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By Robert Fitzwilson of The Portola Group

November 17 (King World News) - “The Largest & Most Spectacular Rise & Fall In History”

Although the chart below is difficult to read, what it shows is the performance of the Nasdaq 100, Dow Jones Industrial Average and Standard & Poor’s 500 indexes at the top, and the Russell 2000 Index below those two from 1995 to the end of 1999.

The top line shows the Nasdaq gained a staggering 426%, while the S&P gained 179%, the Dow Jones gained 144%, and the Russell 2000 gained 71%.  You can see the mania develop culminating in the collapse at the end of the decade....

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A lot of what drove the outperformance of the S&P 500 in particular was that the technology stocks became bigger and bigger percentages of the index causing indexers to then load up on even more shares.  That caused prices to rise again for those issues, creating a feedback loop that seemed to have no end.

As new companies came public at astronomical price-to-earnings multiples, infinite in many cases as there were no earnings, multiples became relative.  If a hot networking company was trading for 200 times earnings, the thinking went that the drivers of the S&P 500 -- Microsoft, Intel, Cisco etc, were dirt cheap because they were trading at a fraction of that.

We all know that it ended badly as the “tulip mania” valuations crumbled, but you can see in the graph how a mania in stocks can develop.  Once the mania begins, the pressure on the major pools of money is intense, so the managers of those pools must convince themselves that huge multiples are reasonable.

The debate today continues to center around whether or not the stock market is overvalued.  At the start of the 1980s, we saw single-digit PEs.  Interest rates were well into the double digits, so that probably was appropriate.  With interest rates having dramatically declined in the last 30 years, the current PE environment may be appropriate as well.  If we saw PEs of 100-200 in the late 1990s as money flooded into the “new world” of technology, who is to say that multiples in the 17-25 range cannot be substantially exceeded in this new world of zero interest rates.

While this mania will end badly at some point, we should not be surprised if stocks reach much higher levels.  Janet Yellen testified that it will be full steam ahead this week on quantitative easing.  In her mind, there is only one solution for our current mess, and that will be a growing economy driven by the blank check of quantitative easing.   There is even talk of creating negative nominal interest rates.

If we are seeing panic buying in art ($142 million for one painting) and gemstones ($83 million for one diamond), it is easily conceivable that we will see panic buying in equities before this is over.  Few can afford art and gemstones, but many can afford stocks and precious metals.

In a world of unlimited printing of money, the only lifeboats are real assets.  Cash and fixed income are guaranteed to lose money both in nominal and real terms.  From what we read about the Weimar experience, those who bought and held onto businesses that emerged later on were able to emerge themselves somewhat intact.  There are still plenty of quality companies that will look relatively cheap if unlimited QE continues.  It is an allocation that should be considered as a part of the overall portfolio.  Gold, silver, mining companies should be part of that mix.

Many responsible individuals and institutional strategists correctly assessed that a rising stock market driven by an historically unsustainable explosion in the growth of credit and fiat currency was very risky.  We are sensing that caution is being thrown out the window as greed and peer pressure replace fear and rationality.  There could very well be a spectacular melt-up just like what was seen in Germany in the 20’s.  Investors need to remember, however, that the dramatic rise in the price of stocks in that period was wiped out in one evening as the currency was reset.  There was no opportunity to sell.  We saw that in Silicon Valley at the end of the era.  Prices simply collapsed.

Silicon Valley is once again euphoric.  Unlike the era, a lot of the prosperity is being generated by companies with actual revenues and earnings.  However, the social media companies do remind us of that period.  Just this week, stories surfaced about a non-public company with no revenues turning down two offers to buy of $3 billion and $4 billion.

In sum, the Fed’s determination to print for the foreseeable future in unlimited quantities combined with an emergence of greed overtaking rationality suggest that the final manic phase could be at hand.  If we do get the final melt up, it will take the popular indexes to levels much higher than today.  Future generations will be writing about it in perpetuity as the largest and most spectacular rise and fall in investing history.

IMPORTANT - KWN has now released the fantastic audio interviews with Art Cashin and David Stockman and you can listen to them by CLICKING HERE.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The audio interviews with David Stockman, Art Cashin, Dr. Stephen Leeb, John Hathaway, Bill Fleckenstein, James Turk, Andrew Maguire, William Kaye, Gerald Celente, Dr. Paul Craig Roberts, Eric Sprott and Jim Grant are available now. Other recent KWN interviews include Marc Faber and Felix Zulauf -- to listen CLICK HERE.

Eric King

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