Introduction

1999 was the most prosperous year ever especially in the financial markets in U.S. history. The stock market and other financial assets set new records and enormous wealth was created literally overnight out of thin air. Is the U.S. economy really that strong? Are corporate earnings and fundamentals really that good? Do they even matter any more? Have we finally reached that "new era," that financial Nirvana whereby asset values, like Jack's beanstalk, will grow to the sky overnight and keep on growing forever?

Are hard work and 8 to 5 jobs now outdated anachronisms of the "old era" to be replaced by a "new era" of day trading, instant riches and prosperity, and overwhelming financial wealth, affluence, and prosperity? Has the Internet, unlike Ponce de Leon's elusive "fountain of youth" become our perpetual "fountain of wealth" satisfying our every personal or financial whim or need?

This is now becoming the dream (or is it the delusion) of tens of millions of Americans many of whom have concluded that instant, pain-free wealth from "playing the market" is better than working for a living. We have finally found (like the "perpetual motion machine") a "perpetual money machine." All the old rules have been repealed. We are in a "new era" of perpetual wealth creation.

QUESTION: What is wrong with that picture?

ANSWER: It is a delusional psychology that emerges only once in many decades or even centuries at the peak of a speculative boom and blowoff. It is driven by rampant greed, a rampant something-for-nothing philosophy, and the very arrogant belief on the part of the masses that they are invincible, bulletproof, invulnerable to financial loss. It is a delusion and defies 6000 years of financial history. It always ends in a crash and financial disaster for its participants.

THE MOST MASSIVE MONETARY EXPANSION IN WORLD HISTORY

QUESTION:What has caused the present, largest ever-in-history financial bubble and stock market buying frenzy?

ANSWER: The most massive monetary expansion, the most massive injection of financial liquidity into a financial system totaling trillions of dollars in U.S. or world history. It has been done by the Fed, the U.S. Treasury, and other monetary authorities since 1994 but especially over the past 16 months since September, 1998. It has created the greatest speculative buying frenzy (in U.S. financial assets) since the ill-fated Tulip Mania and financial collapse in Holland in 1637. Only this mania is a hundred times larger.

In October/November '98, in the wake of the near-collapse of Long Term Capital Management, the Fed/U.S. Treasury and monetary authorities pumped over $200 billion in new liquidity into the U.S. financial system to prop up the faltering U.S. stock market. In the last 13 weeks of 1999, the Fed pumped in another $194 billion to keep the bubble market expanding and to insulate against a Y2K-induced financial collapse which the Fed desperately feared.

In the last 60 days of 1999, the Fed expanded the adjusted monetary base at an unprecedented annualized rate of over 48% - the highest in U.S. history! Much of that excess liquidity has flowed into the U.S. stock market. The public is now stampeding into stocks like at no time in history, with stocks that have no earnings or near term prospects for earnings (i.e., they are losing money) going up 10, 15, 20 or 25 times in 1999.

In November '99 alone, margin debt rose $24 billion to $206 billion a $65 billion or 46% increase in margin debt for the year. An explosion of derivatives trading in stocks has added massive leverage to the stock market. And that does not include all the indirect borrowing that has made its way into the stock market from an increase in mortgage and other debt for the household sector as well as unprecedented stock buybacks by the corporate sector.

Underscoring the present buying panic and mania is the fact that from October 27 to December 22 (less than 60 days) the Nasdaq grew 40% that is an incomprehensible $1.4 trillion increase in market value or new wealth. Over the past nine weeks, over $2 trillion in stock market wealth has been created.

Over the past 14 weeks, our already overleveraged financial sector increased its commercial paper borrowings another $123 billion to $1.1 trillion, while the broad money supply (M3) increased $230 billion to $6.8 trillion. We are presently seeing the greatest credit expansion in U.S. history and most of it is pouring into the stock market. Some is also beginning to pour into real estate.

ARE WE ENTERING HYPERINFLATION?

QUESTION: What is happening?

ANSWER: The Fed and the U.S. monetary authorities have triggered a hyperinflation which is currently manifesting itself in financial assets (primarily stock). It is now beginning to roll into real estate where prices in certain California real estate markets are now rising 25 to 35% per year. It is likely that at some point in the coming months, this hyperinflation in financial assets will roll into wages and prices. Indeed, industrial commodities were up almost 40% in price in 1999.

If the present hyperinflation in financial assets rolls into the real economy, our currency could be destroyed in a matter of days or weeks. This phenomenon is beginning to take hold all over the world. Hyperinflations are normally followed by financial/economic collapse and the rise of a dictatorship. The hyperinflation of the German Weimar Republic was followed by economic collapse and the rise of Adolf Hitler and the Nazi Third Reich.

WHAT IS A "CRACK-UP BOOM"?

Ludwig Von Mises, history's greatest free market (Austrian) economist, wrote in his epic work The Theory of Money and Credit about a concept he called the "crack-up boom." As he wrote: "The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system."

Dr. Frank Shostak, a leading Austrian economist and Chief Economist at Ord Minnett in Sidney, Australia, explained the concept of "crack-up boom." According to Von Mises, "whenever people are observing ever expanding money supply they start to form expectations that the purchasing power of money will fall. Once they become convinced that the monetary pumping will never stop and consequently prices of goods and services will continue to rise, they will spend their money as fast as possible," i.e., their demand for money will fall.

"Ultimately this could reach an extreme," i.e., no one wants to hold money and there is a flight to real goods. This Von Mises calls a crack-up boom. "In other words, the increase in the money supply that generates expectations of a fall in money's purchasing power leads to the fall in the demand for money. Eventually, prices of real goods are rising to such high levels that people don't have enough money to buy them. Consequently it is not possible to conduct monetary transactions. The monetary system breaks down."

When Von Mises wrote about credit excesses precipitating a flight to real goods (i.e., super or hyperinflation), he may not have envisioned today's stampede into stocks. Nevertheless, there are some strong similarities in his "crack-up boom" and in the stampede to convert money into stocks today fed and exacerbated by the Fed's promiscuous, non-stop monetary expansion. So we have the masses dumping cash to borrow more money to buy more stock. The same is beginning to happen in the real estate market and could begin to happen in commodities and other real goods including the much maligned, manipulated, and suppressed gold and silver markets.

The Fed may be losing control. Von Mises describes an accelerating situation which finally eventuates, wherein the monetary authorities must keep injecting more and more financial credit on an accelerating basis into the bubble to keep it going. When they slow it down, to stop the monetary inflating, the bubble collapses.

This is like a drug addict who must take ever increasing doses of drugs to maintain the same high. There is a principle of diminishing returns at work and if he levels off, slows down, or stops the drug intake, he will crash. The same thing applies in accelerating inflation, hyperinflation or a "crack-up boom."

For the first time since the 1970s, this writer now believes that there is the potential for high and rising inflation in the U.S. possibly leading to super or hyperinflation. A financial collapse will surely follow.

IN SUMMARY

Americans are still partying on the deck of the Titanic driven by raw unadulterated greed, materialism, pride and arrogance believing that nothing can touch them, nothing can bring them down. They are very wise and indestructible in their own eyes. They just dodged the Y2K bullet (or so they believe) or was it an iceberg? But they don't see that there are other, even larger icebergs directly ahead. The Bible says that "pride comes before the fall." Americans are a very proud and prosperous people and this writer suspects they are headed for a major fall in the not-too-distant future.

-- Dragnet (just@the.facts), January 14, 2000

Answers

We are within a few years of a collapse. Thanks for the info. Signs are everywhere and the people are asleep.

-- JACK (jack@aol.com), January 14, 2000.

Agreed Jack,Unfortunately it's going to take an extreme rumble to awaken them.

-- Dragnet (just@the.facts), January 14, 2000.

Jack, the collapse is sooner than you think. :(

-- dinosaur (dinosaur@williams-net.com), January 14, 2000.

"Americans are a very proud and prosperous people and this writer suspects they are headed for a major fall in the not-too-distant future."

I don't disagree, but I've been hearing just this kind of talk since the early 1970's. The big crash/wrath of God is always just around the corner, closer than you think, etc. etc.

I would ignore such talk if I could. I'm actually grateful that most folks DO ignore it, otherwise nothing would ever get done.

-- not living in caves (and@quite.grateful), January 14, 2000.

JACK be nimble, JACK be quick

JACK jump over the candle-chart schtick

-- (ohno@mr.bill), January 14, 2000.

Not living in caves

If you've read the post you would realize the situation at hand was not relevent to the 70's,60's,50's,etc.We've surpassed the mania of the 20's and even the "tulip craze"if you know what that was.I fear the dollar will be worthless in our time,meaning 10 years.I don't see how you can abandon the facts as heresay.

-- Dragnet (just@the.facts), January 14, 2000.

With all due respect, this is some of the most uninformed just plain wrong stuff I have read. Sir, you write:

"It is likely that at some point in the coming months, this hyperinflation in financial assets will roll into wages and prices. Indeed, industrial commodities were up almost 40% in price in 1999.

If the present hyperinflation in financial assets rolls into the real economy, our currency could be destroyed in a matter of days or weeks. This phenomenon is beginning to take hold all over the world. "

Okay, where is hyperinflation taking pace in the world? Care to name any countries? Didn't think so! Second, most commodities have suffered their lowest prices in history over the 90's, so a 40% increase doesn;t mean much, especially given changes in production techniques (e.g. more efficient use of commodities).

More importantly, hyperinflation doesnt appear all of a sudden, it would take some real mismanagement by the Fed to have this happen. Given the Fed's record and keen eye on inflation, I doubt hypreinflation has any chance.

I'm not even going to get into the inadequacies of Von Mises' theories, he is plain wrong in a lot of cases. Its okay to forecast hyperinflation or whatever, but you have to base it on facts, analysis and reasoning not just supplying numbers without any context.

-- not so fast Tonto (blah@blah.com), January 14, 2000.

Prepare for the coming hard times. Y2K was a test in which most people failed to prepare for the unknown disaster scenario. If you have prepared spiritually and physically, then you will be better off than the poor souls who scoffed at your common sense precautions. Do you truly believe you prepped in vain? No, you did not.

Do your preps in steady steps.

-- dinosaur (dinosaur@williams-net.com), January 14, 2000.

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I still agtree with you dinosaur (and the article). It is mind-boggling to watch, new records every week. Market rises 100 or more in a day and people just yawn.

Still prepping in a modified way.

-- Jon Johnson (narnia4@usa.net), January 14, 2000.

-- # 3 (fixers@re.us), January 14, 2000.

Tonto, Agreed,hyperinflation isn't something you wake up next to.As far as countries experiencing same I suggest you start with Russia and work your way forwards and back until it sinks in.As far as the Feds"keen Eye"let me tell you Kimosabee,the books are cooked and keen eye or not they couldn't see through all the smoke and mirrors for all the tea in China(tea means ICBM's).I didn't write the article I posted it.If you want backup it's out there but I'm not going to hold your hand and lead you to it.

-- Dragnet (just@the.facts), January 14, 2000.

Six minutes before the market closed today (Friday) I bought two February S&P 1450 Puts. for $2475.00 each.

Methinks I'll see a tidy profit as the next correction unfolds...

-- Joseph Almond (sa2000@webtv.net), January 15, 2000.

Dragnet:

With all due respect, whoever wrote that article needs to spend a little more time researching and developing a cogent argument. It may represent your views, but these views are better supported by some more solid evidence.

You mention Russia as an example of hyperinflation. Yes, I agree, Russia is a basket case. But it is hardley representative of the world's economies, especially Western economies. You suggest that the Fed's "books are cooked." Maybe, maybe not. That's not really strong evidence.

I'm not going to look for that article because, as I said, it doesnt provide a convincing, realistic case for hyperinflation. Therefore, I am not worried about it. A hard rain may fall, but there are weather forecasting systems that will warn us about it, and these systems are currently calling for clear skies.

-- not so fast Tonto (blah@blah.com), January 15, 2000.

Greetings Tonto, Clear skys it is.Currrent forecasts predict clear skys forever.However,long range forecast indicates a storm is forming in the east.As to cooked books,follow the "revised" numbers which aren't covered in the mainstream media but are part of government record.Numbers are reported in line with expectations then revised upward or downward prior to the following months numbers.The following months numbers are reported as up or down from the previous months"revised"numbers completely absolving the actual incline or decline.You're confused,I know,and so are the American people.In this market free money will become very expensive.

-- Dragnet (just@the.facts), January 15, 2000.

I do hope I can articulate what I want to say.The Fed is a private group.I dont know all the players,however this group has great power.They are making their loans to our Gov.,to our banks,to other govs. and their banks,and by that means indirectly to all users of credit.Our Gov. is now enslaved by this debt,it is a debt that probably has gone out of the range of ever paying.The people in this nation and world are also enslaved by their debts which in many cases will not be paid.Where did these folks at the Fed build their empire from?Why from the peoples money of course,from their fruit of labor.There is a plundering going on here but who is wise among you and can see it?I marvel at what I see.Debts are being run high and the leverages are great,this means a collapse will be very costly with many losing the fruit of their lifes work.So why not preserve at least what you have invested at least and leave in the rest if you wish to gamble.I see perhaps a very select few with the chips as this unwinds.Will you be wise or foolish with what God has given you???

-- J (jax@borg.com), January 15, 2000.

Joseph Almond: Long time no see. I'm "Logikos" from the Michael Hyatt days. I will be so bold as to say that you sold the puts too soon. The charts are VERY bullish at this point. I will explain in more detail where you erred. First off, EVERYONE is expecting a 1/2 point interest rate increase by Greenspan. So if Feb 1 and 2 comes and goes and he raises interest rates, you would expect the market to tank, right? Wrong. The market has already absorbed the news and priced it in long before the official release. So, if Greenspan raises rates 1/2 point (the most popular opinion), then see the market go down for half a day, then scurry back upward. However, if Greenspan pulls a surprise and raises rates more than 1/2 point, then watch out below! It will shock the market.

REVISED STOCK MARKET ANALYSIS

Two weeks ago the stock market looked bearish. At this point, it never looked more bullish. What started out as a "false breakout" recovered into an actual bona-fide upward move from being range-bound for almost a year. This charting phenomena will cause a huge buying spree in the coming weeks.

CAUTION!

Don't be a fool, but play smart! We are entering a dangerous phase in the markets. I'm not sure how many of you followed the Silver market umpteen years ago when they tried to corner the market, or the gold market back 20 years ago when it went to $800+ per ounce, or many other stock and commodities, but we are seeing the same thing happening to the stock market.

What is happening is that a frenzy is hitting the market. Y2K passed without much of a problem and good news abounds. The public is bidding up stock prices like never before. I SEE A FAST AND FURIOUS BULL TREND FOR THE NEXT SEVERAL MONTHS! The market is near vertical upward now, especially the NASDAQ.

WHAT WILL HAPPEN?

The market will blow off at some ungodly height. Then, just like Silver and Gold and the other markets that had it's heyday, it will crash hard.

WHAT TO DO?

I will invest like crazy right now, especially in high tech companies, and ride them up to the top. When it becomes unreal how much you made on them, SELL THEM! Do NOT buy and hold technology stocks right now, but enjoy them for the next several months.

Remember, it IS an election year. Stocks usually do well during an election year.

-- I AM (Trying@2B.Reasonable), January 15, 2000.

"ride them to the top."

I wonder how many people have gone broke trying to predict market tops? If this were as easy as you would make it seem everyone with a brain would be a millionaire.

At this point in time, the stock market IS in a monster mania, with no economic reason governing prices. Yes, you did say to sell when you get uncomfortable with profits. But, most people get carried away and hang on just a little bit too long. That is the mania of the market.

-- (4@5.6), January 15, 2000.

No, noo, you don't understand. You just buy stocks now, and then sell them *before* they crash. Tons of money to be made. *Easy* money.

Follow Me!!

-- Me (me@me.me), January 15, 2000.

Dragnet:

Thanks for the info on the revisions to the numbers -- I'll be sure to look that up. Still don't agree with Titanic analogy but I see where you're coming from. Guess it wouldn't hurt to be near a lifeboat just in case! Cheers.

not so fast Tonto -----------------

-- not so fast Tonto (blah@blah.com), January 16, 2000.