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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
THURSDAY, 21 JUNE 2001 |
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Today:
The Life of Alan
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*** The bills are coming due...consumers in trouble
*** People not buying mobile phones, or cars, or airline
tickets...
*** Capitalists exploited! What's a normal rate of
return? Jules passes...and more!
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*** An AP article: "The bills are coming due for the
shopping spree of the 1990s, and Americans are having
trouble paying up. Personal debt is at an all-time high,
and the amount of income Americans are dedicating to
making payments on it is at levels unseen in 15 years.
Mortgage delinquencies and write-offs by credit card
companies are rising, and personal bankruptcy filings
could hit a record this year..."
*** Among the things that consumers are beginning not to
buy are mobile handsets and airline tickets. Northwest
Airlines' CEO said yesterday that he had never seen
ticket sales fall off so suddenly. And the chief of one
telecom company estimates that sales of 400 million
phones this year would be "extremely ambitious." Last
year, 620 million units were expected to be sold this
year.
*** Canada's leading telecom, Nortel, fell another $4
yesterday. Even at the peak of the telecom boom,
however, Nortel never made a profit. It hasn't been
profitable since '97.
*** And the Industry Standard, host to technology
company advertising, says that ads are off 70% since the
beginning of the year.
*** Sales are falling and so are many prices. Steve
Leuthold tracks 75 commodities. Recently, most of them
are falling in price.
*** Greenspan is probably right. Inflation is not
threatening the U.S. economy - not yet. Deflation is the
threat. At least bond buyers seem to think so. The gap
between the 10-year Treasury notes and inflation-indexed
TIPS has fallen below 2%, suggesting either that bond
buyers believe inflation will be below 2% for the next
two years...or that they've lost their minds.
*** Support for the latter proposition is offered by a
brief glance at a chart of inflation rates. Currently
3.7%, inflation has only been 2% or lower on two brief
occasions within the last 30 years - once in 1987, and
once again in the late '90s.
*** On the other hand, I notice that the big losers
yesterday were the gold stocks - down about 5%, while
the price of the metal itself fell $1. Gold seems to see
no inflation menace either.
*** Meanwhile, Lynn Carpenter's writes to tell me she's
got another hot one on the burner - up 50% currently. If
you are interested in learning more about Lynn's service
please click
here.
Let's see what else happened yesterday, Eric?
- It was a warm, almost-summer day in Manhattan
yesterday, and Wall Street finally enjoyed a day in the
sun. The Nasdaq jumped 38 points, while the Dow tacked
on 50.
- Nevertheless, the financial weather system featured
more than a few storm clouds. Tellabs, Teradyne and
Northwest Airlines each announced deteriorating
profitability. Undaunted, very few investors ran for
shelter yesterday. Rather, it was a day to ignore the
gathering clouds and bask in the warm glow of hope.
- Consumer spending in New York is headed for trouble,
according to Crain's. "The city's economy faces a big
shock beginning in December and continuing into next
year when Wall Street will issue bonuses. Bonus payments
totaled about $13 billion this year and are one reason
why the New York economy has held up so well compared
with the rest of the country...Wall Street profits for
this year are now likely to be only a third to a half of
last year's, which would reduce bonuses by at least that
amount."
- Yet, somehow, investors are keeping the faith in
Greenspan's ability to steer our economy on a steady
course - at least judging by the strongly performing
cyclical stocks. The Morgan Stanley Cyclical Index (CYC)
has advanced about 30% from its October lows, even
though signs of a recovery loom far beyond the visible
horizon.
- Steve Leuthold, of the Leuthold Group, observes, "From
1900 to date, the stock market has compounded at a 10.8%
annual rate." However, says Leuthold, from 1995 through
the 2000 peak, the S&P 500 compounded at the much higher
rate of 25.7% per year.
- Only one of these rates of return could be considered
"normal" - a hint: it's not 25.7%. Citing the work of
Anirvan Banerji, head of research at the Economic Cycle
Research Institute, James Grant observes that U.S.
industrial production, which has now fallen for eight
months in a row, "has never [produced] a string of more
than three monthly declines during the postwar era
except in times of recession."
- Likewise, Grant observes that the U.S. unemployment
rate has risen 0.6 percentage point from its lows of
last fall. "Never in postwar annals has the jobless rate
climbed by more than 0.4 percentage point, except in
recession."
- A couple of weeks ago, 86,000 people from 143
countries signed up to take the Chartered Financial
Analyst (CFA) exam. Only 10,000 eager applicants showed
up for the test in 1990. The rapidly swelling ranks of
CFAs means one thing for sure: the lower the stock
market falls, the less likely we will be to receive
incorrect change at McDonald's.
- "Even as Tyco International CEO Dennis Kozlowski
stacks floor after floor on the Tyco revenue edifice,"
write grantsinvestor.com's Andy Kashdan, "the
structure's financial underpinnings are rotting away.
Tyco is a growth stock without the growth. Tangible book
value (the stuff that you can put a real value on) has
literally disappeared - falling from $701 million at the
end of fiscal 2000 to a negative $4.4 billion as of the
second quarter."
- "Just look at P/E ratios..." notes Dr. Richebacher.
"Most of them are higher than a year ago as profits have
fallen even faster than stock prices. This is
overconfidence... Few people are ready to sweep the
miracle stories of the past few years into the dustbin."
(More below...)
- Jay Akasie of grantsinvestor.com: "Krispy Kreme is a
perfect example. Despite its listing on the Big Board
earlier this year, KKD retains its Nasdaq-flavored
valuation with a P/E of 118. Assume the doughnut king
manages to post 25% annualized earnings growth...
investors would actually lose an average of 7% per year.
Even a five-year Treasury note would yield 4.8%. Given
valuations like these, it's clear the market is a long
way from any bargain-basement values." (see: Don't Shop
Til P/Es Drop)
*** "Hey Dad," said Jules cheerfully, when I got home
last night. "They passed me." The 13-year-old flies
dangerously close to the ground, in my opinion, but he
seems to end up where he wants to go.
*** Later, I took the two girls and Elizabeth out to
dinner. It was probably our last night out together in
Paris - at least for a while. We are all returning to
the U.S. for the summer. And then, Sophia, 18, will soon
be going off to do other things in other places with
other people.
*** 'Children grow up so fast' say the Empty-Nesters.
'Not fast enough,' say those whose nests are still full.
But yesterday, on Midsummer's eve, thinking about Sophia
leaving, I recalled Shakespeare's lines:
...momentary as sound, swift as a shadow, short as any
dream
Brief as the lightning that in the collied night,
Unfolds both heaven and earth,
And ere a man has power to say: behold!
The jaws of darkness do devour it up.
So quick bright things come to confusion!
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THE LIFE OF ALAN
Let us return to our epic novel.
Our hero, Alan Greenspan, was a bright young man facing
a modest career as a saxophonist in a jazz band and even
more modest prospects as a gold bug and member of Ayn
Rand's small, gabby circle of 'objectivists' in New
York.
In 1963, he wrote:
"The financial policy of the welfare state requires that
there be no way for the owners of wealth to protect
themselves. This is the shabby secret of the welfare
statists' tirades against gold... Gold stands in the way
of this insidious process. It stands as the protector of
property rights. If one grasps this, one has no
difficulty in understanding the statists' antagonism
toward the gold standard."
But neither power nor money are given in much abundance
to such men. Neither clear-headed polemics nor saxophone
riffs nor gold buggery pay very well. And so, our hero
decided that rather than fight the statists, he would
join them.
After many years of exertion, Alan Greenspan became the
one of the most powerful central planners since Joseph,
the Jew who interpreted Pharoah's dream and then became
overseer of all Egypt, second in command to Pharoah
himself.
Now, Alan faces his biggest test.
After 18 fat years, all of a sudden, the American
economic Nile has begun to run dry. Our hero is on the
spot. For unlike Joseph, Alan did not encourage savings
during the bountiful years. He made a remark once about
'irrational exuberance," but that was the end of it. He
later recanted, saying that there was no need to worry,
and no need to save - future harvests would always be
rich and full.
Worse, he nurtured the myth - now widespread among the
people - that he, Alan Greenspan, could control the
great river himself. Through the hocus pocus of the
central bankers' arts he was supposed to be able to
restore the river to its former levels. Alan knew that
this was not actually so, but he hoped that he could
keep people believing it until the river recovered on
its own.
And so, the drought has begun. And the granaries are
empty. Already, those who were most exposed to the risk
of drought conditions - the dot.com investors - have
taken huge losses. But they were at the margins of the
economy, not down in the rich, fertile bottomlands of
the Dow.
Investors are not alarmed. The river will flood again,
they say, it is just a matter of time. "The worst is
behind us," chant the corporate CEOs, the newscasters,
the analysts, and the great steaming mass of investors.
Still, the question is on everyone's lips - when?
People still think Greenspan can restore the mighty
river by opening the floodgates of liquidity. Indeed, so
furiously has the Fed chief been working the winches and
levers he must have gotten blisters on his hands.
Rates have been lowered 5 times in as many months. Next
week, he will probably cut rates again, perhaps by 25
basis points, perhaps by 50.
And the money supply! "M3," reports Dr. Kurt
Richebacher, "shot up by $321 billion in the first 4
months of 2001... Broad money in the last few months has
been expanding at an annual rate of 12% and higher." M3,
too, has been rising at a double digit rate year over
year.
Surely, all this liquidity should find its way into the
consumer economy, investors believe. Accordingly, they
boosted share prices from April 2nd until about a week
ago.
And yet, the irony we discovered yesterday is that
Greenspan's liquidity may never reach the real economy.
Greenspan, master of the money supply, protector of the
dollar, overseer of the entire world economy...cannot
control the price of consumer credit. Greenspan may be
willing, but he is not able. The markets stand in his
way. Mortgage interest rates are higher than they were
at the end of last year. And credit card interest rates
have hit minimum levels.
"We notice a total failure of the Fed's rate cuts,"
writes Dr. Richebacher. The Financial Times elaborates:
"The US economy continues to labour under an excess of
unsold goods; an excess of production capacity; and an
ongoing deterioration in corporate profits and profit
forecasts. All have suggested the possibility of more
cuts in production and staffing levels in the months
ahead."
Thus, Greenspan's easy money flows, not to consumers,
but into the vaults of bankers - who now borrow at real
rates near zero and lend at real rates as high as 11%.
Mr. Greenspan, himself, responded to this perversion in
his remarks yesterday. He urged bankers and other credit
institutions to lend more freely in order to keep the
economy moving.
Spend, spend, spend, urges Fed governor McTeer. Lend,
lend, lend, urges Fed chief Greenspan.
But the object of their attentions, the consumer, upon
whose back the New Economy has rested for so long, is
about to collapse...
"Many experts convey the impression that consumer
spending has remained strong," writes the Jeremiah of
modern economists, Dr. Kurt Richebacher, but "the
general perception of rather stable consumer spending is
another illusion."
Auto sales for the month of April, for example, were
reported to have increased by 0.8%. But this was
achieved by manipulating the numbers of previous months
and making seasonal adjustments. In fact, Dr.
Richebacher reports, sales actually fell...from 603,340
autos in March to only 520,394 in April.
And, while consumer spending growth rates are still
positive - around 2% - Dr. Richebacher explains, "the
rate of growth of retail sales has literally collapsed
over the year."
"The great hope is that a debt-addicted consumer will
keep the economy out of recession," concludes Dr.
Richebacher. "Don't bet on it. He has no chance. The
longer he keeps borrowing and spending...the sharper his
later pullback in spending will be. His finances are in
rapid deterioration: losses in the stock market and
sharply lower growth in real disposable
income...interest payments have become a quickly rising
burden."
The consumer is in trouble. The economy is in trouble.
And Alan Greenspan, the most powerful central banker who
ever lived, shudders in his bath.
Stay tuned...as we discover how this story will turn out
- tragedy, comedy, or farce?
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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