Midas commentary for April 7, 2000



Financial Times
April 8, 2000

Even the ringing tone of the telephone seemed unusual:
low-pitched and rasping. I picked it up with a degree
of instinctive fear -- and rightly so, because it turned out
to be a call from Mortimer Duhm, the arch-bear.

Bears are forced into hibernation for long periods;
then they burst out of their caves with renewed energy.
In Mort's case, though, it was a cold wind from the
markets that woke him up, not spring sunshine. "I see
that the London Stock Exchange has shut down," he
hissed, referring to this week's computer glitches.
"You remember that the last time it happened, after the
October 1987 hurricane, was only days before the global
stock market crash."

Wall Street was wobbling badly, I agreed, but there was
still plenty of resistance. After the 500-point
collapse in the Dow Jones Average on Tuesday and the 11
pe cent crash in the Nasdaq index, the markets bounced
straight back again.

"Yes, the manipulation continues for the moment,"
snapped Duhm. "It was suspiciously similar to the
dramatic recovery in October 1998. Wall Street now
believes that the U.S. government and the big
investment banks will always organise a rescue, helped
by the occasional Saudi billionaire. But moral hazard
is piling up and time is running out.

"The bull run has become ever more intense and
concentrated, finally climaxing in an eccentric
technology bubble. The old economy had plainly become
overpriced, so the concept of the new economy was
invented by Wall Street and Alan Greenspan, with stock
market ratings justified by ever-rising prices. But it
has become a vast Ponzi scheme."

I was aware, I said, of all the conspiracy theories
about the role of the U.S. authorities in fueling the
great bull market, which had done so much to restore
President Clinton's popularity. But why, then, was the
U.S. government threatening to break up Microsoft, the
biggest technology company of them all?

"It's simple," snapped Duhm. "The financial and legal
sides are just not working on the same wavelength. The
whole bubble has been pumped up by the U.S. Treasury
working in cahoots with the Federal Reserve. It began
in the mid-1990s as an idea for boosting economic
growth. Then it got out of control, and has regularly
had to be propped up through liquidity injections and
interest rate cuts."

It was certainly interesting, I replied, that bodies
like the Institute of International Finance were
accusing the Americans of generating economic fragility
and encouraging wild volatility in asset prices. The
current account deficit had hit $28 billion a month.
You could add that an incredible binge by American
consumers was in progress and the U.S. was mopping up
the world's savings. The surge in the oil price was an
early warning signal; but that was easily presented by
politicians as the fault of greedy sheikhs rather than
the American love of unnecessary off-road gas guzzlers.

I remembered that the last time I talked to Mort Duhm,
he was obsessed with alleged similarities between
Thailand, which crashed in financial ruins in 1997
after a currency collapse, and the United States. All
that had happened since, though, was that the United
States had boomed ever more strongly, hitting a 7
percent economic growth rate by late 1999. Even so,
Duhm insisted: "We are getting very close to the edge.
Being the world's biggest debtor is safe only when you
have complete political mastery.

"The Asian problem was solved by transferring the
financial imbalances to the United States itself. That
is a patch-up, not a solution. The Americans have
squared the circle temporarily by persuading foreigners
to invest in U.S. technology. But now, that illusion is
collapsing. The United States depends on foreign
governments being willing to keep piling up dollar
assets -- especially Asian countries and oil producers.

"True, the United States deliberately left Saddam
Hussein in power in Iraq to keep the Saudis and
Kuwaitis frightened and submissive. That's recently
helped to buy the Americans time over the oil price.
But now they face China, which, through its massive
trade surplus with the United States, has acquired an
economic weapon: It can attack the dollar as part of
the political battle over Taiwan."

"Hold on," I replied. "You could also argue that China
has acquired a big stake in the dollar and needs to
keep it healthy. I'm rather more interested at the
moment in the internal risks. Investors have chased
ever more risky investments, in a classic mania. Safe
companies have collapsed in price. As we have seen in
the past week or two, the risks of equities have
increased. Logically, the prospective return must go up
to compensate, which is another way of saying the
market must begin again from a much lower level."

"Yes," said Duhm, "and it will wipe out many investors
in the process." I could just imagine the rare smile on
his face. "Watch those hedge funds, in particular.
Julian Robertson, who has just shut down Tiger
Management, was not typical but he demonstrated the
level of instability. This was an orderly withdrawal.
Just imagine what will happen when real disaster
overwhelms some of the others who have been leveraging
their positions in technology stocks. This week there
have already been signs of forced selling by small
investors financed by margin debt, but, when the big
funds collapse, the impact will be much greater."

Perhaps so, I answered, but should we be so afraid of a
stock market crash? Admittedly, the 1987 collapse had
hurt quite a few investors, but the underlying
economies had continued almost unaffected. The worst
aspect was that the central banks had overcompensated
by cutting interest rates at the time, which had proved

The line began crackling and Mort became more and more
difficult to hear. "Irresponsible credit growth and
stock market gains have fuelled this U.S. consumer
boom. There's a 20 percent growth rate in real estate
lending," he snapped. "When the bubble bursts, there
will be colossal bad debts and a slump in demand. But
the Fed won't be able to cut interest rates because the
dollar would tumble and inflation, so far suppressed by
cheap imports, would soar. My new web site has the
detailed arguments."

The line got worse.

"Disaster.... derivatives.... depression...." He finally
faded out. I didn't complain to the telephone company.

Mort certainly provides a challenging alternative to
all the bullish talk that comes out of the stockbroking
fraternity. Sometimes, I think that, if he didn't
exist, I would have to invent him.