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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
WEDNESDAY, 20 JUNE 2001 |
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Today:
Faith
and History, Fear and Greed
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*** "Americans' Debt Soaring..." will it never come back
to earth?
*** The worst may be, well, could be...hopefully,
possibly...kinda near the very beginning of what might
turn out to be...the end.
*** 3 clues to what is really happening on Wall
Street...insider trading...Pearl Harbor (and other
disasters!)...
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*** "Americans' Debt Soaring" declares a headline in the
Chicago Sun Times. "More and more people are at the
crisis point," the paper quotes a debt counselor. The
details:
* The second-highest number of personal bankruptcies on
record - 356,836 - were filed during the first three
months of this year, according to the American
Bankruptcy Institute.
* The average amount of debt per household has reached
14.29 percent of disposable income, the second-highest
rate ever, according to the Federal Reserve.
* The average credit card debt per household hit $8,123
in 2000, nearly three times the average amount owed 10
years ago, according to CardWeb.com, which tracks the
credit card industry. We owe $568 billion to credit card
companies, up from $172 billion in 1990.
* The percentage of credit card loans considered
delinquent - as well as the number of Americans behind
on mortgage payments - at the end of last year hit their
highest levels since 1992, according to the Federal
Reserve and the Mortgage Bankers Association.
*** As you will recall, the health of the economy
requires Americans to spend themselves even further into
debt. Americans may be immune to prudence, but they are
surely vulnerable to incapacity. Either might bring on
an attack of thrift, of which, even a mild case could be
fatal.
*** But let's see what went down on Wall Street
yesterday. Over to you, Eric:
- Thanks to a not-terrible earnings report by Oracle,
the Nasdaq jumped to a 3% gain shortly after the opening
bell. "We think, we hope that the worst is over," Oracle
announced, "Hopefully, we hit bottom in our fourth
quarter."
- But one hedge fund manager with whom I spoke called
the Oracle announcement, "A big 'So What?' Nothing has
changed...Oracle's operating earnings fell a
considerable amount. I'm not prepared to call that 'the
bottom,' no matter what Larry Ellison says."
- The early gains didn't last, anyway. On the day, the
Nasdaq snapped its string of seven consecutive losing
sessions by gaining only four meager points...but I saw
no spontaneous celebrations on Broad Street. The Dow
fell 49 points.
- How tough are things becoming in this ol' economy of
ours? Agilent CEO Ned Barnholdt provides a clue:
"Frankly, the speed and severity of the slowdown [is]
unlike anything I've seen in my 34 years in business."
- Fred Hickey provides a second clue: "Even the $1
billion on-line adult site industry is struggling... One
site owner despaired, 'Lots of people are canceling
memberships saying they've lost the job or are stacked
up with credit card debt.'"
- Clue #3: A friend of mine who is vice president of a
commercial real estate firm in Manhattan reports that
the real estate market is noticeably slowing down...on
Martha's Vineyard. A perennial renter on the island, he
relates that an astonishing number of houses remain
available for rent even though the season is almost
underway. "Rental agents are returning my phone calls on
the very same day," he reports with amazement. "That's
never happened before."
- One imagines that commercial real estate agents in
Manhattan are promptly returning phone calls as well.
"Manhattan office leasing dropped dramatically in the
first four months of this year," Crain's reports, "with
the volume of space rented in midtown and downtown just
half of what it was in early 2000. And nearly 6 million
square feet more space was vacated than was rented..."
- Exacerbating the trend, companies like Cisco Systems
are dramatically scaling back plans for office space in
New York. Instead of the half-million square feet of
office space on Times Square that Cisco had planned to
lease, the struggling tech giant has decided to lease no
more than 100,000 to 200,000 square feet.
- Many public company insiders have been stepping up
their selling lately, according to Thompson First Call's
insider-selling guru, Paul Elliott. Sales of so-called
restricted stock totaled a hefty $11.2 billion in May up
from $6.9 billion in April.
- Charles Biderman, editor of Liquidity Trim Tabs, tells
me that the insiders at many former tech highfliers are
leading the charge to unload shares. Biderman also notes
a remarkable surge of initial public offerings (IPOs).
He reports, "The five days ended Wednesday June 13, had
$15.5 billion in new offerings - which was a 5-day
record. The $57 billion sold in the last seven weeks is
also a record."
- I don't know what all these selling insiders see, but
I suspect it is not a "second-half recovery".
*** What else? Well, I took my mother to see "Pearl
Harbor" last night. I thought she might enjoy reliving
an event in which her husband, and my father, played a
small role. What a disaster! I mean, the movie. It lasts
longer than the attack itself and is so revoltingly
shallow and silly, it makes the viewer embarrassed. Only
the Japanese seem to know what they are doing - and go
about their business with dignity and skill.
*** In one scene, President Roosevelt struggles to his
feet - which is not easy for a cripple to do. It is hard
not to laugh as the old humbug tries to shame his
military commanders with his show of determination and
the battle courage of a man confined to a wheel chair
10,000 miles from the front lines.
*** I was curious about the French reaction. The French
fleet was the object of a surprise attack, too. On July
3, 1940, British warships pulled up in front of the
harbor where the French were moored at Mers el Kabir and
proceeded to blast them to pieces. More than 1,200
French sailors died. No pretentious films have been made
to record the incident.
*** The children are in the home stretch. Just ten more
days of school. Sophia is studying hard for her final
exams...and will then take a year off before college.
Maria needs to pass a single test - the brevet. Without
it, her scholastic possibilities are limited, in France
anyway. But Maria has already turned her attention away
from school. She figures she will be able to make a
career for herself in show biz, no matter what happens
on the brevet. Jules seems to be squeaking by this year
- or at least he thinks so. We won't know until next
week. And Henry and Edward are doing okay and ready to
move ahead to the next level. Henry, 10, enters the
'college,' the French equivalent of junior high, next
year.
*** You have no reason to care about my children, of
course, but what the heck...the Daily Reckoning is free
so I feel I have the right to bore you with the details
of my family life...
Until tomorrow...
Bill Bonner
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FAITH AND HISTORY, FEAR AND GREED
by John Mauldin
"Faith," wrote Paul, "is the substance of things hoped
for, the evidence of things not seen."
The received wisdom of Wall Street is that the stock
market is driven by the twin emotions of Fear and Greed.
And for hundreds of years, that wisdom has been true.
But there is now a new emotion asserting its right to
move markets: Faith.
Specifically, it is a Faith in the power of the Federal
Reserve to either forestall recessions or that any
recession will be such a short-lived event that stocks
must shortly and surely take off thereafter. In an
ominous sense, it is really Faith in just one man to so
manage the economy of the world that we avoid the twin
shoals of inflation and recession.
This trust supplies the substance of a quick recovery,
and the evidence of large and growing future profits. As
a basis for their Faith, members of the Church of the
Fed point out that one year after the Fed begins to cut
rates, historically the stock market was up an average
20%. During market dips, they repeatedly chant that
mantra as they buy even more Cisco and Oracle.
While these faithful cite this one shaky premise (see
below), History itself dredges up a Pandora's box full
of contradictions. Thus we become witnesses of a titanic
boxing match between Faith and History.
A brief perusal of economic history yields this crop of
facts:
* Never have we had a negative yield curve as appeared
last August and not had a recession four quarters later.
The yield curve tells us a recession should begin in the
third quarter of 2001.
* Industrial production has never dropped as it has for
seven straight months without having a recession.
* We have never seen such large losses in non-farm
payrolls without a recession in the last four decades.
Increases in unemployment usually PRECEDE recession buy
7 months. This means a recession should begin in the
third quarter. Further, many recessions started from
employment rates better than we currently have, so the
fact that we only currently see 4.5% unemployment gives
us no encouragement, at least from a historical
perspective.
* Manufacturing and trade sales have dropped 1.6% since
last August. Such a decline has never occurred outside a
recession.
* Many, if not most, of the one-year recoveries the
Greenspan acolytes seek confidence in began at
reasonable or low P/E ratios. History tells us it has
taken index investors 10 years to eke out a profit when
P/E ratios are at the current level.
* Seriously slowing world trade, the debt markets, trade
deficits, decreasing profits, more lay-offs, etc. Many
of these are also in statistical territories that
historically suggest we are facing a real honest-to-Alan
recession in our near future.
So what is the problem? History tells us that the stock
market declines over 40% in an average recession.
The bursting of the NASDAQ was not brought on by a
recession. That was a greed-based, irrational bubble. We
have yet to see how serious a decline, if any, will be
precipitated by a recession which History tells us is
right around the corner.
If we are going to avoid a recession beginning in the
third quarter, SOMETHING needs to start showing some
signs of a recovery. But as I survey the statistics, I
ask myself where? What reason do I have to think that
unemployment won't increase? That would seriously erode
consumer confidence. Then, how long can consumer
spending hold up? When is production going to start back
up? What country is going to rally and pull the world
back from the brink? Japan is in a deflationary spiral
and Europe is starting to show real signs of weakness.
Everywhere I look, there are far more negatives and
questions than positive aspects and answers.
The Fed (Alan Greenspan) is in a death match fight with
History. History tells us we should see a recession,
lower stock market prices and higher bond market prices.
And yet, the S&P and the Dow do not go down, and even
the NASDAQ rises 30% in the face of what many think is a
coming recession. Those of us who look to History are
amazed at the Faith of investors in Greenspan.
In a way, Greenspan is not so much fighting History as
he is trying to change future History. If he pulls this
off, he will become History. By that, I mean that in the
future, we will look at the possibility of recessions
from a new vantage point. Analysts such as myself will
not be able to point to History and say (as above) when
these 10 things happen, we have always had a recession.
We will always have to acknowledge that the Fed can
"manage" economic History.
Those who have put their Faith in the Fed are basically
saying that one man, or at the most, 5-6 men, can
effectively direct the entire course of human economic
commerce, and that they can do it with very limited
tools.
History tells us that the stock market declines over 40%
in an average recession. If the S%P 500 declines to its
historical average value, it would drop below 800.
Typically, one would expect the pendulum to bring us
down to 600 or lower.
On the other hand, for the S&P 500 to go up 10% by the
end of the year, you would have to believe that P/E
ratios will remain in the absurdly high 25-28 range, and
that 2002 earnings estimates will be 20% higher than
actual 2001 earnings.
That takes a lot more Faith than I have. Investors are
risking a 40% downside for a 5-10% upside this year.
The Fed has been giving History a real beating in the
first few rounds. But like Ali fighting Foreman with his
rope-a-dope tactics, History has staying power. Bet on
History in the late rounds by a knock-out.
Regards,
John Mauldin
(John Mauldin is president of Millennium Wave
Investments and a frequent contributor to the Fleet
Street Letter. Daily Reckoning readers can get his
weekly e-letter for free by going to: www.2000wave.com)
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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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