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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
MONDAY, 22 JANUARY 2001 

 

Today:  Mission Impossible

*** No pardon for the Junk Bond King...but will today's 
junk bond investors do as well?

*** GE down, Walmart down, MSFT up... a default every 
day...

*** Hero to fool in record time...Nasdaq rally 
continues...debt grows...gas lines... 'Electricity will 
replace God' ... and more!

*** Poor Michael Milken. Bill Clinton handed out pardons, 
er...liberally - including one for his drug dealing half-
brother, Roger, and Whitewater stonewaller Susan McDougal. 
But no pardon for Milken.

*** Despite reading the press reports at the time, I never 
was able to figure out what Milken had done wrong. He was 
the junk bond king on the throne of aggressive 
capitalism... and maybe that was crime enough for the 
proles who sit in prosecutors' offices and on juries.

*** But what happened to investors who bought Milken's 
junk? Ah, what about the victims? Well, it turns out, they 
did well. The rate of return on Milken's junk was healthy 
and, in some cases, spectacular.

*** And it is thanks largely to the return on Milken's junk 
that investors today are rushing back to buy high yield 
debt. Despite defaults at the rate of one a day - 
including, last week, high-profile Globalstar (which made 
our list of Financial Darwin Award winners) and the 
improbable Chiquita Banana, investors are confident that 
this junk will survive and reward them just as Milken's 
did.

*** But that has been the way of things for the last decade 
or so... Every time things looked as though they might go 
very wrong - well, something happened...and they turned out 
all right after all. There was the crash of '87...the fall 
of Japan, Inc...the Gulf War...the LTCM crisis...Russian 
debt...Asian currencies. Every story had a happy ending. 
So, investors might be forgiven for coming to believe that 
something good always happens in the investment markets and 
that things always turn out for the better. But do they? 
See below...

*** The Dow fell 90 points on Friday. It was dragged down 
by Home Depot - whose stock fell 7.3% after a disappointing 
announcement. Harley Davidson dropped 7% too. Walmart fell 
4%. And GE ended the day down 1%.

*** But all the news wasn't bad. Microsoft rose 10%. And 
some other techs and Internets managed a decent 
performance. The Nasdaq rose nearly 2 points.

*** "The Nasdaq is going back up," Benoit remarked to me 
yesterday as we filled our stonewall with concrete. "I 
thought you said it was dead."

*** "Did I say that?" I replied, feeling as though I had 
already slipped from hero to fool in less than 3 weeks, 
"Well, I still think it is dying..."

*** The Nasdaq is in the middle of what appears to be a 
bear market rally. It has bounced back up less than a fifth 
of the 2757 points it fell since last March and could go 
much further. Stocks crashed in October of '29 - from 381 
in September to 198 in November. Then, they began a rebound 
that lasted until April and took the Dow back up to 294 - 
recovering more than half its losses. But then, as Bill 
King puts it, stocks began their "death march" that took 
the Dow all the way down to 41 points in July of '32.

*** "The high of the post-crash bounce was on April 17, 
1930," says William Fleckenstein, "from which the market 
collapsed nearly 90 percent. The moral of that story is 
that folks shouldn't confuse the bounce that is under way 
with a return to prosperity - no matter how long it 
lasts..." (see: Wall Street switches from basting pan to 
pressure cooker 
http://www.dailyreckoning.com/body_headline.cfm?id=884) 

*** So relax, Benoit. The Nasdaq could go up another 800 
points or so - and still be within the range of a typical 
bear market rally.

*** Friends from New Canaan, CT, report that they had to 
top the offer price to buy a condo in town - and still got 
into a bidding contest. But the WSJ reports that expensive 
properties are taking longer to sell - and sellers are 
becoming less confident.

*** The University of Michigan reports that consumer 
sentiment has dropped to its lowest level in 4 years. And 
the trade deficit fell for the second month in a row, in 
November, to just a little more than $1 billion per day. It 
looks as though the deficit may have peaked in September.

*** Still, that does not seem to have reduced the demand 
for credit - at least, not yet. Doug Noland, of The Prudent 
Bear team, reports that MBNA, the largest credit card 
lender in America, increased loans by 20% (annualized) in 
the 4th quarter of last year. MBNA added $16.5 billion to 
its lending total during the year. Much of that amount is 
securitized and sold, by the way.

*** Providian, a sub-prime credit card lender, increased 
its lending in the 4th quarter at a 50% rate. The weakest 
credit risks are borrowing at the fastest pace, in other 
words.

*** Capital One added - could this be right? - 47,000 new 
accounts a day...bringing the total to 33.8 million 
accounts by year-end. "Consumer loan balances" at Capital 
One grew at a 22% rate in the 4th quarter.

*** But 57% of investment advisors are bullish; only 32% 
are bearish. 

*** Yet, "on the basis of the 200-day moving average," 
writes Harry Schultz, "the US stock market is bearish." All 
of the major indices are below their 200-day moving 
averages, with the exception of one: the Value Line Index. 

*** Globally it doesn't look so hot either. As of January 
12th, says Harry, only one index is above its 200-day 
moving average:

Brazil's Bovespa

The following indexes are BELOW their 200-day moving 
averages: 

Australia's All Ords (by 2 points)
Belgium's BEL 20 (by 2 points)
Canada's Toronto 300
Finland's Helsinki General
France's CAC 40 
Germany's DAX
Greece's General Share
Hong Kong's Hang Seng 
Italy's MIBtel 
Japan's Nikkei 225 
London's FTSE 100 
Malaysia's KLSE Composite
The Netherland's AEX
New Zealand's Cap 40
Norway's Total Share 
Singapore's Straits Times 
Spain's Madrid General 
Sweden's Stockholm General
Switzerland's SMI (barely)
Taiwan's Taiwan General 
Thailand's SET (by 2 points)

"Of the 23 stock markets above," Harry opines, "1 is long-
term bullish, 22 are long-term bearish, based upon their 
200-day moving averages as the key criteria."

*** Consensus earnings for 2001 are now nearly even with 
those of 2000. Analysts do not expect earnings to rise. 
Yet, the Dow is still selling at a P/E over 20. Why would 
people pay nearly twice the historical average P/E for 
stocks that aren't growing earnings? 

*** Oh what a mess of things! "Gasoline Shortages 
Possible," AP reports from California. A pipeline operator 
was on a "service interruption contract" with the 
utilities. When the juice stopped coming, the gas stopped 
pumping. And now what? Gas lines in the Information Age?

*** Meanwhile... "The CIA predicts a world population of 
7.2 billion in 2015..." writes John Myers, "...95% of this 
increase will occur in developing countries, and most of 
that in already rapidly expanding Third World cities. Yet, 
four-fifths of the world still lives agrarian lives. No 
society can go from the hoe to the Internet without 
stopping first to use a tractor. In short, 5 billion people 
need cars, electricity and the infrastructure that goes 
with a developing economy. The process is already underway. 
And if world growth represents anything like post-World War 
II Western growth, commodities at today's prices are a 
tremendous opportunity." (see: The World's Next Great 
Explosion of Wealth 
http://www.dailyreckoning.com/body_headline.cfm?id=886)

*** Vladimir Ilych Ulyanov, better known to the world as 
Nikolai Lenin, died on this day in 1924 of a cerebral 
hemorrhage. Lenin, a violent believer in New Eras, once 
said: "Electricity will replace God."... if this is true, 
it would appear residents of California are in serious 
trouble.

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MISSION IMPOSSIBLE

"During the Clinton years," writes executive editor David 
Ignatius in the International Herald Tribune, "treasury 
secretaries Robert Rubin and Lawrence Summers and the Fed 
chairman, Alan Greenspan, were able to move quickly and 
quietly when disaster loomed..."

The "pros" as he calls them, were called the 'Committee to 
Save the World,' "because of their success in averting 
financial disasters."

"Tending Global Finances is a Mission for Experts," 
proclaims the headline of Mr. Ignatius' article. But what 
do the experts do? Well, we're told that it involves 
"negotiating with banks, [and] imposing harsh conditions on 
foreign countries..."

Negotiating with banks must be a drag, but imposing harsh 
conditions on foreign countries could be fun. Who could not 
vastly improve some of these forlorn, Third World sink 
holes? Take a country like Albania, for example, a 
misbegotten muck of a nation. How easy it would be make the 
place better!

You could force everyone to wear those funny folk costumes 
with tassels. And anyone who didn't look good in tassels 
would be deported to Bulgaria, which as far as I know is 
tassel-free. All buildings constructed after WWII should be 
razed...and replaced with traditional-style Albania 
architecture. I don't know exactly what that is...but it is 
bound to be better than the Stalinist monstrosities that 
blemish the landscape today. Also, all motorized vehicles 
should be outlawed. This would seem like a "harsh 
condition," but it would pay big dividends. Not only would 
the energy bill be cut in half...the country would be so 
picturesque! Tourists would flock to Albania and soon turn 
it into one of the richest nations on earth.

But do you think the honchos who run the treasury, the 
World Bank or the IMF would think of such a thing? Should I 
watch my mail for a note of "thanks" from the Albanian 
Economic Development Agency? No chance. They lack the 
necessary imagination.

You may recall, dear reader, that a lack of imagination 
lies at the heart of so many of the world's troubles. 
People seem unable to imagine the consequences of their own 
actions - even when the results are as obvious and 
predictable as the IHT's editorial comments.

Modern humans seem unable to imagine a world more 
complicated than say, an automobile engine or a grapefruit 
juicer. That is how the "pros" are supposed to be able to 
do their work - these experts are thought to understand how 
the machine works...they know what levers to pull and what 
screws to turn.

People understand, more or less, how machines work. Yet, 
when they try to apply the same metaphor to human society, 
the results are disastrous. Lenin, whose death we celebrate 
with loud hosannas today, had a machine-like vision for how 
Soviet society ought to function. The trouble was that 
people were never willing to follow the plan. This led to 
one economic calamity after another. But rather than revise 
his view of how the world works, he and his successor, 
Josef Stalin, decided to force people to do as they were 
told. Over the course of the 70 years of Soviet rule - 
including wars, economic programs, starvations, mass 
deportations, gulags, purges and other 'harsh conditions' - 
an estimated 20 million people were killed. And when it was 
over - the resulting national carcass was as lean as a New 
York anorectic. 

In the U.S. voters still believe that Mr. Bush or Mr. 
Clinton 'run things'. Many people still think that you can 
make goods and services more affordable by decree - as 
President Nixon did with his wage/price controls. Some 
still believe that rent controls reduce the cost of 
housing, and you can or that pass a law (minimum wage) that 
will make people richer. 

And yet, experience shows that none of these measures work. 
Human society is far too complex for these simple-minded 
fixes.

Investors, many of them, still think that Greenspan and 
other experts can avoid financial hardship simply by 
negotiating with banks, imposing conditions on foreign 
countries...and setting interest rates at the correct 
point. And it has been so long since the last serious 
economic downturn in America that we have no personal 
experience to contradict it. 

What about America's Great Depression? What about Japan? 
Well, those were a long time ago, or a long way away. 
Besides, Alan Greenspan explains:

"While bubbles that burst are scarcely benign, the 
consequences need not be catastrophic for the economy. The 
bursting of the Japanese bubble a decade ago did not lead 
immediately to sharp contractions in output or a 
significant rise in unemployment. Arguably, it was the 
subsequent failure to address the damage to the financial 
system in a timely manner that caused Japan's current 
economic problems. Likewise, while the stock market crash 
of 1929 was destabilizing, most analysts attribute the 
Great Depression to ensuing failures of policy." 

Apparently, the Japanese didn't know what knob to turn. 
Hoover and his Fed chairman pulled the wrong lever. But, is 
the 'Committee to Save the World' infallible?

I put it to you, dear reader, that it doesn't really 
matter. There is some suffering - like an overdue visit to 
the dentist - that cannot and should not be avoided. It is 
best to get it over with as soon as possible.

"The way to deal with a collapse of exchange," wrote 
Freeman Tilden in 1935, "is not to pretend that 
'prosperity' is merely in a temporary eclipse, to return 
again if everybody will act optimistically; but frankly to 
acknowledge that conditions were unsound, and permit the 
natural impulses of trade to rectify them. This prescribes 
a bitter medicine, which people do not like and politicians 
cannot collect upon; but quack remedies merely put off the 
final day of reckoning.

"The natural remedies, if the credit-sickness be far 
advanced, will always include a redistribution of wealth: 
the further it is postpones, the more violent it will be. 
Every collapse of credit expansion is a bankruptcy, and the 
magnitude of the bankruptcy will be proportionate to the 
magnitude of the debt debauch. In bankruptcies, creditors 
must suffer." 

Your ever-optimistic correspondent...

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: April 01, 2001

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