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I open Richard Russells daily letter and it begins,
" January 19, 2007 -- Let's see, what's today's mega-deal? Wait, here it is. Morgan Stanley, the biggest real state investor among Wall Street firms, has just agreed to buy CNL Hotels & Resorts Inc., adding eight luxury hotels and resorts throughout the
Surely this is unsustainable, each day goes by with another deal announced and each one is done at a price that seems more outlandish than the previous one. Listen to John Mauldin comment on one such buyout (the largest REIT buyout in history) with some help from Charles Dumas from Lombard Street Research,
"Dumas first started talking about the Savings Glut in September 2004. His latest book is titled 'The Bill From the China Shop, How Asia's Savings Glut Threatens the World Economy.' (www.amazon.com)
So why is Sam Zell getting $37 billion at what is under a 5% return on current cash flow?? Because there is money looking for a home and returns. Dumas says US homeowners are borrowing less, so the savings glut means investors have to be and are willing to take less return on their capital. If you are a pension fund or insurance company, you have to put that money to work.
"The foundation of the flood of liquidity in the world (Chart 9 below) remains the Eurasian savings glut, now rising again after stagnating between 2005 and 2006. As long as deficit countries have sectors - business, households or governments - willing to borrow and provide the savings glut with a home, the flow of capital boosts asset prices, providing the incentive to borrow. This virtuous circle is the process that has underpinned Goldilocks. The problem is that it means stable, ontrend growth requires rising debt ratios to GDP."
"Ultimately this has to stop. The exhaustion of the debt capacity in US housing was always likely to be the beginning of the end of Goldilocks. It still looks that way - especially as the resumed growth of the Eurasian saving glut means the deficits to be absorbed by borrowers are now larger. But the slowdown in the US economy has not been a straight-line process, and the enlarged savings glut, and capital flow, is having a peculiar effect, in the absence of the previous US housing boom: it is in a sense forcing stock markets (and commercial property) into leveraged booms in order to create borrowing elsewhere, as the US household credit spree fades."
My take on all this madness is that the chickens will come home to roost and there will be a long period of I told you so, I also think this will happen a lot sooner than people currently expect.
The question I am now asking myself is, this madness does not seem any different to the madness of the tech bubble in the late 90's, yet the story seems to be so plausible to the man in the street and of course many fund managers, investors, and analysts.
So I find myself becoming more and more intrigued by the POWER of the herd, as if it was as obvious as it is to me and I am no great maven on the economy and markets then it should be just as obvious to the experts if not more so. The only other option is that this is not madness but the new world order, which would make me mad.
If it turns out to be the latter then I will have to be the one admitting that I was mad in the end as I should have listened to all the experts as well as the evidence at hand (a continually rising stock market and economy).
Bottom line, trading the markets in its current form is extremely difficult and at the end of the day there has to be one result, that being someone is mad, in this case I hope the masses are madder than me.
Mickson
