concerted effort in the last week during sharp downturn of NASDAQ index that market specialists, like Janus Company, the mutual fund company which manages $310 billion, started to issue new buy orders for recommended stocks that were down as much as 20 percent a day, when they realize that they have become so intertwined with the Internet stock bubble, as underwriters of initial public offerings and other stock sales, that a collapse of high-tech stocks threatened their own future.
Wall Street investors value Internet companies not according to their profits but by sales revenues because most companies do not make money. Therefore, this put enormous pressure on Internet CEOs to make their revenue numbers look bigger than they actually are.
Take Priceline.com, highly valued web site that lets consumers bid for everything from airline tickets to hotel rooms to supermarket items, for example. They utilize the accounting gimmick to convolute the size of their revenue from actual revenue of $18 million to $152 million.
In other words, these major players in Wall Street drive down the small investors and bankrupt old retirees in such a concerted way that a disgruntled day-trader went berserk to kill other traders en mass in the United States.
But dot com billionaires want every small stock trader not to panic, keep holding, and keep buying this fictitious paper wealth. They advise that the market could go down more in the next few weeks, more in next year, but if you hold onto stocks for longer than that – until you drop dead – the market will return, during which average CEO makes money in a day as the average Joe Blow makes in a year.
This fictitious capital grows like a swelling malignancy of the entire society. Under the explosion of new wealth, there has been a quantum division between the rich and the poor in the world, putting all the resources, human and material, at the disposal of the high-income minority, while leaving a picayune amount for the low-income majority.
It is no wonder, then, that wealth has congealed so spectacularly at the top and with wealth comes extraordinary social power to buy politicians, pundits, and professors, and to dictate both public and corporate policy.
In addition, the day-traders, portfolio managers and shareholders that know nothing of businesses are increasingly influencing the management of the company demanding layoffs, investment cutbacks, and downsizing.
The government debt, no asset behind it other than a government ‘s promise to pay, is the valuable commodities in the eyes of creditors, and higher the deficit, happier the bankers and investors. The state remains safely in the back pocket of bankers whose treasury bonds become the safe house hoarding their treasures.
As for the South Korean stock market, it has completely lost its own operational engines to the Wall Street and parasitized on the fluctuation of Dow Jones and NASDAQ.
Since IMF bailout in the financial crisis, there has been a flood of speculative hedge funds and the mutual funds in the market ebbing and flowing freely along the profit margins at the mercy of “sell” or “buy” orders of Wall Street robber barons…that is, South Koreans are not the major players in the market any more and all the financial institutions like banks, investment and trust companies, and other major credit companies are managed and controlled by foreign managers according to a “Letter of Intent” signed by Korean Finance Minister and Michel Camdessus, Managing Director of IMF on May 2 1998. (The Document is now available to the public on the IMF web site. One would be surprised how shameful and devastating concessions the South Korean government has made to be rescued by the global money lenders.)
After the bankruptcy of Daewoo Corp, and the takeover of Samsung Motors by Renault, it would be no surprise that Hyundai Group are the main target from the institutional investors, speculative currency traders and hedge fund managers, who intently drive down the stock prices of one of Hyundai’s subsidiaries, cause the chain reaction of panic among other investors, and gobble up major stocks of the profitable Electronics and Motor Companies of Hyundai Group.
Someone said it is helpful to remember that among economic systems, capitalism is the manic-depressive patient. Exuberance, unbridled optimism, and euphoria followed by gloom, listlessness, and depression are the natural state of capitalist economies. But no matter how often the cycle is repeated, the patient always believes the latest boom will last forever, only to feel foolish again when the bubble bursts.
When the speculative capital poured into so-called emerging market that submerges it with the flood of the mutual fund, the patient becomes exuberant and optimistic in his life; trouble is the money could pour out faster than it poured in, the patient is on anti-depressant medication of restraint administered by bankers and money managers who are not accountable for any responsibility for the patient’s health. The state that was elected by the patient has already become powerless and spineless remaining inside deep in the back pocket of the Wall Street tycoons.
This maniac cycle may repeat globally for a while as far as the capital with its accrued interest flow back into the United States to feed its trade deficits and recycle back into the emerging market with higher interest rates that the submerged people up to their ears were able to pay back.