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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

BALTIMORE, MARYLAND 
MONDAY, 23 JULY 2001 

 

Today:  Victims of Greenspanism

*** Amazon...further down the river... 

*** A useful phrase for 2001-2002: "We did not fully 
comprehend the risk..."

*** Wall Street on the defensive...wine futures...more 
losses in Japan...$10.4 billion for Yahoo?... and so 
much more...

Oh Amazon...another quarter gone by and Amazon.com 
has gone nowhere but down the river! 17 consecutive 
quarterly losses. More than 5 billion books sold...and 
AMZN has 50 cents of debt to show for every one of them. 
What a company!

But Jeff Bezos' monster is just a sideshow. The 
real show is taking place in the credit markets...the 
economy...and the Dow.

Mortgage lenders Freddie Mac and Fannie Mae - the 
freaky Siamese twins of credit creation - are 
practically holding the economy and the Dow up alone. 
Fannie's portfolio of mortgages grew by 70% over the 
last 3 years, while Freddie's holdings grew by 134%. And 
Freddie, ever eager to help out a central banker in 
distress, has bought 180% more debt in the 2nd quarter 
than the same period a year ago. (see: Has The Fed 
Abdicated Its Authority?)

We "did not fully comprehend the risk" said the 
CEO of AMEX recently, explaining how the company took a 
$826 million hit on its junk bond investments. AMEX 
expected the bonds to default at a 2% annual rate. 
Instead, 8% of them are going bad each year.

Whether for use by homeowners with too much debt, 
shareholders with stocks that are too expensive, 
foreigners with too many dollars, or financial 
institutions with elaborate derivative positions...the 
phrase - 'we did not fully comprehend the risk' - may 
come in handy.

But, Eric, what's shakin' on Wall Street?

*****

Eric Fry reports from New York:

- Last week, Wall Street featured a lot of "sound and 
fury, signifying [next to] nothing." The Dow gained a 
meager 37 points over five trading days and the Nasdaq 
fell a slightly more significant 55 points.

- The week's overall message seemed to be that the slow-
down is not over just yet. Although Nokia offered an 
upbeat forecast, AOL, Intel and EMC each told a tale of 
woe. When the dust settled, EMC's share price had been 
sliced in two.

- "All of Wall Street is on the defensive," The NYTimes 
reports. But not because the stock market is struggling. 
Rather, because the legions of investors who are only 
now coming to realize that "their decimated portfolios 
may never come back" are looking for someone to blame. 
Next step: sue your broker.

- Most of the unfortunate souls who lost a bundle in the 
stock market should probably begin their blame game by 
looking in the mirror. Greed loses far more money than 
any wire-house broker ever could. Couple a client's 
greed with a broker's greed and it's bye-bye savings.

- But then, following the timeworn American custom, it's 
'hello lawyer'. To be sure, avarice is a dominant part 
of Wall Street's DNA, but suing brokers for being self-
serving is like trying to blame a rattlesnake for being 
poisonous. 

- Nevertheless, Wall Street firms are the new Phillip 
Morris of American courtrooms - purveyors of a known 
toxic product, the victims of which claim ignorance when 
they suffer the consequences of using it. 

- Says the New York Times, "...investing is not as easy 
as it looks." Now they tell us!

- Wine futures will begin trading on - where else - the 
Paris bourse on September 14th. The Winefax futures 
contracts will cover three different price levels for 
French Bordeaux wine.

- Apparently, the hand of fate isn't finished slapping 
the Japanese around. For more than a decade, asset 
values from stock to real estate to golf club 
memberships have been spiraling downward. At the same 
time, the industrious nation's economy muddles 
along...on its good days. And now this:

According to the Ministry of Health, Labor and Welfare, 
Japan's Pension Welfare Service Public Corp. suffered a 
loss of 2.31 trillion yen ($18.8 billion) in the year 
ending March 2001 - the national pension fund's largest 
one-year loss ever... and that's saying something, 12 
years into a bear market.

- You gotta love Chris Byron. The inimitable financial 
writer for the New York Observer offers a unique take on 
Yahoo's latest earnings. "The fact is, the only 
worthwhile business Yahoo now has going for it is 
collecting the interest it has been earning on its $1.75 
billion of cash and marketable securities," says Byron. 
"As such, Yahoo Inc. isn't really a business at all; 
it's just an enormous money-market fund that employs 
3,000 people engaged in wasting shareholders' money...

- "Just how overvalued is Yahoo, really?" Byron asks. 
"Yahoo is being valued at somewhere around $10.4 
billion. So if someone came around and offered you the 
following - $10.4 billion in cash, or all of Yahoo Inc. 
- which would you take? Enough said..."

***** 

Bill back in Charm City:

*** "ENERGY IS DONE. Sell it all," writes Dan Ferris, 
"Whenever people start talking about permanently high 
oil prices, you know it's all over. Oil will continue 
its century-long real descent. That's called progress, 
and it happens mostly when times are bad. The beauty in 
this is that human nature will never change, and this 
opportunity will come around every several years like 
clockwork. For now, it's definitely time to sell oil."

*** Meanwhile, my old friend, Scott Burns, urges 
caution: "'The End of Cheap Oil' - a landmark article in 
Scientific American in 1998 - asserted that global oil 
production would start to decline around the year 2010. 
Based on a global extension of techniques developed by 
geophysicist M. King Hubbert, the article showed that we 
were rapidly approaching the point where half of all oil 
reserves had been pumped out of the ground. The article 
also showed that most of the recent increases in oil 
reserves were political fictions, that new finds were 
smaller fields, and that global oil production would 
turn down as certainly as U.S. oil production had peaked 
in the late '60s."

*** "It should be noted that the authors [of the 
Scientific American article] are not members of the 
gloom-and-doom school," Scott continues. "They were 
careful to acknowledge alternative sources of oil that 
are, as yet, undeveloped. 'The world is not running out 
of oil - at least not yet,' they declared: 'What our 
society does face, and soon, is the end of the abundant 
and cheap oil on which all industrial nations depend.' 

*** "One implication: The energy jolts of the last year 
could signal that we are about to experience the 
economic boom of the '80s and '90s in reverse." 

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VICTIMS OF GREENSPANISM


Hang the black crepe. Bring out the gladiolas...

I can almost see the caskets, laid out side by side. 

If you have endured the last few days of the Daily 
Reckoning, you know the stiffs to whom I refer. For on 
Friday, I posed the question: upon whom will the 
deadweight of Greenspanism fall? When?

Force and fraud, the two weapons of modern government 
and managed currencies, are bound to cause some damage. 

Jeffrey Rogers Hummel explains:

"The pirates who plagued colonial waters until the 
middle of the 18th century enriched themselves with 
captured cargoes. If they sank merchant ships in the 
process, then the losses of merchants exceeded the gains 
of the pirates. Economists call this excess burden 
'deadweight loss'..."

All government actions - whether making war, taxing 
citizens, or forcing funny money and artificial rates of 
interest upon them - leave a path of destruction. Today, 
I take a peek into the open boxes of two of tomorrow's 
victims:

There, on the one side, is the investor - the poor soggy 
schmuck who was sunk by Wall Street and Fed 'liquidity.' 
Urged to 'buy, buy, buy' by shills like James Cramer and 
Abby Joseph Cohen, he went out and bought. 

What chance did he have? Figures from May show more than 
$17 billion of new money reaching equity funds. And 
these are not cheap stocks he's been buying. The Dow 
still trades at 25 times earnings. Despite the blow-up 
in tech, companies such as e-Bay trade at 170 times 
earnings. Loaded to the gunwales with these heavy 
stocks, he was sure to go under when the waves picked 
up. 

And there on the right, is the American consumer, the 
poor schlep - he broke his back trying to carry the 
entire world economy. 

Urged to excess by Dallas Fed governor McTeer, and low 
short-term interest rates, he did his best. Struggling 
with a greater burden of credit card debt and mortgage 
debt than the world has ever seen - he nevertheless 
tried to "spend, spend, spend" as if it were his 
patriotic obligation.

His situation had been hopeless for a long time. 

When Greenspan began cutting rates, unemployment was 
below 4.5% - lower than it had been since the late 60s. 
How could he ever expect that unemployment would not 
rise? Previous downturns had sent unemployment soaring 
as high as 10% - as recently as the early 80s. In the 
slump of '89-'92, the jobless rate hit 7.8%. 

What's the key to jobs? Easy - corporate profits. When 
profit margins come under pressure, managers cut 
payrolls. 

"The signs of an investment collapse are everywhere," 
wrote Dr. Kurt Richebacher in early July, "particularly 
in the steepest and most rapid slump of profits in the 
whole postwar period."

"Corporate America is in a deep earnings recession," 
observed Stephen Roach of Morgan Stanley, "and needs to 
cut costs. We went hog wild bringing in managers, and I 
think they're going to get slashed..." 

I examine the corpse in front of me for slash marks. 
Sure enough, there they are. But it wasn't the sharp 
pink slip that killed him. It was what happened next. 

Mr. Consumer could have cut back and hunkered down; he 
might have thrown away his credit cards while there was 
still a chance to save himself. But why worry? Wall 
Street and the news media assured him there would be a 
'second half recovery.' Instead of cutting back, he 
actually increased his indebtedness in the first half of 
2001. 

In 1980, the consumer had only about 60% as much debt, 
relative to his earnings. And he had more savings, too. 
But this guy, in the coffin before me, left no 
savings...he had no margin of safety. When he lost his 
job, he could no longer support the weight of 
Greenspanism. 

What a shame we have no suitable last rites...and no 
appropriate dirges or funeral services for those who 
have been blown-up by Wall Street, or drowned or broken 
by the Fed. Nor are there any placques...nor 
statues...not even a small white headstone erected to 
their memory. What a pity. For these two both heeded the 
call of duty just as any Johnny Reb, Doughboy or grunt. 
They went 'over the top' when they heard the whistle - 
buying stocks that were far too expensive...and 
borrowing more money, even when they already carried 
more debt than any trooper could bear. Surely, they 
deserve at least a memorial service...a few candles and 
a prayer? 

But wait...this is still in the future. 

The investor and the consumer are still alive. They 
still breathe and walk among us. Perhaps there is still 
time! Maybe they can avoid disaster...maybe it's not too 
late! But how? If they sell their stocks, the market 
will crash and everyone will lose. If they stop 
borrowing and spending, the economy will come crashing 
down...and they'll lose their jobs...

Oh well, at least we can prepare a decent wake and 
funeral oration. And a tombstone with these words 
chiseled out: "We did not fully comprehend the risk."

Your reporter in Baltimore...dusting off his black suit.

Bill Bonner

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About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and sends it off by e-mail before most Americans’ alarm clocks have buzzed. Many readers say it's the first thing they want to read when they get up—not only because it's informative and thought provoking, but also it's inspiring, in its own quirky and provocative way.

Of course, there's much more to Bill than his daily market commentary. He's also the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest . Since then, the company has grown to include dozens of newsletters focusing on health, travel, and finance. Bill has vigorously expanded from Agora's home base in Baltimore, Maryland since the early ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication subsidiaries include Pickering & Chatto, a prestigious academic press in London and Les Belles Lettres in Paris, best known as a publisher of classical literature in bilingual editions.

 

 
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Last modified: July 24, 2001

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