Contributed by Bill
Publisher of: The
Fleet Street Letter
SANTA FE, NEW MEXICO
THURSDAY, 17 MAY 2001
Fight the Fed?
*** Mr. Market likes rate cuts...at least, he did
*** Dow not far from record high...even Amazon rises...
but history does not favor a new bull market...
*** Consumers have little money to spend...gold moves
up...gold shares up 10%...
|*** Yesterday, Mr. Market reconsidered the significance of |
the Fed's recent rate cut. Upon further reflection, he
determined that what had at first seemed a non-event was in
fact an extraordinary and economically transforming event.
Why this is so, he is not exactly sure. But he is sure that
it is so. At least for one day.
*** The Dow soared 342 points. In so doing, the indomitable
index reclaimed and promptly surpassed the 11,000 level to
close at 11,215.
*** The Dow, which last reached 11,000 - albeit in the
reverse direction - eight months ago, now stands little more
than 500 points below its all-time high. The NASDAQ,
although still several 3-woods away from its all-time high,
put in a solid day's work on Wednesday by advancing 3.9%.
*** 'If this is a bear market, let's have more of them!'
investors must be thinking. But Daily Reckoning readers are
cautioned that Mr. Bear is a wily animal. The DOW rallied
50% from its 1929 crash low of 195.4 to its April 1930 peak
of 294.1, before resuming a decline that carried the index
down to the ultimate bottom of 41.6 in 1932.
*** "After the initial stock market crash in October 1929,
the country remained sanguine," writes Fred Hickey of the
High Tech Strategist. "The Harvard Economic Society issued
a series of optimistic forecasts, including one in May 1930
that claimed that business 'will turn for the better this
month or next, recover vigorously in the third quarter and
end the year at levels substantially above normal.' Does
this sound familiar?
"In 1930 President Hoover famously declared, 'Prosperity is
just around the corner.'" It is no small bit of irony,
Hickey points out, that Leo Reisman and His Orchestra first
recorded "Happy Days are Here Again" in November of 1929.
*** "The most important lesson that can be learned from
studying past manias is that, with no exceptions, every
completed mania has seen stock prices fall until they are
below the original starting level," writes a reader of Bill
Fleckenstein's Market Rap. "History does not favor the
current bear market ending soon, despite daily predictions
of a bottom from Wall Street media."
*** If, as the saying goes, markets make opinions, the
opinion now being made would seem to be that Greenspan's
got the cure. The economic plague is over. Celebrate! Kill
the fatted calf, make merry, buy tech stocks and, if at all
possible, break out the credit card to buy a little
something nice for the spouse and kids.
*** "If at all possible" is a high bar for the consumer to
clear these days. "Not only is consumer debt outstanding at
a record relative to disposable personal income, interest
payments are also," the ISI Group points out. US consumer
installment debt now totals a record 21.7% of disposable
personal income, while the payments necessary to satisfy
that debt total 3.1% of disposable personal income, also a
record. Looked at another way, US private debt now equals a
record 147% of America's Gross Domestic Product. ISI
concludes, "To be sure, consumers and corporations are the
most highly leveraged they have ever been going into a
*** The latest auto sales reports suggest that happy days
are not quite here. GM and Ford both reported 16% sales
declines in April. Non-Mercedes Chrysler's sales fell 18%.
Maybe the reason is as simple as: Consumer wants to spend.
*** "Just maybe the consumer will draw down credit lines
only to maintain a satisfactory standard of living,"
grantsinvestor.com suggests, "forgoing the new Jeep Liberty
or Maytag dishwasher in favor of keeping his already
heavily indebted head above water." The article goes on to
state that "likewise, corporations will borrow money for
'general corporate purposes' like paying officers' bonuses.
Not, we repeat, not to buy routers from Cisco, trucks from
Volvo and blocks of airline seats from American Airlines."
*** Charles W. Peabody, the brilliant bank analyst from
Mitchell Securities, Inc., observes that revolving home
equity and credit card loan growth both peaked in January.
"This may be the first indication that the consumer doesn't
have the appetite for more debt," he writes. "The big
question is whether this diminished appetite is because the
consumer is losing confidence, and thus, unwilling to spend
or can't spend anymore because his debt service burden is
already too high. Either answer bodes poorly for the
economy over the next six to nine months."
*** Amidst the frenzy on Wall Street yesterday, a little
bit of buying sloshed over into the gold market as well.
The precious metal continued its winning ways on Wednesday
by climbing almost $4 per ounce to $272.40. The Amex Gold
Bugs Index soared more than 10%.
*** "No joke: Newmont Mining has outperformed Cisco the
last two years," writes Eric J. Fry of grantsinvestor.com.
"Shares of Newmont, the Denver-based gold producer, managed
a 16% gain over the last 24 months, compared to CSCO's 26%
"Might these archetypes be sending a message?" he asks. "As
the tech sector abdicates its throne, are resource stocks
laying claim to it? Chairman Greenspan's seemingly
inflationary monetary policy improves the odds. By
expanding the money supply at double-digit rates and
cutting the fed funds rate five times into the face of a
rising CPI, the Fed may be spurring greater demand for gold
than for PCs and cellphones - for the time being at least."
*** Even Amazon rose yesterday. But Dan Ferris sends me
this note: "Amazon's 5 year return on capital, -103.2%.
Yes, that's NEGATIVE 103.2%."
*** Dan is also the source of the following comments on
credit quality: "The median corporate bond rating stands at
BBB, weak investment grade, the lowest since 1981, the
first year that statistic is available. Also, just 28% of
the junk-bond universe holds the top junk rating, according
to Moody's Investors Service, the lowest proportion in at
least 80 years, a span including the Depression."
*** I am in Santa Fe, New Mexico, where I will be attending
my son's graduation from St. John's College this weekend.
Santa Fe has a style all its own. I lived here, briefly,
about 30 years ago. But the place has changed. It's gone
up-market. I hardly recognize it. More to come.
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FIGHT THE FED?
"Almost half of the 1300 employees of the Peruvian Central
Bank of Reserve of are related to one another," Bloomberg
reports. Central banking is, after all, a government job.
It is different from, say, the local Department of Human
Resources, only in that its employees are better paid and
get better press. Even the Federal Reserve - perhaps the
world's most powerful and prestigious bureaucracy - is
still, like every other government agency, a scam, a
sinecure, and waste of money.
At least, that is the working hypothesis of today's letter.
Not much in life is certain. That is why it is such a
comfort to have government. One of the few things you can
depend on is that government officials will do the wrong
thing. Even when they occasionally seem to do the right
thing - it turns out later on that it was at best
accidental, and at worst, the wrong thing after all.
"The last successful government program," observed New York
mayoral candidate Jimmy Breslin, " was WWII." Since then,
there have been a number of wars declared and undeclared by
Washington hawks. But in almost every instance bureaucratic
instincts and motives were hopelessly wrongheaded.
In the war on drugs, as we observed here just the other
day, the government seeks to put drug dealers out of
business by interdicting supplies. This is just the wrong
thing to do, since it increases profit margins. The more
taxpayer money spent trying to keep illegal drugs off the
market, the more profitable the business becomes and the
more entrepreneurs rush in to fill the unsatisfied demand.
Yesterday's USA Today brought news that the shooting war
has moved to the suburbs as dealers battle it out for
control of the Ectasy market - made especially rich by
If government really wanted to put dealers out of business
it would flood the market with illegal drugs - give it away
on street corners for free. But what profit could there be
in that? Not only would it put the drug dealers out of
business - it would also put the DEA out of business too.
Likewise, if the bureaucrats really wanted to win the War
on Poverty - they would tax poor people at a higher
rate...not reward them with subsidies and handouts. So,
too, would health officials cease to coddle the sick and
infirm. If they really wanted a nation of healthy people
they would revoke public health insurance benefits for
people who eat too much or watch TV all day, and perhaps
shoot a few smokers and fat people in the streets.
Thus do bureaucrats go about their business - making worse
whatever problem they're supposed to be fighting, while
actually increasing their own power. But as we will see
tomorrow, it is a rare person who will not give up his
dignity and his common sense in a bid for riches, fame or
Even Alan Greenspan, once an Ayn Rand devotee, could not
resist the lure of power. In order to get his picture on
the cover of TIME, something he could never do as an
'Individualist,' he has become a collectivist central
Unlike other activities in life - from shopping for
vegetables to running a Rotary club - government
distinguishes itself in a singular way: by its ready use of
force. Instead of coming to terms with people in a polite
and dignified way, government orders them around like
prisoners of war. The results are almost always pathetic
Could it be any different with Alan Greenspan and the
Federal Reserve? Could the interest rates proclaimed by the
Greenspan Fed be superior to those set by buyers and
sellers? Could this be one - and perhaps the only one -
instance where government is superior to the market, and
where the judgment of powerful government bureaucrats is
superior to that of millions of investors and lenders?
Raising these questions, I realize that I put myself
directly in the path of the rush of popular opinion. 'Don't
Fight the Fed' blows the common sentiment.
The odds favor the Fed, it is believed. Because easy money
has to go somewhere... and because stocks rise more often
than they fall anyway. The Fed, clearly committed to
cutting rates until the economy turns around, seems to be
offering investors a no-lose wager. If at first the Fed's
cuts fail to boost stock prices... Greenspan will try, try
again - and keep trying until the market finally responds.
And yet, anyone betting on government bureaucrats to win
the War on Poverty, the War on Drugs, or any of its other
wars since 1945 would have found himself on the losing end
of the wager.
Even the Fed itself has a reliable record. Charged with
protecting the currency, it has done the exact opposite. In
the 100 years preceding the creation of the Federal Reserve
System, the dollar went up and went down, but it ended the
period about where it began, worth as much in 1913 as it
was in 1813. Since then, thanks to the Fed's management, it
has lost 95% of its value.
Having failed so miserably, the Fed has done just what
every government agency seeks to do - expand its mandate.
Now, the Fed has taken on the job of managing the economy
as well as the currency.
Mr. Greenspan believes, at least publicly, that the Fed can
manipulate key interest rates and keep the economy
expanding almost eternally. And the public believes it, too.
Even people who have not yet begun to shave believe it.
Teddy Chestnut, of Montclair (New Jersey) High School, said
he was "almost positive" that the Fed would cut another 50
basis points this week. "People are losing confidence," he
explained, "and right now spending is the only thing
keeping us out of a recession."
If the Fed merely cuts rates, Teddy seems to think,
consumers will be inspired to do more of what they do
naturally...and the economy will continue its record
expansion. It is, of course, possible that the economy
functions in exactly the way Teddy imagines - with the
complexity of a grandfather clock. Greenspan has merely to
adjust the pendulum to make it run faster or slower as
desired. This view helped Teddy's team win $40,000 from
Citibank in a remarkable competition called the "Fed
Challenge." The challenge for the kids is to think like
central bankers. That is, to think like central bankers who
believe that Alan Greenspan is a bureaucrat like no
other...one whose decrees actually lead the nation where it
wants to go.
How likely is that, dear reader? Should you 'fight the Fed'
I will take up the issue next week.
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The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand 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 upnot 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 90sopening offices in Florida, London, Paris, Ireland, and
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.