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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
MONDAY, 4 JUNE 2001 

 

Today:  What The Fed Can't Do

*** 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?

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:

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: June 04, 2001

Published By Tulips and Bears LLC