Contributed by Bill
Publisher of: The
Fleet Street Letter
TUESDAY, 12 JUNE 2001
Baby Boomers' Gift To The 21st Century: Recession
*** McVeigh is dead. Justice is done. But Reno still on the
*** Mr. Market feeling a little down...
*** Coal burns hot...a worldwide slump (except for the
world's biggest countries)...Marseille anyone?
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*** "McVeigh no longer has the power to hurt, by word or
deed," Oklahoma's governor reassured the nation. The
International Herald Tribune reports that the McVeigh was
fed two pints of chocolate chip ice cream. Then, just to
make sure he was dead, they injected him with some even
more lethal ingredient.
*** McVeigh, I don't have to remind you, was ice creamed in
retribution for his role in killing innocent women and
children. His big mistake was his target. If he had chosen
better he could be a U.S. Senator or maybe head of the
Justice Department. Best not to think about it.
*** But wait...our we've strayed off our beat... Let's see
Eric, what's going on in the land of investments, economics,
and filthy lucre?
Eric reports from Wall Street:
Tech stocks, once again, showed the way down as the
Nasdaq lost another 2%, to 2,170. The Dow dropped
55 points to 10,922.
Even an incorrigible optimist like Mr. Market can't
see the glass as half-full every day. Occasionally,
he notices the space between the rim and the liquid
and gets depressed...like an alcoholic working on his
last drink after the liquor stores have closed.
Yesterday, his attitude turned downright despondent
after Merrill Lynch issued some negative comments about
contract-manufacturer companies like Celestica and
These manufacturers of various electronics for companies
like Motorola and Cisco aren't making quite as many
widgets as they used to. Yet, even though business
conditions are worsening, many stocks in the group have
rallied almost 70% from their early April lows. That
adds up to a "Neutral" in Merrill Lynch's book. The
rest of us might call it a "Sell."
Up north, Canada's once high-flying Nortel Networks
fell to a fresh 52-week low, dragging the Canadian stock
market down with it.
While technology stocks stumble and bumble along,
resource-related stocks continue their winning ways.
Most oil-related stocks ended the day in the plus column.
"The Dow Jones Coal Index is up an amazing 279% from one
year ago," observes John Myers, editor of Outstanding
Investments. John thinks the boom times are only
beginning for the U.S. coal industry. "U.S. coal producers
saw exports surge by a whopping 37% last year compared
to 1999. An energy-hungry world seems to have a craving
for U.S. coal - a trend that will boost profits at coal
companies and put dollars into the pockets of smart
resource investors." (see: Coal Market Heating Up
In May, Taiwan's global trade plunged 26%. Orders for
U.S. technology goods like computers and semi-conductors
have collapsed 40% since last year, the ISI group reports.
"Taiwan's economy is on its sickbed," Credit Lyonais
Securities Asia (CLSA) surmises, "and it doesn't seem to
have a doctor either." CLSA notes that the current
unemployment rate stands at a record high and first-quarter
GDP growth was the lowest in Asia. "The final piece of
evidence: low hotel occupancy rates and half empty bars
even while Taiwan's mammoth Computex's trade show was in
Things aren't any better in Japan, either. Japan's
economic output fell 2% in the first quarter - despite
more than 5 years of easy money policies. Funny isn't it...
the way people have no confidence in Japan's central bankers
and almost unlimited confidence in their American
Yet, amid the global economic slowdown, the two most
populous countries on earth are oases of economic growth.
Economically speaking, China and India are doing quite
nicely, thank you.
Friedburg's Commodity & Currency Comments observes,
"China's economic strategy has made it, for the most part,
impervious to the regional and global slide in economic
activity...China should finish 2001 with another 8%-plus
The Indian economy continues to sail (mostly unscathed)
through the global economic tempest. While perhaps not as
stalwart as China's economy, India's real GDP growth will
likely exceed 6% this year.
The nation of one billion people now claims 3.7 million
cell-phone subscribers - an 89% increase from the year
before. Only 996.3 million to go.
Alan Greenspan is a "one trick pony" according to DR Blue
team member David Tice In a recent interview with
Welling@Weeden, Tice notes that whenever he's facing
adversity, Greenspan's consistent tactic has been simply
to create more credit and thereby entice consumers to spend
beyond their means. "The point is," says Tice, "the consumer
has to keep borrowing in order to keep the boom going."
Tice argues that the Fed's easy-credit tactics promote
excessive borrowing in the corporate sector as well. "We've
taken the debt-to-equity ratio on the S&P 500 from 84% to
116% over the last 15 years." In the process, says Tice,
"We misallocated capital. Instead of building power plants
in California, we built more bandwidth than we need..."
*** As you may have noticed, Eric does the heavy lifting
for the Daily Reckoning. I do the kibitzing. Last night, I
had dinner with a few French friends, one of whom travels
frequently to America. "The big difference," he commented,
"is that in America people do jobs they are not trained to
do. So, you get terrible service, sometimes, from barely
qualified people. But the advantage is that you have people
who will try almost anything."
*** "If a 'well-diversified' investor was burned in U.S.
stocks recently, chances are it was primarily due to one or
more of these ten culprits," writes C.A. Green, of the Oxford
Club "Microsoft, Cisco, Intel, Dell, JDS Uniphase, Oracle,
Ericsson, Nokia, Nortel Networks and AT&T. Together
they make up three quarters of the drop in the S&P 500 over
the past year."
*** How to do better? Green: "Look at what sectors have
been out of favor recently and are likely to ride the cycle
all the way back to the top again. To my mind, that means
favoring value stocks over growth stocks, small and mid-caps
over large caps, and international markets over Nasdaq."
*** Maria's career in show biz seems to be taking
off....slowly. She had her first paying modeling gig the
past weekend. She'll be featured in a French teen magazine,
I believe. And she may be offered a part in a real movie -
to be filmed in October. If she gets the part, she'll have
to be on location in Marseille for two months - with a
tutor and a chaperone. Any DR reader want to spend two
months with a beautiful 15-year-old in the South of France?
No, on second thought, I'll do it myself.
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THE BABY BOOMERS' GIFT TO THE 21st CENTURY: RECESSION
Sha, la, la, la live for today...
Don't worry about tomorrow, hey, hey, hey...
An actual song lyric,
Written by Grassroots
Theme song of the Baby Boomers?
"Savings seen as threat to the economy," warns a headline
from the Chicago Tribune.
Can anything be done to stop this menace?
Of course, much is being done. Mr. Greenspan and his band
of merry central bankers are doing all they can. The fed
funds rate has been cut more aggressively than at any time
in history. Likewise, the money supply is growing at the
fastest rate since the late '70s.
In short, our central bankers are mounting an effort to
debauch the currency worthy of a gigolo in a finishing
Dallas Fed governor, Robert McTeer, adds comic rhetoric:
"Go out and buy an SUV," he urges consumers. Spending
yourself deeper into debt is an act of 'patriotism', he
Yet, virtue sometimes triumphs - even if by accident or
lack of opportunity more often than by force of will.
"Sated, Will Consumers Hurt the Economy," asks the Wall
Street Journal. The Journal article worries not that
consumers have lost their will, nor their ability...but
they may have lost interest. Businesses invested too much
in IT and other capital improvements in the late 90s. The
business sector is now "teched up." Consumers went on a
buying spree too - loading up on new cars, houses, and other
big-ticket durables. Could consumers be 'durabled up' too,
wonders the Journal.
But the threat doesn't stop there. A bigger risk is that
baby boomers will discover savings as they once discovered
sex, drugs and rock & roll. They may even come to like the
idea...and think they invented it. And perhaps they will
even do it, like everything else they do, to excess.
The vanguard of the boomers are now 56 years old. Behind
them trail 80 million Americans, few of whom have taken
the challenge of retirement planning very seriously. As I
reported in this space a few days ago, 80% of the
population has no more than 8 months' worth of financial
"50-Plus Population Not Prepared for Retirement" says an
AARP Report. And the number of those not prepared for
retirement is swelling faster than their lower extremities.
In 2000, about 76 million Americans - or 28% - were older
than 50. By 2020, there will be 40 million more in that group,
amounting to 36% of the population.
Well, well, well...
You will recall, dear reader, that one of the sustaining
rumors of the boom on Wall Street was that these millions
of baby boomers were pouring billions of dollars into 401ks
and other stock market investment programs in anticipation
This gush of money was supposed to carry the Dow to 35,000
in what Harry Dent called "the greatest boom in history."
Yet, nearly half of the baby boomers never bought any stock
and never will. And even those that do buy stocks may not
continue to do so forever.
Why not? Because they are getting a lesson in how the stock
market really works. Stocks tend to go up more often than
they go down. But then, they compensate for this upward
bias by dropping suddenly and sharply - or going nowhere
Arguably, an investor who still wears his baseball cap
backwards can wait out the down cycles. Over the very long
run, he can say to himself, I'll come out ahead.
But an investor approaching retirement looks at his
finances with a greater sense of alarm. He is often willing
to forgo the incremental gains from stocks in favor of the
surer returns from bonds...or mortgage lending...or rents.
Could it be that Harry Dent, whom Office.com calls a "human
crystal ball," has gotten the story completely backwards?
Might not Dent's vision of the 'greatest boom in history'
be shattered by the very boomers he expects to create it?
Wouldn't that be just like Mr. Market, dear reader?
Dent predicts that stocks will fall in the near term - to
about 7,000 on the Dow. But after this happens, stock
prices are supposed to shoot back up wildly.
Mr. Market will decide for himself what to do, of course.
But I will give him a suggestion:
Confirm the first part of Dent's forecast...but not the
After the Dow has lost 35% of its value...and the Nasdaq
60%...will baby boomers continue spending at the same rate
and rush back into the stocks that have just burned them?
Or, approaching retirement and stocked up on durables, will
they do what consumers in similar circumstances have always
done: cut back on spending...and place the savings
Even a little bit of forbearance could have a dramatic
effect. John H. Makin of the American Enterprise Institute
calculates that when you include capital gains as savings,
Americans 'saved' about 15% of their incomes during the
People are not idiots, not even baby boomers. They know
they need to set money aside for the future. So, when
capital gains disappear, they have to compensate somehow.
For a while, of course, they can tell themselves that the
market will come back...and the capital gains will return.
And, maybe the market cooperates - for a while. But, sooner
or later, somehow or other, stock values have to work
their way back to the mean. After a long period of superior
gains, there must be a period of inferior ones.
When the baby boomers recognize that they face a stretch of
time without capital gains from stocks - or even losses -
they will decide to increase savings in other ways.
Makin figures that if they save at only one third the
prevailing real rate for the 1990s - that is, at 5% - they
would have to forego $350 billion of spending each year.
This would subtract 3.5% from the GDP - effectively
guaranteeing recession for many years to come.
Dr. Richebacher has done the math too. He found that if the
savings rate were to revert to only 3% to 4% of disposable
income - less than half the postwar average - it would make
for "the deepest and longest recession since WWII."
Your reporter, just saying...
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.