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Co-brand
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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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OUZILLY, FRANCE
MONDAY, 4 JUNE 2001 |
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Today:
What The Fed
Can't Do
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*** Recession? Or recovery? Inquiring minds want to know...
*** Cisco sees no recovery...but investors are in techs
'for better or for worse.'
*** Chickens and eggs...Picasso or T-bonds...fools or
knaves?
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Market Watch
This section of the Daily Reckoning is written by Eric Fry,
editor of Grantsinvestor.com.
*** "What recession?" the Fox network's Neil Cavuto asked
optimistically on his weekend business show. The more
appropriate question would seem to be, "What recovery?"
*** Early last week, Sun Microsystems slashed its earnings
projections for the current quarter due to very soft demand
for its products both in Europe and the U.S.
*** Chemical giant DuPont warned of "continuing challenges"
and said it would lay off more of its workers than
previously expected. Semiconductor manufacturer Altera
disclosed a "greater-than-expected" drop in its foreign
sales. And according to a filing with the SEC, Cisco
reported to that it expects the capital-constrained telecom
and technology sector to scale back expansion plans "for
the foreseeable future."
*** Still, the stock market embarked upon one of its
periodic flights of fancy Friday. The Nasdaq bounced 39
points to 2,149, and the Dow tacked on 78 points to finish
just below the 11,000 plateau. Still, it was a week most
investors would rather forget as the Nasdaq tumbled 6% and
the S&P 500 shed 2.5%.
*** SmartMoney.com's Igor Greenwald described those
investors buying tech stocks last week as "codependents."
Greenwald warns, "Like the faithful partners of errant
spouses, investors will get more proof next week that the
tech companies they love have strayed. And like many a
long-suffering wife, they seem likely to consider the
alternatives and fall back on that familiar oath: 'For
better or for richer or for poorer.'"
*** Weekly jobless claims reports continue to rise. Worse,
continuing claims for unemployment now total 2.8 million
Americans - the highest level since 1993. The Conference
Board's help-wanted index slipped again in April to its
lowest reading since 1992. The "jobs-plentiful" index also
fell again last month to 39.5 from 53.0 the year before.
*** The trend is your friend - only if the trend is
friendly. And the unemployment trend is unmistakably
hostile toward investors at the moment.
*** "If we are going to avoid a recession, SOMETHING needs
to start showing some signs of a recovery," writes Fleet
Street Letter contributor John Mauldin. "But I ask myself -
what reason do I have to think that unemployment won't
increase? How long can consumer spending hold up? When is
production going to start back up? Everywhere I look there
are far more negatives and questions than positive aspects
and answers. So, where do we place our faith? Do we trust
in Greenspan or do we believe in History? (see: Fighting
The Fed or Fighting History)
*** "It may be time to trade in your T-bills for a
Picasso," says Crain's New York Business magazine.
According to a new study by two New York University
professors, art investments produce a higher annual yield
than government bonds or Treasury bills. Crain's reports,
"Using 5000 repeat sale prices for paintings sold at
Christie's and Sotheby's, dating back to 1875, art
investments showed an annual return of 5.6%. In that time,
government bonds grew only 4% annually and Treasury bills,
4.3%."
*** Still, for those unable, or perhaps unwilling, to pay
$82.5 million for Vincent Van Gogh's "Portrait of Dr.
Gachet," Treasury bills may offer an adequate substitute.
Besides, compared to Picasso, Treasury bills are works of
art..
Eric Fry
And more notes:
*** It's a holiday in France today, Pentacost. So, we're
enjoying another spectacular day in the country. Paris
empties out on holiday weekends. The streets were so jammed
up on Friday night that it was midnight before we reached
the toll booths at the entrance to the highway. It was
after 2 am before we finally reached Ouzilly. It will be
just as bad going back to the city tonight.
*** "When Jesus left the disciples and ascended into
heaven," Pere Marchand explained the meaning of Pentacost
in his Sunday sermon, "he promised to send a sign. Well,
this marks the day the disciples received the sign. Their
hair was set on fire...and their hearts were set on fire
too, with the Holy Spirit. And they spoke in tongues. They
became one body with Christ. Yes, that is what it is all
about, being in solidarity with one another and with
Jesus..."
** "Someone is stealing the eggs," reported our gardener.
"I don't know who...but I have my suspicions." Elizabeth
could not believe the hens laid only a dozen or so eggs
last week. She has her suspicions too. Stay tuned for the
next exciting development.
Bill Bonner
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WHAT THE FED CAN'T DO
Since 1871, stocks have - on average - traded for about 12
times their earnings. If a company earned $1,000, the
company would have a stock market value of $12,000.
On Wall Street today, however, the average Dow stock with
$1,000 of earnings is thought to be worth $24,000 - about
twice the average. Has something changed?
As reported in this week's Barron's, Jeremy Grantham
maintains that no bubble market has ever gone uncorrected
forever. Sooner or later, every penny of excess valuation
is given up, as every market regresses to the mean.
Grantham has challenged analysts to come up with a single
exception. None have come forward.
The way to make money, says George Soros, is to find the
trend whose premise is false and bet against it.
The premise of today's values on Wall Street is that Alan
Greenspan, public servant, will be able to do what no one
has ever been able to do before - prevent stock prices from
regressing to the mean.
Many are the reasons given why this may not be the case
today. The 'productivity miracle' was popular, until the
most recent figures showed productivity growth regressing
to the mean.. 'Higher GDP growth rates' was a winner until
the last quarter - when GDP growth also slowed.
'Information technology' had a ring to it, but it needed
the objective correlative of higher productivity and
economic growth to give it substance. How about 'higher
corporate profits?' Alas, that fell into the gutters of
Wall Street as corporate profits slipped up along with
everything else.including the myths of the 'endless
expansion' and the 'perfect inventory control systems.'
Only one thin reed remains standing - the idea that Alan
Greenspan is in control of the U.S. dollar and its economy.
Somehow, it is believed, Greenspan will restore the vigor
of the economy and the vitality of its stock markets.
It is not for me to predict the future, dear reader. That
gift is not given to mortals. Maybe the economy will
recover in the 2nd half as advertised. Maybe the stock
market will go up. Who knows?
But the premise - that Mr. Greenspan has the power to keep
the economy expanding for as long as he lives...and thus
prevent a regression to the mean of stock prices - is
surely false.
We have already discussed the manner in which the Fed has
carried out it's primary duty - protecting the value of the
dollar. Over an 87-year period, it turned the dollar from a
hard currency into something with the consistency of
custard pudding. Of course, that doesn't mean that in the
88th or 89th year Mr. Greenspan will not add a little more
corn starch.
Protecting the value of the dollar is one thing. Driving
the economy is another, arguably more difficult. You not
only need your hands on the wheel, but your eyes on the
road ahead. In the autumn of 1999, Mr. Greenspan provided
testimony on the Fed's ability to see around corners: "The
fact that our econometric models at the Fed, the best in
the world, have been wrong for 14 straight quarters does
not mean that they will not be right in the 15th quarter."
The record shows that Mr. Greenspan neither smiled nor
chuckled to himself when delivering the above sentence.
Yet, if the Fed cannot see the on-coming economic
traffic.how can it avoid a collision? Perhaps it can't.
If evidence for this were needed, more of it is presented
in the latest issue of Grant's Interest Rate Observer.
Grant's discusses a new book by Martin Mayer, "The Fed: The
Inside Story of How the World's Most Powerful Financial
Institution Drives the Markets."
"Mayer's special contribution," Grant writes, "is to
demonstrate that the Fed is incapable of doing what it
appears to be doing with the techniques available to it. It
can't control the money supply. It can't direct the
economy. Banking deregulation, coupled with the growth of
securitization and the derivatives markets, means that it
does not actually control much at all."
This is not to say that the Fed has no power. It had the
power to debase the currency, after all. It has the power
to increase liquidity.and to set the rate that member banks
pay to borrow money, thus almost offsetting the tendency of
bankers to lose money by lending recklessly at the top of
the credit cycle.
Beyond that it has another peculiar tool. "It sets the
terms of financial discussion and manipulates the
expectations of its adoring public," explains Grant.
Last week, for example, Dallas Fed chief, Robert McTeer,
urged consumers to go more deeply into debt in order to
continue buying. In the name of patriotism, McTeer asks
Americans to sacrifice their own financial security to the
good of the national economy.
It is hard not to like McTeer. These days, when most public
figures are mealy mouthed blanks, so cautious in their
speech that you can't tell if they are fools or knaves,
McTeer is a completely unhedged buffoon.
What imbecile would run down his own balance sheet for the
benefit of 'the economy?' What possible good could possibly
come from trying to get the GDP growth rate up a point or
two - at the cost of setting yourself up for bankruptcy?
How many people will answer McTeer's appeal for mass
financial suicide? Enough to overcome the business cycle?
We will see, dear reader, we will see.
Bill Bonner
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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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