Loaded Up on Leverage

The market is approaching an unprecedented -- and dangerous -- crossroads: Not only is there enormous confidence in the notion of another long worldwide economic boom abetted by non-U.S. influences, but like in the late 1980s, there is a bubble in credit availability, credit costs and in investor activism -- i.e., buy stock, make a 13-D filing (a la Icahn), make waves and make a boatload of money.

It can't be that easy. (Remember the aborted United Airlines takeover in the late 1980s that brought an end to the speculation surrounding junk-bond financings?)

Moreover, leverage, as in past cycles, is playing a much more active role in today's hijinks. But, leverage is always the monster that kills, and it will likely have a primary role in upsetting this cycle as it has had historically.

Of course, in the last stages of an accelerating trend in prices, the consensus view always seems to look smart. Think back to the last two bubbles: the housing bubble that was formed in the early 2000s, and the stock market bubble emanating from the late 1990s.

To paraphrase Broadway hoofer Ethel Merman in Gypsy, "everything was coming up roses" for home prices and for Internet stocks.

Rose-colored glasses were the fashion du jour as the investment community was convinced of the new paradigm and long boom in home prices (and activity), in the unparalleled prospects for technology/Internet and in almost a zombielike trance in listening to the proselytizing by Wired magazine's Peter Schwartz and Peter Leyden that a long and uninterrupted economic boom was inevitable. "We're facing 25 years of prosperity, freedom and a better environment for the whole world. You got a problem with that?"