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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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OUZILLY, FRANCE
FRIDAY, 20 APRIL 2001 |
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Today:
The Theory
of Ignorance
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*** Rate cut magic continues to work...
*** Business brisk at home mortgage refinancers...
*** But gold up as half the world sinks into
slowdown...buy bonds?
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*** "Rate Cut Glow Continues to Shine," says
TheStreet.com, describing yesterday's market
activity. Both the Dow and the Nasdaq rose. The Dow
ended up 77 points. The Nasdaq made a 102-point gain.
*** "The gains will stick," TheStreet quoted one
trader, "as people are focusing on the second half."
*** But "it is only a matter of time before the
market realizes that lowering interest rates will
not do very much for the US economy," says Albert
Friedberg.
*** Business is good at Countrywide Home Loans. The
company is getting twice as many telephone calls as
usual - following the Fed's 50 basis point rate cut.
Most callers are hoping to refinance existing
mortgages at reduced rates. Could it be that they
are looking for ways to reduce their expenses,
rather than enlarge them?
*** People are still borrowing, but they are not
necessarily increasing their spending. Caught
between the millstones of higher energy costs, lower
employment levels, and lower equity
values...American consumers are feeling a little
pinched...
*** "I have just come from Washington DC," writes
Jeff Randall of the BBC, "where my over-riding
impression was that ordinary Americans fail to
realize just how precarious their economic plight
has become."
*** "I see huge risks for the economy right now,"
said former Fed governor, Janet Yellin. Alan
Greenspan must have seen the same dangers.
Industrial production turned up last month.
Consumers are still borrowing. Home sales are
surprisingly strong. So why the surprise rate cut?
*** A NY TIMES article addressed the question,
coming to the conclusion that Greenspan & Co. have
two major fears: 1) that consumers are near the
breaking point - where they may be forced to curb
expenditures, which could set in motion a Japan-
style slump and 2) "a related pullback by companies
in the purchase of computers, communication
technologies and other types of equipment." Why
should the Fed care if companies purchase computers?
Ah...more below.
*** If the U.S. sinks into recession, it probably
won't go down alone, warns Anirvan Banerji, of the
Economy Cycle Research Institute. Japan, Taiwan, and
South Korea will be dragged down too. So would
Mexico and Australia. That would put more than half
the world's GDP in negative territory - the first
such slowdown in a quarter century.
*** "Name a company that dominates its industry,
that has 20% operating margins, 10% net margins,
earns 30% on equity, 20% on total invested capital,
generates $1 billion of free cash flow and trades
under 10 times trailing earnings..." challenged Bill
Miller of Legg Mason in Barron's. That company is
the very one that our own Porter Stansberry believes
is doomed by the creative destruction of the
marketplace: Kodak. At 9 times earnings, with a
dividend yield of 4.12%, at least Kodak is
relatively cheap. Cheap enough to buy? It is "not
yet actually cheap," judges Jim Grant, but it is
"becoming cheaper, which, however, is progress."
*** "The major averages need to decline another 30-
40% before they reach the median levels of
valuation, never mind cheap," calculates Michael
O'Higgins. "While stock investors have experienced
huge losses - over $6 trillion so far - there seems
to be little in the way of the type of capitulation
that normally prevails at market bottoms."
*** What to do? Buy bonds, O'Higgins urges. "I have
found that long-term US Treasury rates tended to
fluctuate around a level 2 percentage points above
the nine-year moving average of the Consumer Price
Index (CPI). With the nine-year CPI currently at
2.58%, it would appear that long-term T-bond rates
should approach 4.58% by year end 2001. If that
happens, my long-term zeros should appreciate by
another 20+% during a time when...the major stock
averages should drop by 30-40%.
*** "What will I use as an indicator to signal the
end of the great bull market in bonds that we have
enjoyed for the last 20 years?" asks O'Higgins,
rhetorically. "An indicator which has correctly
signaled the course of the long-term T-bond rates in
26 out of the last 32 years is the price of gold.
With the price of gold still lower than it was a
year ago, it still looks safe to own long-term
Treasuries."
*** But the price of gold jumped $4 yesterday. And
bonds didn't seem to like it. Bonds were down,
worried either about the dollar, inflation, or a
quick business recovery (which would send rates
higher). The gap between regular Treasuries and
inflation-adjusted TIPS widened, suggesting that
investors are worried about an uptick in inflation
rates.
*** "We could have real economic contraction (2%, 3%
4% of GNP)," said Albert Friedberg recently, "plus a
rate of inflation that will eat further into
incomes. So you have a loss of income via
unemployment. You have a loss of income via the
shrinkage of the purchasing power of wages. And
that's a serious problem... We have a combination of
wealth contraction or shrinkage, via the asset
implosion, an attack on income via inflation, an
attack on income via further layoffs. All the
makings of a prolonged slump that can be pretty
deep..."
*** I searched the British press for the usual
"naughty vicar" story. But the vicars seem to be on
good behavior recently, perhaps out of respect for
the Lenten season.
*** Today, lest we forget, is Adolf Hitler's
birthday. Whatever else can be said about him, few
elected officials can boast such name recognition.
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THE THEORY OF IGNORANCE
"The same forces that have been boosting growth in
structural productivity seem also to have
accelerated the process of cyclical adjustment,"
said the world's top-rated bureaucrat, less than 60
days ago. "New technologies for supply chain
management and flexible manufacturing imply that
businesses can perceive imbalances in inventories at
a very early stage - virtually in real time - and
can cut production promptly in response to the
developing signs of unintended inventory building."
The New Era is already passe. Old. Even ridiculous.
Yet as recently as two months ago, the best informed
economist on the planet, Alan Greenspan, still
believed in it.
"Even sober analysts," writes Paul Krugman in the
New York Times, "began to question the classic
script for a slump, in which a slowdown in consumer
spending and investment leads to a buildup of
business inventories and businesses are then forced
into severe production cut-backs to work off those
inventories."
Of all the companies that might have been able to
harness this new advantage given them by the
Information Age, perhaps none was better placed than
Cisco. The company was so admired by investors that
they gave it a market cap higher than any other
company had ever received.
And even after the Nasdaq had crashed, Cisco's CEO
John Chambers explained to investors that Cisco
would nevertheless continue to enjoy sales growth of
30% to 50% annually for as far as the eye could see.
But that is the problem, dear reader. The eye cannot
see very far. And it sees what it wants to see
anyway. Neither Mr. Greenspan, the world's most
celebrated macro-economist...nor Cisco Systems,
recently one of the most envied corporations on Wall
Street, really understood what was going on.
As reported in previous letters, it was this capital
spending boom - not productivity nor New Era
information technology - that made Wall Street's
numbers look so appealing. Businesses all over the
planet felt the need to get into the swing of the
New Era by spending on Information Technology. In
the perverse logic of the late tech bubble, if they
could spend enough, fast enough - their share prices
would rise.
But now people seem to have all the routers and
multiplexers they need. Even more than enough.
Capital spending is falling by between 5% and 10%
this year. And unsold equipment is piling up on the
shelves.
John Chambers recently announced that, instead of
growing 30%, sales were falling 30%. "This may be
the fastest any industry has deteriorated," he said.
Like an auto dealer in a downturn, Cisco finds
itself with its lot full of various makes and models
it would like to unload - new and used. "Cisco
Systems Capital," reports the company's website,
"now offers refurbished Cisco equipment with the
same warranty protection and support as new...but at
a lower price."
Lower prices are the name of the game in the router
and switch business these days. Discounts listed at
www.usedrouter.com range from near 70% to as little
as 20%.
Grant's Interest Rate Observer quotes Mark Magee of
Asset Recovery Center: "I can buy the equipment for
10 cents on the dollar...the stuff we are seeing
right now is very often less than a year old and
still under warranty."
"I have several hundred Pentium III PC's in my
warehouse," he continued, "that I will sell for
probably $500 a system..."
Grant's also interviewed the folks at usedrouter.com
and got this comment: "[Internet Service Providers}
can get equipment really, really cheap right now,
brand new equipment."
Errata. Everybody makes mistakes. Even here at the
Daily Reckoning. Yesterday, for example, I misstated
my own Theory of Ignorance. This time I'll get it
right:
Ignorance increases as the square of the distance
between your personal experience and the subject
matter.
Mr. Greenspan was just guessing...and should have
said so.
Your correspondent, just guessing...
Bill Bonner
P.S.
The world is full of mistakes and misapprehensions.
"I thought you were talking to someone," I said to
Mr. Deshais on Sunday, overhearing part of a
conversation as I walked into the greenhouse.
"Oh, I was just talking to myself," replied the
gardener. "I always talk to myself. I could talk to
the plants the way some gardeners do. But I'm afraid
they would give me dumb answers. So I talk to
myself..."
"But I like talking to myself," he continued. "I
find my companion so agreeable. And he always
understands what I am talking about."
Alas, a conversation involving more than one person
is bound to result in misunderstandings. Married
couples, for example, may go through their entire
lives together failing to grasp what the other
means, wants, or intends. Often as not, it is
probably these malentendus that keep the couple
together. If the truth ever were to get out, it
would probably ruin the whole thing - like a teenage
girl who discovers what they put in hot dogs.
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| About
The Daily Reckoning: |
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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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