Contributed by Bill
Publisher of: The
Fleet Street Letter
TUESDAY, 29 MAY 2001
*** Markets closed yesterday...but the Daily Reckoning
office remained open for business
*** Consumers are still up to their necks in debt...but
employment, not debt, is the key to consumer spending
*** Don't fight the fed!? The little engine that ran off
the rails...hot times in Paris...and more!
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To remind you, this section of the Daily Reckoning is
written by Eric Fry, editor of Grantsinvestor.com. Eric is
also the guest host on CNN-FN this week, 9:30 - 11 E.S.T.
My notes and letter follow, as usual.
*** The U.S. financial markets took the day off yesterday
in observance of Memorial Day. The stock market ought to
have its own Memorial Day to remember those stocks that
have fallen in the pursuit of capitalism.
*** Nasdaq Stock Market delistings have tripled so far this
year. Names like Drkoop.com Inc., EToys Inc. and Pets.com
Inc. litter the battlefield. Through the end of April, the
Nasdaq's ranks thinned by 147 companies - more than three
times the 46 companies delisted in the same period last
*** But as the NASDAQ stocks did not trade yesterday,
neither were any additional companies delisted. No
casualties reported. All present and accounted for.
*** European stock markets, although open for business
yesterday, might as well have been closed. About the only
noticeable trend was that the stocks of exporting companies
moved a little bit higher, the thinking been that as the
euro weakens against the dollar, any company selling its
goods for greenbacks will enjoy rising profitability.
*** The shares of French cosmetics company L'Oreal and
Dutch consumer electronics maker Philips, both advanced
about 2% yesterday.
*** The slow US economy is opening up travel bargains in
Europe as well as at home, according to the Wall Street
Journal. "For vacationers, there's one pleasant side-effect
to the soft economy: Summer travel is on sale, cheap."
*** Even in the hoity-toity Hamptons to which wealthy
Manahattanites flock every summer, rental rates for the
summer season are softer than last year's. Thrifty
multimillionaires, here is your chance. A beach house that
cost about $80,000 to rent for "the season" last year might
only cost about $70,000 this year.
*** Even as consumer debt levels soar, the retail sales
trend is an Icarus cascading into the sea. It is becoming
painfully obvious that employment levels, not debt levels,
power retail sales. That is, because unemployment is
rising, retail sales are falling.
*** Not only do the unemployed avoid shopping malls, they
also avoid opening mail from their creditors. "The
quarterly bad loan write-off rate rose to 5.6%," Moody's
states, "and the rate at which cardholders repay their
credit card debt fell to 14.9%. That was the first time
since 1996 that [these] measures of US consumer credit
quality have posted such a broad-based decline."
*** Yet, it is these consumers that Mr. Greenspan depends
upon to pull the economy out of its slump. "Heavily
leveraged consumers are in no position to take up the
economic slack." grantsinvestor.com's Andy Kashdan
observes. "Exuberance has returned to Wall Street in recent
months and the mood on Main Street appears to be
brightening as well. But lest this revived party mood
completely obscure some of the imbalances that have built
up over the last few years, we offer a friendly reminder:
consumers are still leveraged to the hilt."
*** Citing graphs provided by the International Strategy &
Investment Group, Kasdan points out that mortgage debt,
consumer installment debt and interest payments as a
percentage of disposable personal income are all at record
high levels. "At some point, creditors might actually want
some of that money back," he notes dryly.
*** Aware of these trends, most lenders are becoming a
little more cautious about extending credit to consumers.
Upon examining the May "Senior Loan Officer Opinion Survey
on Bank Lending Practices," Charlie Peabody stated, "The
banking industry continued to move toward a position of
'tightening' in its standards for credit card loans and
mortgage loans. Bankers are growing concerned about "the
recent run-up in consumer delinquency rates."
*** Peabody continues, "The simplest measure of the banking
industry's liquidity (the loan-to-deposit ratio) has
deteriorated to its worst level since data started being
kept in 1934."
*** Still, somehow Wall Street's faith in Greenspan remains
unshakable. Most investors, when gazing across the Valley
of Dire Economic News, still believe that they see the land
of milk and honey and Dow 36,000.
And a few notes from Bill:
*** "Don't Fight the Fed!" Do a search of the financial
media and those 4 words - in exactly that sequence - are
likely to occur more often than any others. It is as if
that is all we know and all we need to know. Is it really
that simple, dear reader? I don't think so. More below...
*** "I see the funds rate coming down at least another 100
basis points to 3% and possibly a little bit lower than
that by yearend," said Morgan Stanley's chief economic
strategist, Stephen Roach. "But the Fed won't get the bang
for the basis points that it got in past periods of
*** Why not? "Unlike in '98," Roach explains, "when America
was the engine that pulled the world out, this time the
engine is off the tracks."
*** What will it take to put it back on the rails? "All the
President's tax advisers and all the Federal Reserve's
actions can't put the economy back together again," writes
Stephen Gottdiener to Barron's. "The stock market will seek
new lows and so will the economy."
*** All of a sudden global warming has reached Paris. It is
hot - with temperatures reaching up into the 80s. It must
be a little like American cities before air conditioning
and the flight to the suburbs. Windows are open. You can
see your neighbors dressing and smell when they are having
*** Edward, 7, is scheduled to go on a class trip on
Wednesday. He'll spend two night away - in Normandy . That
is, if he goes. He's never spent a night away from his
mother. And I don't know who's more concerned - Edward (our
youngest child) - or his maman. Stay tuned.
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I, GREENSPAN ... PART DUH
Bill Bonner asked me to write today's letter.
"How did an Ayn Rand devotee become the world's most
respected central planning bureaucrat" he asked. "How can
you hope to overcome the business cycle and command the
entire world's economic tides" he wanted to know.
Good questions. So earnest. So innocent. So silly.
And why not answer? Nobody reads this pathetic little
electronic rag anyway. That is, nobody who counts. Nobody
with real power, that is. And if anyone ever asks me...I'll
deny I ever heard of it.
Besides, I've been dying to explain...
Do you think I really failed to see the bubble in U.S.
stock prices? You would have had to be blind, deaf and dumb
not to notice.
Do you think I really believe in this New Era nonsense...or
the productivity miracle? Do you really think that I don't
know what happens when I flood the world with cash...and
take real short-term interest rates down near zero?
But what was I supposed to do? I couldn't exactly come out
and say - "it's a bubble!" Investors would have panicked.
Once stock prices got to bubble levels, I had to think of a
reason why they might stay there...that was where that New
Era and productivity razz-ma-tazz came from. People wanted
an explanation and I gave it to them.
Do you think I learned nothing in all that time I spent
with Ayn Rand - that miserable, self-absorbed old tart?
Reading her books was painful enough - but can you imagine
having to spend time with her? I tell you frankly, I got so
sick of those ego-centric gab fests, in those pitiful
little apartments of lower Manhattan...I thought I would go
Rand had made herself into a minor cult figure. But what
did it gain her? A following of marginalized nuts and kooks
with bad taste, bad habits, and apartments cluttered with
science fiction paperbacks.
What I wanted was power, love, money - the same things we
all want. And I could never get them with the Randites.
Instead, if you want power, you have to go to where the
power is. Ceasar could have lived comfortably in any of the
Romanized towns around the Mediterranean. Hitler could have
had a pleasant life eating schnitzel and brautwurst in
Austria. And Bill Clinton could have stayed in Hope,
Arkansas. He could have married a local girl, worked as a
courthouse lawyer, and become a colorful subject for a
grotesque southern novel.
Power in America is in two places. The political power is
in Washington. And financial power is in New York. But the
real power is where the two come together - in the Federal
You have to remember, that the purpose of the Fed - as with
any cartel - is to make sure the member banks make money.
But, the Fed gets its authority from Washington...it has to
pay for this privilege somehow.
The Fed was chartered to protect the currency and ensure
the stability of the banking system. But its real mission -
now - is to keep the economy expanding. Why? Because that
gets politicians re-elected. Not only that, it keeps the
money flowing to Washington. Give people the impression
that they are better off...and they won't fuss about taxes.
The Fed was founded in 1913. At that time, Washington only
took about 5% of the nation's income and the dollar was
solid. Since then, Washington's percentage of GDP has
increased by nearly 600%. Meanwhile, the dollar has fallen
Do you really think that was an accident? C'mon...give us
central bankers some credit. Inflation pushed people into
higher and higher tax brackets. Plus, it gave people the
impression that they were getting richer - just what
Of course, if the inflation rate goes to high...then,
people begin to complain and you have to take action. Thank
God, Volcker was on watch back in the late '70s, and not
But here's the important thing. Even when you have control
of short term rates...and some control over the money
supply...you can never completely master the markets.
They're too big, too many players, too much money. If you
allow too much inflation, you spook the bond markets...and
the bond vigilantes mount up. Investors dump
bonds...driving up long term interest rates...which has an
effect opposite to what you're trying to accomplish. That's
already happening a little bit. I've cut rates 5 times in
the last 5 months - no one ever cut rates as aggressively
as I have - and still mortgage rates are higher today than
they were at the end of last year.
Could inflation go higher? Could the dollar fall? Mightn't
the bond buyers get nervous and drive up long-term rates
Yes, of course. It's a risk. But it's a risk I have to
take. You don't get power by being careful. And you don't
do either the Fed or the politicians, or yourself, any
favor by carefully protecting the dollar.
The goal here - as with all government programs - is to
produce the desired benefits...while pushing the costs onto
someone else. That's how politics works. You promise
something...and you force someone else to pay for it. You
rob one rich Peter voter...and spread the loot among the
Why do you think liberals always favor the poor? Why do you
think every politician talks about programs for the
disadvantaged, the sick, the unemployed? Why do they not
give money to the rich...at least, not openly? You think
they are just big-hearted, generous souls right? Ha ha.
Look, you have to do the math.
Politics favors the poor for two reasons - they are more of
them...and they're cheaper. How many rich votes can you buy
with a $100 handout?
Does that sound cynical? Well, sorry. But you have to look
at the situation, shall I say, objectively.
In the long run, giving money to poor people hurts the poor
more than the rich - but who cares about the long run? In
the long run, said Keynes, we're all dead.
And now let me tell you another secret - how I became the
most successful central banker ever. Keynes also figured
out how to use fiscal policy to keep the economy expanding
- beyond its natural cycle. The idea was for the government
to spend like crazy when the economy was weak - to
stimulate it. The government would run deficits during the
down cycles...and then make up for them by running
surpluses in good times.
But guess what? The politicians forgot to run surpluses in
the good times. Why? Because they really don't care about
the long term or about fiscal responsibility. What they
care about is promising voters new programs...and keeping
the economy expanding. So, the debts mounted up. but people
felt like they were getting something for nothing and so it
worked for a long time.
And now, thanks to the economy that I helped create,
government is looking at big surpluses. Well, don't count
on it. Washington wants to appear to run surpluses - this
allows the politicians to decide where to spend the money.
But no one in Washington has any interest in actually
running a surplus. Count on it. The surpluses - to the
extent they were ever real (which they weren't) - will
disappear before our very eyes.
Well, what I figured out was that you could use monetary
policy in roughly the same way. The theory is that you're
supposed to loosen up on the rates - lower them - in a
downturn. And then, when times are good, you gradually
increase rates to 'cool things down.' But the trick is, you
forget to raise them as much as you should. You always
favor rates that are lower than they ought to be. Because
you want to encourage more business expansion - and the
illusion of prosperity - than would otherwise be justified.
Let me ask you a question: could you imagine me raising
rates 5 times in 5 months to head off a bubble? Not a
chance. I would be torn apart by the furies in Washington,
the media, and Wall Street.
Of course, there will be a price to pay for this too.
Nothing comes without a price. Investors who really believe
this New Era nonsense will lose a lot of money. They think
they can get 15% per year on their investments forever. It
isn't going to happen. That doesn't mean stocks have to
crash. In fact, I think I can keep them at present levels
for many years - perhaps like the period between 1966 and
1973. Easy money can perform wonders - for a while. But
instead of 15% for the next 10 years, investors are likely
to get zero percent for the next 15 years. Who knows?
Probably bonds and the dollar will come down too...and a
lot of people will be hurt. But it could take years. And it
might not even be noticeable. Who knows or cares that the
dollar today is worth only 5 cents in 1913 terms?
And eventually, the system of managed currencies will
collapse. Every central banker is doing what I am doing -
deliberately destroying the currency to insure the
appearance of prosperity. Sooner or later, people will
catch on. They will try to switch from one currency to the
other - but all the paper currencies will be weak and
untrustworthy. Most likely, they will turn to gold. It's
the only thing that we can't manipulate.
But that is probably years ahead. And it's a problem for
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.