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*** Monday was a slow day on Wall Street. Not much action
in either the Dow or the Nasdaq. The Dow fell 9 points. The
Nasdaq fell 12 points.
*** Dell caused a little excitement - warning that selling
computers was not as hot a business as investors had hoped.
The stock fell...but came back before the end of the day.
Gateway, by contrast, lost 9%.
*** Gold rose $2 to $267. The HUI - an index of gold mining
companies - rose 7%. Homestake climbed again...it has moved
up 50% in the last few months.
*** Is gold a good investment now? I don't know if it is
ever a good investment. But it might be a very good
protection in case problems with securitization,
derivatization, and globalization become worse than is
popularly imagined.
*** And if books and articles on the subject are any
indication, investor psychology may already be changing
with regard to gold. Doug Casey: "Just as a spate of pro-
gold books were published and did well in the marketplace
back in the 70s, the same is happening [with anti-gold books]
now after the 21 year bear market has bottomed. People
like to hear positive, reinforcing things at the top
of a market; and they love negatives at the bottom"
(See: A Literary Bell Tolls For Gold)
*** Bloomberg sees no fall off at the top end of the real
estate market. In California, sales of million dollar
houses rose 50% in 2000. In Manhattan, prices of apartments
on 5th and Park avenues rose 47% - in the 3rd quarter!?
That couldn't be right, but that's what it says. Prices in
the Hamptons rose 41% in the 3rd quarter to an average of
$680,947 for a single-family house.
*** Americans own $14 trillion worth of stocks and $11
trillion worth of real estate. Even a 10% decline in asset
values would wipe out $2.5 trillion in wealth. But people
tend to owe a lot more money against their real estate
holdings than against their stocks. The New York Times
reports that homeowners have borrowed against their own
property as never before...
*** "The borrowing has been so extensive, in fact," says
the Times article, "that homeowners, after building up
equity through much of the 1960's and 1970's, have let
their ownership shares deteriorate over the last two
decades to the lowest level on record... Now a slowing
economy catches the average household owning less of a
stake in its home than in any economic slowdown since the
advent of the modern mortgage in the 1930's." More below...
*** "...The only thing that might reinvigorate the consumer
is a replay of 1998," writes David Tice in this month's
Strategic Investment. "That is, another refinancing boom."
When the Fed cut rates three times in the fall of 1998,
Tice explains, it did more than bail out Long Term Capital
Management. In fact, the Mortgage Banker Association's
index of refinancing quadrupled from the end of June to its
peak on Oct. 9, 1998. Nearly 10 million U.S. homeowners
refinanced their homes in 1998 alone. "Unfortunately,
rather than shoring up the consumer," Tice continues "the
refinancing boom piled on more debt." (see: Will Another
Refinancing Boom Keep The Consumer Afloat?)
*** Investors are now talking about the NEXT rate cut -
expected next week. Will it be 25 bps? Or 50? But Jimmy
Rogers is still wondering about the last one. "It is
astonishing that they cut rates," he wrote to Marc Faber
recently, "The Dow is within a few percentage points of its
all time high. The S&P is only down about 12%. Even the
Nasdaq is just back to where it was two years ago. It's
certainly not at 10-year lows or at 16-year lows as is
Japan. The man [Greenspan} is throwing fuel into a raging
fire, which is going to consume him."
*** Rogers expects the conflagration to ignite commodities.
"We are in the early stages of the new multi-year bull
market [in natural resources]," he writes. (see also: The
World's Next Great Explosion of Wealth)
*** You will remember, many of the Big Techs get a large
part of their profits not from operations but from their
investment portfolios. They frequently invested in other
up-and-coming techs. Who would be in better position to
know which new tech companies would succeed than their
customers and clients in the industry? But Fred Hickey
looked at Intel Capital's positions and found it held the
same turkeys that everyone else owned: CMGI, Corad
Communications...eToys...and so forth. The value of Intel's
holdings fell from $5.85 billion on September 30 to $3.74
billion on December 30. "The portfolio's decline," comments
Hickey, "is far worse than the Nasdaq's, since Intel's
positions are primarily in second and third tier
companies."
*** California's two big utilities are in default on their
loans and could be pushed into bankruptcy any day. With $12
billion in debt between them, together they would comprise
the biggest bankruptcy in U.S. history.
*** Bankruptcies rose 23% in Japan last year, leaving
record debts of almost 24 trillion yen.
*** What's wrong with the Japanese? Milton Friedman says
it's simple: they've failed to increase the supply of money
at a fast enough pace. Maybe so. Could it be that simple?
Not likely.
*** My son Edward, 7, was so impressed with the Pokemon
phenomenon that he has been collecting the cards for the
last year and a half and decided he wanted to be Japanese
when he grew up. Alas, I read in the newspaper today that
the Pokemon mania has collapsed. Rare cards that brought as
much as $375 last April can now be purchased for only $100.
The Pokemon bubble blew up at about the same time as the
Nasdaq. Edward, my boy, you waited too long to sell.
*** "Warming of Earth Raises New Alarm," says the front
page headline in the International Herald Tribune. Uh
oh...this must serious. According to the paper, an
authoritative new report shows that "global temperatures
are rising faster and higher than most experts feared only
a short time ago - faster, in fact, than at any time during
the past 10,000 years according to one climate scientist."
*** "Some scientists say they believe that...an uneven
warming process has already begun with the march of the
Sahara desert into parts of southern Europe..." Wow...the
Sahara is going to do to Sicily and Andalusia what Sherman
did to Georgia!
*** This winter, and the last for that matter, has been
unusually mild here in France. The temperature has only
dropped below freezing on a couple of nights.
*** Steve Sjuggerud writes with what he believes is a real
"no brainer" investment for a post-dollar, post-glacial
world: "Here is Iceland government paper," he remarks.
"Right now in Iceland, we can earn a yield of over 11% in
one-year Treasury notes. This is nearly twice what you can
earn in one-year U.S. government paper, and Iceland's
government finances are in much better shape than the U.S.
Over the long run, the currency of the country that saves
is worth more than the currency of a country in deep debt.
So in theory, Iceland's krona should strengthen against the
U.S. dollar. In practice, the Iceland Krona is fairly tied
to the new European currency, the euro..."
*** Steve, by the way, is leading an investment discovery
tour on the other side of the globe... to Argentina on
March 29 - April 8th of this year. Apart from meetings with
high-level Argentinean businessmen and government
representatives, the trip sounds rather enjoyable: "our
trip will take us to the 'Paris of the Americas,' Buenos
Aires, where we'll take in a tango, while enjoying the
world-famous steaks," writes Steve, "... and to a five star
hotel in a tropical rainforest on the Brazilian border -
overlooking Iguaza Falls, the world's most spectacular
waterfalls..." (If you're interested please see: Opportunities In Argentina)
*** And DR reader MK explains why cows in California are
agitated: "The cutting of electricity and the scarcity of
gasoline will wreak havoc with the dairy industry in
California and the rest of the country. California is the
largest dairy producing state in the country. I think it
now produces more dairy and cheese products than Wisconsin.
Cows that produce milk must be milked at least once a day
or they stop producing. In today's industrial age, they are
usually milked by milking machines, not by milkmaids. The
milk must be refrigerated... and shipped in refrigerated
trucks. Product (milk, cheese and other dairy products)
that cannot be refrigerated will either be dumped or sold
to the government for lower price, because the
manufacturers cannot afford the risk of selling
bacteria/mold-infected products. A World Net Daily article
reports dairy farmers were dumping milk yesterday... If the
blackouts continue or get worse, things could get real ugly
in a real hurry, not only California but the rest of the
country, as well, because of our dependence on California
for food."
As the markets turned fetid Oxford Club members were taking
profits of 905.66% on JDS Uniphase, 233.8% on Nextlink,
108% on Datacraft Asia, 78% on Alcatel and 56% on Trimeris,
among other winners last year.
In less than 10 minutes, you too can learn the secrets to
ignite explosive profits in any market. Click below to take
your first steps down the:
"Equity Shrivels as Homeowners Borrow and Buy" declares the
New York Times headline.
"So what?" replies the New Era believer. "Instead of equity
in an unproductive asset, a house, they have stocks -
equity in profit-making businesses. Everybody is better
off."
In most people's view of things, mortgaging the house is a
shrewd move. At least, it has seemed shrewd. For almost
anytime during the last 18 years, both real estate prices
and stock prices were rising faster than the net cost -
including tax advantages - of a mortgage.
The shrewdest thing to do, in fact, was to buy the most
expensive house you could possibly afford, in the most
expensive and fashionable area...and then mortgage it at
more than its market value. The mortgage might cost, net of
taxes, only about 6%. But property in places such as San
Francisco or Manhattan, Silicon Valley or the Hamptons, was
rising at 15% to 30% annually.
What's more, by investing the mortgage money in growth
stocks, you had a chance to profit as fully as possible
from the last great asset boom of the 20th century.
The NY Times reports that few people missed the trick: "The
average home owning household owed lenders 46% of the
market value of its residence during last year's third
quarter, up sharply from about 30% in 1982 and 40% in
1991... For a typical family with a home worth the median
market value of $144,000 late last year that meant their
equity was $77,760 while their debt was $66,240."
Gone are the days when American families celebrated paying
off the mortgage - breathing a sigh of relief and enjoying
the security of knowing that, even in a pinch, they would
not be out on the street. People are so confident of
America's economic miracle they've given up ownership
of part of their own homes in order to participate.
What would happen if the prices of homes and stocks go down
- as they tend to do at the end of an asset bubble?
"In a longer recession," said Mark Zandi, chief economist
at Economy.com in West Chester, PA, "housing prices would
weaken and many homeowners could easily find themselves
owing more on their homes than the homes were worth."
But in today's letter I intend to forebear from spelling
out the obvious consequences of a bear market. Instead, I
want to explain why the prosperity of the late '90s was a
fraud. As you will see, the declining equity that Americans
have in their homes is not so much a threat to their future
wealth - as an indication that wealth has already
disappeared. Like an illicit lover hiding in a closet, the
fact merely awaits discovery.
The head of the household will discover it in due course -
and in the old fashioned way. Eventually, his portfolio
statement will reveal that his stocks have fallen. About
the same time, news will spread that neighborhood houses
are not selling quite as fast as they used to...and that
sellers are getting less for them.
Even worse news could reach him, too. Perhaps he will find
that his employer requires fewer overtime hours from
him...or that he is out of a job altogether. Thus, will his
clever financial strategy - which worked so well during the
upswing of the credit cycle - prove ill suited to the
inevitable contraction.
But, you and I, dear reader...we cannot wait for the light
of experience to light up our path. We have to use our
imaginations...we have to try to anticipate these events
before they happen so that we can prepare for them. And
that will require poking around in the most dismal corners
and attics of the most dismal science.
To that end, I refer to the work of Dr. Frank Shostak, an
Australian economist, quoted at length in Marc Faber's most
recent newsletter. "Wealth is always generated by means of
land, labour and capital goods - i.e. tools and machinery,"
writes Dr. Shostak.
A man with $100,000 in savings and no house can exchange
the accumulated sweat of his brow for a house. So far, so
good. But what happens when he then takes out a mortgage
for the house - for the full amount - and invests the money
in IPOs? Now, he owns the house, subject to the mortgage,
and $100,000 worth of stocks. The mortgage company now has
a $100,000 asset too...and companies whose stocks he bought
also have $100,000 in cash.
This transaction, rehearsed millions of times, brings a
flood of cash to the stock markets - which raises stock
prices. The investor with $100,000 worth of stocks soon
finds that his stocks have gone up. His house, too, has
increased in value. So he doesn't mind spending some of his
new wealth on a higher standard of living. And the
companies on Wall Street, flush with cash, don't hesitate
to put it to work - hiring more people, buying advertising,
launching yet more risky ventures.
"A pathetic side of the manipulation of credit in modern
times," wrote Freeman Tilden in his book, A World in Debt,
in 1935, "is that the owners of capital, especially the
little capitalists, are swept into a pool of adventure, in
which the actual lending of the capital is on a great scale
and performed by central agencies alleged to be so expert
in debt-trading that it is better to entrust all to them.
In this way loans are made and debtors accommodated,
representing risks that the owner of the money, were he
lending directly, would never dream of taking. It is
supposed that the great professional lenders are vastly
experienced, and possess almost magical discretion. The
truth is that these pompous egotists throw money around, in
prosperous times, with as much abandon as though it were
confetti."
"When money is printed - i.e. created 'out of thin air' -
it sets in motion an exchange of nothing for money,"
explains Shostak, "and then money for something - i.e. an
exchange of nothing for something. An exchange of nothing
for something amounts to consumption that is not supported
by production. Since every activity has to be funded it
follows that an increase in consumption that isn't
supported by production must divert funding from wealth-
generating activities. In short, inflation, or rises in the
money supply, creates an economic impoverishment."
America has gotten poorer in the last five years - not
richer. That fact will be the most sensational new
discovery of the 21st century.
More to come...
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
Published By Tulips and Bears
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