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The Sicilian Expedition Ancient Philosophy. The Sicilian Expedition 18.26 With this Nicias concluded, thinking that he should either disgust the Athenians.

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Presentation on theme: "The Sicilian Expedition Ancient Philosophy. The Sicilian Expedition 18.26 With this Nicias concluded, thinking that he should either disgust the Athenians."— Presentation transcript:

1 The Sicilian Expedition Ancient Philosophy

2 The Sicilian Expedition With this Nicias concluded, thinking that he should either disgust the Athenians by the magnitude of the undertaking, or, if obliged to sail on the expedition, would thus do so in the safest way possible.

3 The Sicilian Expedition The Athenians, however, far from having their taste for the voyage taken away by the burdensomeness of the preparations, became more eager for it than ever; and just the contrary took place of what Nicias had thought, as it was held that he had given good advice, and that the expedition would be the safest in the world.

4 The Sicilian Expedition All alike fell in love with the enterprise. The older men thought that they would either subdue the places against which they were to sail, or at all events, with so large a force, meet with no disaster; those in the prime of life felt a longing for foreign sights and spectacles, and had no doubt that they should come safe home again; while the idea of the common people and the soldiery was to earn wages at the moment, and make conquests that would supply a never- ending fund of pay for the future.

5 Sicilian Expedition With this enthusiasm of the majority, the few that liked it not, feared to appear unpatriotic by holding up their hands against it, and so kept quiet.

6 The Icarus Paradox The 'Icarus Paradox' was coined by Danny Miller who observed that great success often precedes severe decline. The Greek word for this was hubris, or pride.

7 The Icarus Paradox Icarus attached wings made of wax and feathers to his shoulders and flew up into the sky. He flew higher and higher, until he came close to the sun, which melted the wax and Icarus fell to his death in the Aegean sea. What made him soar was the very reason for his decline.

8 The Icarus Paradox The same happens to organizations. Successful organizations tend to give more funding, support and status to the people they perceive as the basis of their success (for instance, a technology department).

9 The Icarus Paradox People with other ideas, from other departments, lose funding and status and decrease in number, making the organization more homogenous, 'simple', and inert.

10 The Icarus Paradox The organization loses its sense of urgency and becomes blind to opportunities and threats from a changing environment.

11 The Icarus Paradox Eventually, performance declines, at which time the alerted organization begins watching the environment again only to find out that it is too late and dramatic restructuring is needed to get back on track.

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15 The history of stock markets is one of long bull markets and long bear markets. We believe that U.S. stocks are in a secular bear market - one that could last years, rather than months. Secular bear market underway

16 Bull and bear market cycles Here’s a quick overview of the last 100 years: : Stocks entered the 1900s trending higher, and rose 35% in less than three years. But stocks swung wildly, peaking in By August 1921, the broad market was 40% lower : In the famous bull market of the Roaring ‘20s, stocks returned more than 400% : Stocks plunged, recovered significantly by 1937, but by 1948, stocks were down more than 50% from the ’29 peak.

17 Bull and bear market cycles… : Stocks prices produced a six-fold increase, culminating in the Nifty-Fifty market of : The S&P 500 was lower in August 1982 than in January Adjusted for inflation, the results were far worse : The S&P 500 index rose by a factor of 12. The NASDAQ ended the 90s at 21 times its 1982 level.

18 Most stock returns come from secular bull markets Based on S&P Composite , dividends not included Annual price change for % Long term compound annual price change from Secular Bull periods only (last century) Compound annual price change, no Secular Bulls Excludes: , , Excludes: , , % -1.1% (Simple ave. +2.1%)

19 1966: The next decade saw the most severe bear markets* in the last half of this century: : -34% : -47% (Between December 1968 and December 1974, the unweighted Value Line Index of 1700 stocks lost more than 74%) 1929: The next decade saw the 2 most severe bear markets* in the first half of this century: 1929 peak – 1932 trough: -86% 1937 peak – 1938 trough: -54% *Based on S&P Composite, dividends excluded ’29 peak to ’38 trough: -73% Periods following secular bull markets can produce dismal returns

20 Secular Bear Markets can devastate investors $1,000 Year Initial# of Invested at InvestmentYears to Peak of RecoveredRecover Inflation adjusted recovery period, excluding dividends

21 We can conclude: Secular Bear Markets usually parallel the Secular Bull markets that precede them

22 Bear follows bull - another view:

23 What drives speculative manias? Credit excesses fuel speculative asset bubbles. In fact, all great speculative manias have been associated with rapid credit growth. The greater the credit excesses the wilder the speculation.

24 Installment credit, diluted gold standard, margin loans, lending against property U.S. stock market boom1920s Unregulated trust companiesKnickerbocker Trust Panic, New York 1907 Wildcat banking fueling fever for canals, land and railways Jackson Boom1830s Credit by unregulated country banksSouth American Mining Mania1820s Sword Blade Bank financing of stockSouth Sea Bubble1720 Banque Royal, bank loans for stocks, paper currency Mississippi Bubble1720 Establishment of Bank of England, coin debasement, expansion of bills of exchange British Stock Market Boom1690s Trading on credit notes for future deliveryDutch Tulip Mania1630s The following table from “Crunch Time for Credit? An inquiry into the state of the credit system in the United States and Great Britain” by Edward Chancellor highlights the source of credit fueling famous speculative manias.Crunch Time for Credit? An inquiry into the state of the credit system in the United States and Great Britain” Credit booms drive speculative manias Date Mania Source of Credit

25 Source: Crunch Time for Credit? An inquiry into the state of the credit system in the United States and Great BritainCrunch Time for Credit? An inquiry into the state of the credit system in the United States and Great Britain Credit booms and manias, con’t… Credit derivatives embolden banks, junk bonds U.S. and European Tech BubblesLate 1990s Currency peg yields cheap foreign financing, growth in non-bank lending Asian boom1990s Bank capital linked to stock holdings, growth in non-bank financing Japanese bubble economy1980s Junk bondsLeveraged buy-out mania1980s $91 bill. of post-dated checks fuel boom Kuwait stock market bubble1982 Date Mania Source of Credit

26 Was the late ’90s stock market a credit-fueled mania? According to financial historian Edward Chancellor, there are several indicators that a credit boom is underway and placing an economy at risk: Rapid credit growth Speculative buying (inflows) by foreigners Investment and/or consumption boom Decline in credit quality Financial liberalization Influx of new credit providers and increasing competition among them Zeal for lending against assets (rather than income) Concentration of risk Tendency by lenders/investors to underestimate risk What does a credit boom look like?

27 The ‘90s stock market certainly resembled other stock manias of the 20 th century

28 Here’s another sign of a mania % more equity funds in 5 years! Source: Investment Company Institute

29 In his book, “A Short History of Financial Euphoria,” Economist John Kenneth Galbraith outlines common features of a market mania. See if any of these sound familiar: Brevity of financial memory, disaster is quickly forgotten (S&L debacle, junk bonds, Japanese bubble, Mexico collapse, Orange County, Asian collapse, LTCM) Association of money with intelligence (Derision of those who question New Era market, elevation in status of CEOs, financial commentators, money managers) Arrival, development of something new (Internet, telecom and myth of increased productivity) Claims of financial innovation (Increased use of derivatives, Internet trading, home equity loans, minimum payment mortgages) Sound familiar?

30 Credit fueled our recent mania

31 The credit surge, another view

32 And another view

33 Credit flooded the corporate sector in the late ’90s, supplying financing to too many marginal companies and credit excess capacity, particularly in telecom. When credit growth slowed in these sectors, the Federal Reserve tried to buoy the economy by easing monetary and credit conditions further. The result was a middling economy and a bubble in the home mortgage sector. For the first time in memory, rather than retrenching, consumers took on more debt during the recession. Credit fueled our recent mania

34 Telecom helped business borrowings explode in the late ’90s

35 When business borrowing collapsed, the mortgage sector more than made up for it

36 Cash-out refis were key to the surprising strength in consumer spending

37 When the refi boom faded…

38 … home equity lending surged

39 …enabling the mortgage finance bubble to keep going

40 Bubble! The physical evidence of the bubble is obvious

41 For another view of the mortgage bubble, consider the dollars involved

42 Meanwhile, the mortgage bubble squeezes consumer income

43 And balance sheets bear the burden of excess

44 Despite credit-induced ‘wealth creation’ consumers are more leveraged to housing than ever

45 From the previous pages it’s clear that the credit bubble is ongoing. The Fed’s aggressive posture simply shifted the stock bubble to new sectors. Asset price inflation, which is dependent on credit, continued and has crept back into the stock market as well. What happens when the credit bubble bursts?

46 What will drive the economy once the desire to save returns?

47 Greenspan once had it right about how credit booms can distort an economy:  “The excess credit which the Fed pumped into the economy spilled over into the stock market - triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a constant demoralizing of business confidence.”  Alan Greenspan, Gold and Economic Freedom, 1966Gold and Economic Freedom

48 Have we had our bear market? Valuations never reached “bear market” levels The following charts reveal that stocks remain expensive by a number of measures.

49 Dividend yields unattractive

50 Stocks look pricey relative to gold

51 S&P Industrials price to book value Bond yield/stock yield Source: Elliott Wave InternationalElliott Wave International We are here! This chart combines price- to-book with dividend yield

52 Even over long periods, high PEs result in sub-par returns S&P 500 PE = 20 as of Mar Source: Crestmont ResearchCrestmont Research Poorest return decile burdened by periods with high starting P-Es

53 Net Cash Flows into U.S. domestic equity mutual funds: 1995 – 2001: +$1,256 billion 2002: -$28 billion 2003: +$152 billion 2004: +$177 billion Still no capitulation that typically follows a Super Bull Source: Investment Company Institute

54 History has taught us: Long bear markets are a natural outgrowth of long bull markets Stocks remain expensive. Even if earnings grow at historic rates, stocks could provide poor returns over the next 5-10 years. Credit is the driver of speculative manias. Historically, once credit becomes less available, asset prices suffer.

55 The Bubble Trouble Remains “Since early 2000, the US has gone through a mild recession and the most anemic recovery on record. Over that same period, America’s net national saving rate has plunged to a record low, the household sector debt ratio has risen to an all-time high, and the US current account has gone deeper into deficit than ever. All this smacks of a US economy that is living far beyond its means, as those means are delineated by domestic income generation. Far from purging the excesses of the late 1990s, the United States has upped the ante on structural imbalances as never before.” Stephen Roach, Morgan Stanley 9/2/03


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