The story of Ivar Kreuger was the point of departure for an Ayn Rand play (The Night of January 16th) and it holds lessons for today. From MN Gordon at economicprism.com:
There’s an old Wall Street adage, you’ve likely heard it, “No one rings a bell at the top (or bottom) of the market.”
The bell, of course, is the signal to sell at the market top. Here we pause to take exception with this adage. As far as we can tell, bells do ring at market tops. Yet few hear them. Most people’s ears are plugged with the prospects of easy riches.
Bull markets often give way to manias…where an asset’s intrinsic value becomes less important than the hope that an overpriced asset can be later offloaded at a higher price to a greater fool. Certainly, irrational pricing based on greater fool dynamics is the sound of a ringing bell. Though this can go on for years.
The current ratio of total market capitalization to GDP (now over 200 percent) is most definitely the sound of a ringing bell. Another ringing bell is the $500 million batch in junk bonds recently sold by MicroStrategy for the sole purpose of buying bitcoin. These bitcoin junk bonds pay a generous 6.125 percent coupon rate.
How will MicroStrategy pay the coupon if bitcoin goes down? Will they sell more junk bonds? Will anyone buy them?
Do you hear any bells ringing?
At the moment (at the market top), few people do. These bells won’t be heard until after the market craters. In retrospect, it becomes obvious that, at the market top, bells had been ringing practically every day.
The sound of a bell ringing at the market bottom is much more grim. At real market bottoms, people kill themselves. That’s when the great frauds are revealed. And some former titans of industry are revealed to be great swindlers.
Today we look back nearly 100 years to one of the great Wall Street swindlers. We squint for parallels to the present. There is instruction to be found…and frauds to avoid…