The landing approach has begun. The flaps are down. A
moderate slowdown has hit the U.S. economy. Investors are
still optimistic. But consumer spending is way off.
Still...it seems that everyone believes that Alan Greenspan
has engineered a soft landing for the formerly high-flying
tech bubble. But according to one of the world's leading
economists, it's worse than blind faith. It's high-octane
'new paradigm' propaganda.
Here's what you need to do - right now - to prepare
yourself for:
*** Wall Street was closed yesterday. So, maybe this is a
good opportunity to take stock.
*** A Financial Times article outlines the articles of
faith of New Economy believers: 1) the business cycle is
dead; 2) capital markets now work in a new way; 3) current
technological progress is unprecedented; 4) an information
technology economy works differently from a machine-age
economy.
*** So where does the New Economy stand? In just the last
few months we have seen evidence that the business cycle is
not dead...for we have entered a cyclical slump of unknown
dimensions. Capital markets are bigger, and more global,
than ever before. Developments in securitization and
derivatization have served to amplify cyclical trends - but
we still don't know to what ultimate effect. The
technological progress of the last 10 years was
unique...but not unprecedented.
*** Any of the 5 decades before 1940 may have actually seen
more revolutionary progress - with the advent of internal
combustion engines, electricity, radio, automobiles,
penicillin and so forth. And the info tech economy doesn't
seem to work any differently from any other economy. For
all the blather about the value of information and
knowledge - it turns out that neither are worth anything
unless put to the service of an otherwise valuable,
profitable undertaking. And then, what is needed is not
abstract "information" or "knowledge" but very specific
skills and know-how that can only be learned at great
expense and considerable investment of time.
*** My friend, Brian Smith, reports - for example - that
after numerous efforts he discovered that this intellectual
capital was not sufficient to the task of "dry stacking"
stonewalls in Western Virginia. Use cement, Brian, lots of
cement.
*** Marc Andreessen, founder of Netscape, believes the U.S.
is suffering from a "massive champagne hangover."
Interviewed by the Financial Times, Andreessen said "The
era when everything will be free [on the Internet] is
over."
*** A year ago, Byron Wien, Morgan Stanley's U.S. economic
strategist, predicted "10 Surprises" for the year ahead. He
was remarkably accurate - 7 came true, including a
prediction that oil would go over $20 a barrel and that the
Japanese stock market would fall below 15,000.
*** Now, Wien says he thinks the dollar will go up, not
down, in 2001 - with the euro falling as low as 75 cents.
Well, who knows?
*** Only three weeks ago, Merrill Lynch predicted 5% growth
in S&P 500 earnings. Now, the forecast has fallen to zero -
with declines of 3.4% in the first quarter of this year and
a decline of 5.2% in the second quarter, compared to the
year before.
*** Meanwhile, Richard Berner, chief U.S. economic
strategist at Morgan Stanley Dean Witter, says that a
recession has already begun. He believes the U.S. economy
went into recession in the last quarter of last year.
*** And Robert J. Barbera, chief economist at Hoenig & Co.
expects S&P profits to fall 7% to 10% in the first half of
2001.
*** A year ago, the AOL/Time Warner deal was worth $160
billion. Now, it's worth only $105 billion. Still, that's
better than Yahoo! which lost 90% of its value in that
same time.
*** A Salomon Smith Barney report shows Bank of America to
be most exposed to bad loans. BOA could suffer $4.24
billion worth of defaults this year, says the report. Other
banks with big loan default risks (in order): Bank One,
J.P. Morgan Chase, First Union, Fleet Boston, Bank of New
York, KeyCorp, Wachovia, U.S. Bancorp, Commercia.
*** But "there is cause for optimism," said Harry Davis, a
professor of the dismal science, "the Federal Reserve's
decision to cut interest rates earlier this month should
make it easier for corporate borrowers to pay off their
debts." Is that so? See below...
*** While U.S. retail sales slumped in December, and U.S.
automakers have trouble selling cars - even with zero
percent financing - Germany, France and Italy enjoyed
record sales during the holiday season. Royal Ahold, a huge
Dutch retailer, said sales had jumped 50% over a year ago.
And German automakers, Volkswagen, Porsche and BMW, report
record sales and profits.
*** Europeans have very low debt levels and only 5% of
their wealth in stocks, compared with a 25% exposure to
stocks in the U.S. They are much less vulnerable to the
negative wealth effect of falling stock prices and debt
defaults. Euroland is expected to grow by 3.2% in 2001 -
faster than the U.S.
*** Euroland - 15 countries...13 languages...one big happy
family. One of the major achievements of the last half of
the 20th century is that the European wars seem to have been
put behind us. Now, tensions between European governments
tend to be comic rather than tragic.
*** Even at the scout meeting in far Poitou, the organizers
could not resist singing a song which must have been a
relic of the 100 Years War. "Hooray for the King of
France," the scouts sang, in French of course, "and the
King of England can drop dead!" The two English parents in
the audience did not find it very funny.
*** And a little news on the tax front... "This week the
OECD's attack on tax havens suffered a major setback."
writes the Sovereign Society's Bob Bauman, "As that
notorious G-7 front group was forced to back down from its
high handed demands at a meeting Barbados. OECD minions
were forced to accept creation of new a joint task force
including both OECD and tax haven nations, giving
blacklisted nations 'a seat at the table' and a forum for
their complaints and defense."
*** "It does not surprise people when I tell them that the
most important tax haven in the world is an island," writes
tax lawyer Marshall Langer. "They are surprised, however,
when I tell them that the name of the island is Manhattan,
in the United States. The world's second most important tax
haven is also located on an island. It is a city called
London in the United Kingdom." (see: Harmful Tax
Competition-The Real Tax Havens
http://www.dailyreckoning.com/body_headline.cfm?id=869)
Your government may not want you to know this: but at the
click of a button you can be banking in Switzerland; buying
offshore mutual funds in Luxembourg; setting up tax haven
corporations in the Caribbean; buying securities in
Germany, Canada, Indonesia...
In fact, you can be transferring assets into some of the
world's strongest and most private offshore banks and into
some of the world's most powerful offshore asset protection
vehicles organizing your finances just as the super rich
have done for decades.
"No one can draw more out of things, books included, than
he already knows. A man has no ears for that to which
experience has given him no access."
Friedrich Nietzsche
So, where are we? Are the Internets really coming back?
Should you prepare for a new boom? Or will things just
drift along without much change?
No one knows. But it is the things you don't expect that do
you most damage. And what people least expect is what they
cannot imagine.
We only know things by reference to experience, analogy and
metaphor. But our experience with market conditions similar
to those of today is limited, and largely historical.
Dr. Kurt Richebacher recently compared market conditions
today with those of 62 years ago: In September 1929, the
price-to-earnings ratio of listed corporate stock stood at
13.5. Sixty-two years later, this week, the S&P 500's P/E
is around 24. The Dow has a P/E of 29, and the Nasdaq's P/E
is still near 100.
Between 1925 and 1929, the money supply rose 10%. But
during the last five year, to the end of 2000, M3
mushroomed 55%, or more than 5 times as much as the economy
itself.
Dr. Richebacher reports that the U.S. added $500 billion to
its GDP during the five years since 1995. But the volume of
credit available to consumers and business rose $1.4
trillion in 1997, $2.1 trillion in '98, $2.25 trillion in
'99, and an estimated $1.8 trillion in 2000.
And this credit explosion happened while savings were
collapsing and the trade deficit was growing bigger than
any trade deficit in the history of the world.
We know the '29 crash and Great Depression only by
reputation. Things were tough. But very few people now
active in financial markets have had any direct experience
with it. And we lack the imagination necessary to apply the
information we have. Surely a credit bubble that is bigger
than the '29 bubble ought to produce at least as much
debris when it finally explodes. But what sort? How? We
cannot even imagine it.
Close your eyes and try to picture a financial calamity on
a scale with the Great Depression. A quarter of all men
without jobs...soup kitchens...10,000 banks close their
doors. All that comes to my mind are black and white
Depression-era photos. Well, it won't be like that. People
do not dress as well today. And they drive better cars. And
banks can't go bankrupt, or can they? But what difference
would it make? No one has any money in banks anymore.
My own grandfather was wiped out when his bank in downtown
Baltimore failed in 1931. I can't imagine that happening to
me. I put my money in mutual funds, stocks, real estate,
and federally-insured CD's!
I'm so much smarter than my grandfather. And the Fed is so
much smarter than the Fed six decades ago. And the new Bush
administration is so much smarter than the old Hoover gang.
And investors are so much smarter, too. Rather than panic
and sell out - they hold their stocks for the long
term...and even buy the dips. Gosh...I can't even imagine
how dumb people were back then - as dumb as the Japanese
since 1989. But I can't imagine that either.
In fact, with today's investors, today's Fed, today's
enlightened economists, I can't even imagine a financial
catastrophe of any sort. Whatever else you can say about
it, this time, it will be different.
But "every market will eventually find a reason to regress
to the mean," says veteran Merrill Lynch analyst Bob
Farrell, interviewed in the L.A. Times. The stock market
may be a wealth machine, but it is one that produces
wealth, going all the way back to '26, at the rate of about
11.3% per year. That number is fattened by the last 20
years stocks spent in the Wall Street feed lots. During
that period - from '82 to '99 - the S&P 500 gained 19% per
year, dividends included. In the more recent period - '94
to '99 - stocks did even better. The S&P 500 rose at 20%
per year.
These recent figures distort the picture for stocks in the
20th century. Adjusting the numbers in various ways, Andrew
Smithers and Stephen Wright, in their book "Valuing Wall
Street", estimated that the real return on stocks over the
first 97 years of the 20th century was less than 5%
annually.
Clearly, the performance of the period '82 to '99 was
extraordinary.
"After 18 fat years with returns averaging 18% to 20%,"
continued Bob Farrell, "we are likely to have a stretch of
lean years with returns less than 10%."
But that's not what investors expect. A recent survey
showed that investors expected to earn 11.8% on their
stocks over the next 12 months. That's much less than the
18% they expected a year ago...but still more than twice
what Smithers and Wright consider the long term, real rate
of return on stocks...and not nearly low enough to skim the
grease off this blubbery market.
"The very quality that makes the stock market such a good
place to invest most of the time," I reprise a familiar
Smithers and Wright passage, "means that it has to be a
lousy place occasionally. One of these occasions is now."
There have been other lousy periods. U.S. stocks rose 27%
per year from June '49 to April '56. Then, for the next 6
years, investors got only 5.6% per year from their stocks.
In June '62, a new bull market developed, giving investors
14.8% annual gains for the next 4 years. But the following
dozen years were grim - with minus 4% gains each year.
Last year, for the first time since 1982, investors lost
9.1% on their S&P 500 stocks. Does this mark the beginning
of a trend, or the end of one?
We will see, dear reader, we will see.
Your reporter,
Bill Bonner
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: April 01, 2001
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