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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
MONDAY, 12 FEBRUARY 2001 

 

Today:  Phantom Bust

*** Depression? Recession? Party on, dude.

*** Layoffs at record pace...big techs collapsing...

*** "A golden age" coming soon....? Another refinancing 
binge...the Nasdaq to be cut in half...raving in the 
nave...and more!

*** If the Depression was great...maybe this slump will be 
fun, too. A friend reports that the slowdown has been 
welcomed by many over-worked, over-hyped New Yorkers.

"I wanted to be unemployed," said one laid-off on-line 
worker quoted by the New York Observer. "I wanted to be 
laid off for, like, four months, collecting unemployment."
"It was a relief," said another, of his unemployment. "We 
no longer felt like we had to work really hard and not make 
any money."

"Stupid kids!" comments former Mayor Ed Koch, "If they knew 
what it was to live in a depression, or a recession, they 
wouldn't say what they're saying."

*** Friday's news seemed to bring America a little closer 
to recession. Secretary of the Treasury Paul O'Neill, for 
example, said he agreed with Greenspan - that growth has 
slowed to near zero. 

*** The NY Post ran an article illustrated with a "Layoff-
o-meter", on which the needle had moved to the "bloodbath" 
position. There were more than 54,000 layoffs announced at 
the end of the week - 50,000 at GE alone.

*** In December and January the layoff total came to 
275,000 - making the 2-month period one of the worst in a 
very long time.

*** The world's two largest economies are probably in 
recession. I say probably, because you can't tell for sure 
until the numbers are toted up later on. Japan has been in 
and out of recession and near-depression for the last 10 
years.... But it is a strange calamity...after more than a 
decade of stagnation, the Japanese are still the richest 
people on earth...more below...

*** The Dow fell 99 points on Friday - bringing it about 
even for the week. The Nasdaq, on the other hand, lost 7% 
of its value over the week. And TheStreet.com Internet 
index fell 9%. Gold stocks fell too - by 5%.

*** The big news on Friday was the continued collapse of 
the Big Techs. It was disclosed on Friday, that Larry 
Ellison sold $850 million worth of shares in his Oracle -- 
the stock dropped 13% to close at $23 on Friday.

*** IBM lost $2. GE was down $1.48. Cisco fell to $28. 
Microsoft fell $3 to under $60. Amazon drifted down $1 to 
just $13. Lucent slumped 9% after news of an SEC inquiry 
surfaced. Dell fell 10%. And Intel lost more than $1.

*** Remember, these were the 'must own' stocks of the New 
Economy. I will pause here for a brief message of self-
aggrandizement. Okay, the price of gold still hasn't 
risen...and the dollar still hasn't collapsed. But those 
Big Techs have melted down - just as I said they would. 
Billions of investment dollars have been lost as these 
stocks grope for the Big Bottom of their dreams.

*** While stock prices are steady or falling, P/Es are 
going up, thanks to declining earnings. The average P/E on 
the Dow is now 22.2.

*** But not to worry. Paul O'Neil says that tech-led 
productivity gains will take the nation to a "golden era of 
economic prosperity." 

*** The Fed is doing its part - attempting to pump up 
consumer spending by making more cash available. Japan, 
though, is way ahead. It announced a rate cut of its own - 
from 0.5% to 0.35%. Yes, Japan is practically giving money 
away - and still its economy is barely growing. And its 
stock market is still down about 65% from its high 11 years 
ago. 

*** "We are currently in the midst of another extraordinary 
mortgage refinancing boom," writes Doug Noland, on The 
Prudent Bear website. "Yesterday Freddie Mac announced that 
the average 30-year mortgage rate again dropped below 7%, 
so the deluge of refinancings will continue. Wednesday, the 
Mortgage Bankers Association reported that its weekly 
mortgage applications index jumped 19% from the previous 
week, with purchase applications increasing 4.5% and 
refinancing applications surging 31%. Applications to 
refinance are running almost 500% above the levels of this 
time last year and have almost returned to last month's 
peak refinancing rate... Figuratively and otherwise, there 
simply could not be 'easier money'."

*** Lowering rates, to harp on a subject upon which one 
cannot harp too much, is considered the magic potion that 
will make consumers fall in love with more borrowing and 
more spending.

*** But of borrowing and spending we already have plenty, 
comments Marc Faber in Forbes Global. "The booms usually 
come to a painful end when the phase of accelerating growth 
gives way to decelerating growth rates. Financial asset 
prices collapse. In addition, while growth rates were 
overestimated, supply was underestimated. Cutthroat price 
competition and competition from newer technologies lead to 
widespread losses. Stock prices collapse some more. 
Subsequently, the cost of capital rises and credit is 
sharply curtailed, as the new-issue market shuts down, and 
as bonds can be placed only at prohibitively high interest 
rates."

*** The problem is not too little demand, says Faber, it's 
over-investment in the tech-led boom. Making more money 
available allows bad businesses and bad investments to 
survive - thus postponing the day of reckoning. "I 
predict," he says of the Nasdaq, "that it will fall by 
another 50% or so from the Jan. 29 level of around 2840."

*** "Every time the market misbehaves like this, people 
wonder about 1929," says the Fleet Street Letter's Lynn 
Carpenter. "Sorry... Wrong crash, wrong decade. Value 
investors should think 1961-1962 instead. Here's why:

"In 1950, the average P/E for the Dow Industrials was 6. 
But by 1961, growth-crazed investors bid stocks up to 
outrageous prices... P/Es of 100 were common on the hot 
stocks of the day. The mania was so widespread that even 
cautious investors abandoned the 10 times earnings rule the 
market had followed in the previous three decades. They 
moved their sights to 15 - even 20 times - earnings. The 
market fell apart in December 1961, then rebounded quickly. 
Just as today, people thought it was over, the bottom was 
in... but on May 28, 1962 the real crash took another 20% 
off the market. Stocks did nothing for two years. The next 
real bull market didn't begin until 1964. Here's what's 
important - after the 1962 crash, the 10 times earnings 
rule proved a winner again." 

*** "While it is not a precise one to one ratio," John 
Myers tells me, "over the past 30 years, there is a 
consistent correlation between Fed rate cuts and a rise in 
the price of gold. In 1973, the Fed cut rates for several 
months, gold rose from $100 to $183. The crash of 1987 also 
saw the Fed cut rates... while the DJIA corrected 22% in a 
single day, bullion prices rose 10%. Again in 1989, when 
the Fed moved to abrogate a short-term correction gold rose 
from $360 to $410. And most recently when the Fed cut rates 
in 1998, gold again rose 10%. Rates are again being cut... 
we may be on the cusp of a serious gold revival."

*** We enjoyed one of the most beautiful weekends ever at 
Ouzilly. Skies were clear. It was so warm I could leave my 
windows open at night and look out on a beautiful winter 
moon.

*** "Now is the time to do my grafts," announced the 
gardener on Sunday, surrounded by twigs and branches. "I 
have to do them this week, because the moon is full." He 
has been scouting the countryside for old varieties of plum 
and cherry trees - which he's going to graft and plant in 
our orchard. He's also found some old grape vines, of the 
sort that are no longer planted.

*** "Oh no, this is scientific... proven," he went on, 
sensing my skepticism, "if you graft fruit trees on a new 
moon all you get is a lot of growth in the plant and no 
fruit. I've tried it. It doesn't work." So there you are, 
dear reader, a little gratuitous gardening advice to go 
with your gratuitous investment advice. May they both be 
fruitful. 

*** Henry and I went to church on Sunday. The others were 
excused for various reasons. But Henry is an acolyte and 
had to do his duty. We are all very proud of Henry. He is 
well-liked wherever he goes and always seems composed and 
dignified. But as the priest raised the cup in anticipation 
of the eucharist, I noticed Henry standing beside him in 
his altar boy outfit - jerking his shoulders and shuffling 
his feet. What is wrong with the boy, I wondered. He looked 
like he was warming up for a night at the disco. Well, it 
turned out that that very morning, his older sister had 
shown him a rather spastic Michael Jackson dance number. 
Henry couldn't resist rehearsing it - even in front of the 
whole church. Pride goeth before a fall...and satisfaction 
before humiliation.

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PHANTOM BUST

While Americans enjoyed the greatest financial boom in 
history - apparently getting rich beyond their dreams and 
deserts - the poor Japanese were stuck. The New Era, the 
New Economy, the Information Age - all of the wonders of 
the last decade of the 20th century missed them entirely. 
Stocks fell from almost 40,000 - on the Nikkei average - to 
below 13,000, and stayed there.

The economy did no better. Year after year, growth was slow 
or negative - it was as if the Japanese were running 
backward. No promethean light struck their faces. Computers 
and the Internet - the twin innovations that are thought to 
have boosted U.S. productivity and now offer a new "golden 
age of prosperity," according to Paul O'Neil, the new 
Secretary of the Treasury, provided none of their blessings 
to the Japanese. What is wrong with the Japanese?

The poor Japanese. And not only was their economy shrinking 
- so was the population, literally. There are more people 
over the age of 65 in Japan, proportionally, than any other 
country. And each year, there are fewer Japanese - the 
population itself is in decline! 

The poor Japanese - dumb, short, old, few and poverty-
stricken. 

Not that American economists and politicians have been unwilling 
to lend a hand. They've repeatedly urged the Japanese to 
increase their money supply, advice that the U.S. has 
followed, perhaps to a fault.

Inflating the currency, according to U.S. economists is the 
key. If the yen were destroyed, little by little, Japanese 
consumers would be more willing to spend, rather than save. 

But the stubborn Nipponese have been unwilling to destroy 
their own currency in the name of prosperity. Instead, they 
have crucified their economy on a cross of relatively hard 
money. At least, that is the popular view in America.

So moved was Treasury Secretary O'Neil by the Japanese 
plight that he entertained the issue from a humanitarian, 
rather than a central banker's, point of view: The 
question, he said, was "how do we help the people of Japan 
achieve a higher standard of living."

The problem with such generous sentiments is that they 
ignore the reality of the situation. The trend, dare we 
say, of thinking that America is an unstoppable New Economy 
headed for "a golden age of prosperity" while Japan is 
thought to be stuck in a past of permanent recession, 
poverty and ignorance, may be one whose premise is false.

"Japan is the largest net creditor in the world," replied 
the chief economist at Mitsubishi Research, as reported in 
the International Herald Tribune, "and is thus the richest 
country in the world."

Incomes are higher in Japan than in the U.S. People work 
fewer hours. They pay less in taxes. They get more in 
social services for the taxes they pay. They are in better 
health. And they live longer.

The average employee in manufacturing in Japan, for 
example, works 5 fewer hours per week than a similar worker 
in America. On average, an American puts in a full two 
additional weeks of work than a Japanese. 

Not only is his income higher in Japan, but his tax burden 
is lower. The average Japanese pays 12% of his earnings to 
the government. In the U.S., it is 16%.

Japan is a marvel of well-functioning social services. 
Health care is practically free. Public transportation is 
ubiquitous and efficient. Trains pull into the station, on 
average, 18 seconds before the scheduled arrival time. 

Compared to U.S. workers, the average Japanese takes more 
overseas vacations. And he buys more luxury goods. Two-
thirds of the world's high-end products are bought by the 
Japanese. 

The Japanese live better and longer. Japanese women live 
longer than any other group in the world. Japanese men have 
life expectancies second only to Swedes, where people don't 
actually live longer, it just seems longer.

"The average standard of living and the satisfaction 
level," said a partner in Accenture, formerly Andersen 
Consulting, "is higher here than in the U.S."

How could that be? How could people suffer an entire decade 
of stagnation...while the stock market loses 65% of its 
value - and while the competitive Americans dash ahead at 
their fastest speed in 70 years - and still be at the head 
of the field? How is this possible?

The cause of Japan's economic trouble, according to the 
popular view, is the propensity of the Japanese to save 
money. Even though they live well, travel abroad, and buy 
luxury goods, the average Japanese saves 13% of his 
earnings, compared to less than zero for Americans. 
Currently, the Japanese have $6.5 trillion in savings.

Could it be that saving money is not so bad after all?

The IHT refers to Japan's economic malaise as a "phantom 
stagnation." Unemployment has risen - but only to 4.7%. 
Even in a slump, Japan's unemployment number is not much 
different from America's at the top of a boom.

If Japan has experienced a phantom bust, was America's 
prosperity a phantom boom? 

Maybe, dear reader, maybe.

Your 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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