*** Rally Fizzles...no follow through on Greenspan boost
...is the Greenspan Put shot?
*** The dollar gives back most of Wednesday's gains...
*** "When Stuff Happens..."...what does Greenspan know that
we don't?...'How to Survive the Slump'...and more!
*** "Yesterday's Rally Fizzles" announces the headline on
TheStreet.com. After a spectacular run-up on Wednesday -
following the Fed's 50 basis point cut - neither the Dow
nor the Nasdaq could follow through.
*** The Dow closed down 33 points - on huge volume. The
Nasdaq lost ground too - down 49 points. The Internets fell
3%. Could investors just be pausing for breath before
another big move to the upside? Or has the Greenspan Put
been shot?
*** We'll know soon enough. Ominously, while the Dow and
Nasdaq at least held onto most of their gains from
Wednesday, the dollar fell sharply against the euro. On
Wednesday, the dollar registered its biggest increase
against the euro ever. But 24 hours later, global investors
must have realized that lower rates in the U.S. are not
good for the foreign exchange value of the dollar.
By the end of yesterday's trading, the euro was back to
94.71 cents.
*** "Asian Investors Sense Alarm in Fed Move," a Bloomberg
headline informs us. "Why now and why 50 basis points,"
asks Ng Cheong Lip, a Singapore fund manager, "Maybe the
situation in the U.S. is really bad."
*** The last time the Fed cut rates between meetings of the
FOMC was during the Russian default crisis of Oct. '98. Are
there other big defaults coming?
*** The worry echoed around the world as investors waited
for another shoe to drop. Could there be a size 12, EEE
problem - like the Long Term Capital Management crisis -
about to hit the trading floor? Might there be a major
financial institution about to fail?
*** "What does Greenspan know that we don't?" asked analyst
Paul McCulley. "When stuff happens, the Fed eases,"
McCulley notes, leaving investors to think that Greenspan
is always ready to rush in and save the day with lower
rates. And if you look at a chart of stock prices during
Greenspan's tenure you can see that each time stocks were
threatened - the Fed dropped rates. Naturally, investors
have come to expect help from the Fed at critical moments.
More below...
*** "I consider Greenspan a menace to society," writes
William Fleckenstein. "Rather than talking about people
managing their risks, he seemed to embrace the new era. My
complaint with him is not yesterday's ease, it's the
implication that he is bailing out the stock market and
once again 'writing a put for the stock market'."
(see: Rate Cut Rally, A Day Late And Maybe A Dollar Short)
*** A quick, gratuitous opinion: Greenspan's rate cut has
given investors a marvelous opportunity - to get out of
overpriced stocks. Sell the rallies.
*** California's largest utilities are on the verge of
bankruptcy - but everyone knew that. And they're not likely
to be helped by 50 basis points. In fact, few people will
get much out of it. Again, more below....
*** Curiously, breadth was decent yesterday - with 1590
stocks advancing on the NYSE and only 1366 declining. And
only 7 stocks hit new lows, while 272 hit new highs.
*** The Financial Times reports that PC sales in December
fell 2%; PC sales have gone down for the last 5 months.
*** Did I recommend a coal company to you last year? I
should have. The FT also reports that coal has been in a
bull market since July of '99 - rising from $26.55 per ton
to $42.45 recently (coal delivered in Northern Europe).
*** The January 8th cover of TIME magazine tells us "How to
Survive the Slump." But magazine covers are notorious
laggards. If TIME editors are talking about 'the slump', it
must be almost over.
*** "The last big winner from Time," writes Caroline Baum a
Bloomberg columist, "was its selection of Jeff Bezos as Man
of the Year in December 1999. Bezos, the perennially perky
CEO of Amazon.com Inc., an on-line retailer for whom profit
is a motive, not a reality, was anointed at a time when
Amazon's stock was trading at $97, near its all-time high
of $106.69 set on Dec. 10. Amazon is currently down 84
percent from its high at $17.56."
She continues: "Examples of other classic magazine covers
that provided good sell signals are:
- Time magazine's 'Interest Rate Anguish' in 1982, ushering
in one of the biggest bull markets in bond market history;
- Business Week's 'Trouble in the Government Bond Markets'
on May 28, 1984. In the following two years, 30-year bond
yields were cut in half to 7 percent;
- Time's Nov. 9, 1992, cover story, 'Can GM Survive?' GM
stock returned 60.5 percent in the following 12 months;
- Time's counter, 'Detroit Shifting into High Gear,' a
December 1993 cover story, one month before GM went into
reverse;
- The Economist's March 6, 1999, cover story, 'Drowning in
Oil,' predicting $5 crude. Crude oil was trading at about
$13 at the time and marched relentlessly higher to $37.20
in September 2000."
*** A careful reading of the TIME article shows that the
editors have not lost their touch. "If you own stocks,"
they write, "the worst is over. ...Now grab some bargains
on cars, mortgages and investments." What a relief. I was
afraid I would have to change my whole perspective. But no.
Since TIME's editors tell us the slump is over...we can be
sure it is just beginning. What's more, it will probably
not be a slump at all - but a catastrophic financial
collapse.
*** "As a small, but concrete, indication that the Winter
of Woe is starting to bite," writes Alex Green, "consider
this: In Potomac, (Montgomery County) Md. as you know, net
worth is (or was) extremely high. Yet, our local library is
unable to keep the Wall Street Journal from being stolen.
I'm guessing but the odds are that some poor sod ...has
stocks to check and A) can't afford to subscribe to the
paper but B) doesn't want to stay in the reading room where
people can see him cry."
*** Yesterday evening, after work, I helped Maria, 15, with
her math. The problems were simple - if a product sells for
11 francs and 20 centimes including sales tax...and 10
francs wholesale, what is the sales tax rate? But some
people have a mind for math and some don't. "Those sound
like fun," said Henry, 10, a bright, cheerful, figuring
kind of look on his face. "Can I do some?" But Maria's face
was blank. "Sales Tax Rate? Hmmm...was that an American
movie...or a song by Fiona Apple?"
*** Well, Benoit called the countess...and then paid her a
visit. "She was very friendly," he reported. "And she said
she would happily sell the fireplaces. But the French
Commission on Historic Monuments has seized the property.
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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Greenspan's 50 basis point rate cut triggered an immense
rally on Wall Street. The announcement took place just
after noon, while fund managers and analysts were eating
their customers' lunches. Before the sun set on Wall Street
investors were about $900 billion richer. On paper.
What more proof could we want that Alan Greenspan can work
miracles...that he can create wealth out of thin air?
And yet, who knows, in a few more trading sessions that
wealth may be wiped out...and more to boot.
The problem with humankind - to start this letter off with
the proper profundity - is the same as the problem with the
New Era itself. The New Era required a new, digital man to
make it work - one who would respond rationally, logically,
and unemotionally to whatever came his way. He would simply
add things up - as a computer might...and come up with the
right answer every time.
But we homo sapiens analogos don't operate that way.
Instead of ciphering the data, we try to make sense of
things by comparing new information to other things we
think we understand.
We don't say, "the stack of wood was 2.235 meters high." We
say it is "as high as a pile of 15 tort lawyers..."
We don't know precisely how thick each tort lawyer is...but
it doesn't matter. We only know things by analogy and
metaphor...and can imagine how much nicer things would be
if tort lawyers were stacked.
Human minds, except for those of Wall Street analysts, are
flexible enough to absorb almost any new set of facts into
the nuance of known metaphors. But the trouble is that the
metaphors are never perfect.
In the popular imagination, Alan Greenspan is seen as the
pilot at the controls of a vast airplane. He can lower the
flaps or raise them - according to his wont. If the plane
flies too high, or too low, it will be because of 'pilot
error' - because Greenspan reacted too much or too little.
But the U.S. economy is not an airplane. The metaphor is
inadequate. The economy is far more complex...infinitely
complex, in fact. And in one critical respect, it is unlike
any machine ever made: it anticipates the pilot's moves -
and resists them.
"A common characteristic of financial crises," wrote Henry
Kaufman in his recent book of memoires, "is that most
market participants fail to anticipate them. If they did,
the crisis wouldn't materialize, for the majority of market
participants would take countervailing actions that,
collectively, would mute the developing turmoil. Only a few
see the storm approaching. The vast majority - after
contributing to the making of the crisis in the first place
- are caught off guard when the tempest hits, and suffer
the consequences accordingly."
Alan Greenspan is reacting to what may or may not turn out
to be a crisis. No one doubted that Greenspan would cut
rates. The only question was when and by how much. And
since everybody knew what the Fed chief would do - months,
and even years, before he actually did it, they already had
priced the Greenspan Put into their investment decisions.
Those who believed Greenspan would lower rates - and that
lower rates would make stocks go up again - were already
fully invested. The rate cut had been discounted by the
market months in advance, in other words. And since it had
already been discounted - it will change nothing.
The only surprise in Greenspan's move was the timing. He
might have waited a few weeks for the next FOMC meeting.
The real surprise will come when the analogy proves
misleading. Greenspan has opened the throttle and raised
the flaps. But will the plane go up?
If liquidity were like jet fuel, the engine would roar and
the plane would power higher. But it is not. It is more
like pig food. Put it in a bucket and hold the bucket up to
a pig's snout - and you may be able to lead the animal
where you want him to go. Then again, you may not.
There is a phenomenon in economics known as "spent out
demand." It is what happens after people have been on a
spending spree.
"I don't care how low you take mortgage rates and what kind
of incentives you put on cars or how many rebates Best Buy
offers," comments Jim Paulsen of Well Capital Management.
"Demand is saturated. The only solution is we use up those
goods we have."
Also saturated is the demand for credit. Consumers and
investors were quite sure Greenspan would cut rates...or do
whatever is necessary...to keep America prosperous. They
saw no need to wait for him to prove it. They went ahead
and acted on this belief - and thereby cut Mr. Greenspan
off from his controls.
Confident of an era of permanent prosperity, protected by
The Maestro himself, consumers cut savings rates from about
9% in 1991 down to nearly zero in the year 2,000. Household
debt service rose to 13.7% - near an all-time record.
Durable goods spending had been between 22% and 26% of GDP
from '50 to '95. Last year, it hit 30% - "off the charts,"
said Paulsen.
Looking at the 5 1/2 years from the beginning of '95 to the
middle of last year, GDP rose $2.7 trillion. But corporate
and consumer debt rose $4.7 trillion. And total credit and
debt creation rose $8.9 trillion.
The entire nation - anticipating the Greenspan Put - dared
to spend and go into debt as never before in history.
Is there anyone in America who still needs a new gas-
guzzling SUV or pick-up? Is there anyone who failed to
refinance his house when the real, net cost of borrowed
funds was a gain of 15% per year? Now that the net, real
cost of borrowed funds is closer to a loss of 30% - will
people rush to refinance, merely because Mr. Greenspan has
cut the Fed Funds rate by half a percentage point?
People are saturated with confidence in the Fed chairman.
They can only be disappointed.
More to come...
Bill Bonner
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