Contributed by Bill
Publisher of: The
Fleet Street Letter
TUESDAY, 26 JUNE 2001
NEW New Economy?
*** "Tell it like it is..." - what's the Fed really trying
*** Barrick buys a gold stock...
*** Fed rate cut tomorrow? Which way lies Japan...? The NEW
new economy...and more!
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*** "Why don't you tell it like it is," asks a Daily
Reckoning reader. "Greenspan and his cronies at the Fed
couldn't care less about the economy or the markets. Their
job right now is to save the banks. Where is all of the
liquidity infusion going? And why is it remaining in the
banks? ...The Fed is doing what it was created by the banks
to do, bail them out of bad loan portfolios at the expense
of the taxpayers."
*** Well, yes, that is what the Fed is doing. But the banks
are not independent of the rest of the economy or of the
markets. And Mr. Greenspan has his reputation to worry
about...as well as the banks' bottomlines.
*** Tomorrow, the Fed chief will probably cut rates
again...maybe by 25 basis points, maybe by 50. What else
can he do?
*** "The Fed...doesn't have a choice," opines Alan Abelson
of Barron's. "Its strenuous hacking away at rates, frequent
and substantial as the cuts have been, and a wide-open
monetary throttle have failed to right the listing economy.
Wall Street's hopes and cries to the contrary, things are
not getting better; they seem to be getting worse."
*** "At last tally," Abelson explains, "operating rates [in
the manufacturing sector were the lowest since '83, when
the U.S. was emerging from a killer recession. Business is
spending on capital projects at the droopiest pace in
nearly a decade... Unemployment is taking on some chronic
overtones: Nearly three million people filed continued
claims for jobless benefits the past three weeks, more than
at any time since '92..."
*** "The Federal Reserve," he continues, "has not been able
to turn the economy around...What it has done...is to shore
up a very wobbly stock market. Which is nothing to sneer
at, since that way lies free-fall, panic, and Japan."
*** Which way lies Japan? More below...
But, first, let's hear from Eric...what's new on Wall
- As investors tire of beating up on technology stocks,
they are starting to pick on some of the big stocks inside
the Dow. Yesterday, the big board fell another 100 points,
even as the Nasdaq managed a modest 16-point gain.
- The biggest losers? Several stocks that have been holding
tough through most of the year: Home Depot, Caterpillar,
General Electric, and Wal-Mart.
- Walgreen's, another pillar of strength in the stock
market, crumbled yesterday as well. Shares of the nation's
No. 1 drugstore chain fell more than 10% after the company
reported fiscal third-quarter earnings that did not meet
Wall Street estimates.
- "We don't call ourselves recession-proof, but we're
certainly recession-resistant," said President David
Bernauer. Maybe so, but that's cold comfort to Walgreen's
- From Merck to Gap Stores to Walgreen's, the list of
"recession-resistant" companies announcing disappointing
earnings is growing longer by the day. Apparently, there
are not enough credit card-wielding patriots out there
buying goods they can't afford.
- It looks like Peter Monk and the other boys at Barrick
Gold read the Daily Reckoning. Less than 24 hours after we
quoted Michael Martin saying, "I know 'they' don't ring a
bell at the bottom, but I am. You need to own a few gold
stocks right now," Barrick elected to own one - Homestake
- In a $2.3 billion all-stock deal, Barrick Gold will
acquire rival Homestake Mining to become the world's
second-largest gold producer behind South Africa's
AngloGold Ltd. Homestake shares soared 20% on the news.
- Two UK inmates gained their freedom under a 900-year-old
royal decree by saving the life of a prison worker who was
attacked by a boar, the BBC and the UK's Independent
newspaper reported. The decree, named the Royal Prerogative
of Mercy, provides for prisoners to gain their freedom by
performing "acts of courage or other meritorious conduct."
If only it were that easy to get out of a losing stock.
- Now that George W. and the Republicans occupy the White
House, a couple noticeable fashions are back in style: 1)
drilling for oil in pristine wilderness regions; 2) Wearing
coats and ties. Republicans couldn't be happier, of course.
But they're not alone. Because ties are making a comeback,
so are the stocks of companies that sell traditional
business attire. Shares of Nautica and Polo both hit new
52-week highs recently. Even Phillips-Van Heusen is surging
- The slowing economy is also contributing to the changing
business fashion trends. "We're in an economic situation
where the boss can say, 'Go home and come back wearing
something with a collar.' We didn't have that a year ago,"
- We Americans may be "turning Japanese" but the Japanese
have been "turning American" for several years. Note the
upcoming IPO of McDonald's Japan Ltd. The $1 billion share
sale is the biggest one in Japan so far this year.
McDonald's has been selling Big Macs in Japan for 30 years
and now sells two out of every three fast-food burgers
consumed by the Japanese. [But at lower prices than a year
- "It was just a few months ago, it seemed, that it was
almost impossible to book a hotel around in Manhattan,"
observes NewYorkToday.com. "But those days are over - at
least for now - because of a slackening economy and a
record construction boom." According to a recent report by
Pricewaterhouse Coopers, the occupancy rate during the
first quarter of 2001 was 72.3%, down from 78.2% in the
same period last year.
*** "The greens have beaten the coal industry silly over
the past quarter decade," writes John Myers. "In 1975, at
the height of the energy crisis, the price of coal hit $100
a ton. In constant 2001 terms that would put the price of
coal close to $300 a ton. Of course, seal-huggers, more
interested in trees than humans, have declared war on coal
and thrown roadblocks against its use. By 1999 the price of
coal had fallen to just $20 a ton. That was just one-tenth
of its price during its heyday. Even after a revival, the
price of coal is selling for only $40 a ton, a fraction of
what it was fetching 25 years ago." see: (Suffocation, War
*** Paris is hot. I'm ready to leave. But Baltimore is
even hotter. Oh la la...
*** Henry, 10, got his report card yesterday. All A's. It's
nice to have at least one good student in the family.
*** And Maria's dance group did a hip hop performance at
the Casino de Paris theater on Sunday evening. The theatre
was sold out...I couldn't get in...so I avoided the sweaty
spectacle and instead drifted over to Trinity church, where
I was just in time for a cool evening mass.
*** Elizabeth reported that Maria danced well... but was
unimpressed with hip hop. "It was jerky and graceless," she
reported, "I think Maria should stick to ballet."
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The NEW New Economy?
The Seattle Times updates us on what life is like in a
country with neither a new economy nor even an old Alan
Greenspan: "Last month consumer prices in Tokyo fell 0.6
percent from the previous year, marking the 21st
consecutive month that prices dropped," the government
said. "And there is no sign they will stop falling."
"Indeed, falling prices have ruined corporate profits,
saddled banks with hundreds of billions of dollars in bad
debt and wrecked home values. Ordinary Japanese are
worried, and policy-makers are puzzled about what to do."
No one fully understands what went wrong in Japan. But
almost every economist in North America is sure that it
won't be repeated here, whatever it is.
For some reason, the Japanese abandoned their
boom/borrow/spend psychology after stocks crashed in 1990.
Despite a full-time central banker, interest rates of zero,
and lavish fiscal spending - nothing has induced ordinary
Japanese to resume their bubbly ways. Consumer spending,
for example, fell 4.4% this April, over the same period a
Japan's economy lost ground in the first three months of
the year, with negative GDP growth of 0.2%...suggesting the
nation is headed into its fourth recession in a decade.
"I don't think you can point to a single, post-World War II
case of national deflation on such a massive and continuous
scale," comments Robert Alan Feldman, economist for Morgan
Stanley in Tokyo. "These are just not normal times."
But as they say at the bar across the street, the Bear's
Den... "who's to say what's normal?"
In today's letter I take up the issue with both a simple
question and a simple answer.
To the question: "why won't Japan's consumers consume
more?". I offer the following hypothesis: because they are
All of nature breathes in and breathes out, expands and
contracts, booms and busts... The lifecycle of a human
being is no different. We begin as small animals; then, we
grow into big ones. If we are lucky, we contract again...
and finally whither to dust.
I offer no judgment on this process, nor a remedy. I merely
At a certain point in our lives, the desire to expand
ceases and is replaced with a desire to cut back, to
downsize, to take life more slowly... and reduce the level
of risk and excitement. We give up rock climbing and begin
rock gardening, for example. We sell our big houses - in
which we raised our children and endured the sturm and
drang of the teenaged years - in favor of a smaller place,
perhaps with a smaller yard...or maybe even a condo in an
Economists may argue about whether Mr. Greenspan's
counterparts at the Bank of Japan lowered rates...or failed
to increase the money supply...fast enough, or whether the
government has propped up failing institutions, or been
unwilling to 'restructure' the economy (whatever that
means). Meanwhile, the Japanese - with the oldest
population of any major nation - grow older. And as old
people have always done, they seem to be downscaling their
lives. They are saving, rather than spending...and
preparing for retirement.
The Japanese are demonstrating what economists call "the
paradox of saving." An economy needs savings in order to
invest in new and better means of production. But taking
money out of the consumer economy reduces sales and profits
in the near term. Companies pay out wages - but the money
doesn't come back in sales. Instead, it gets squirreled
away for the future.
The New Economy was supposed to be one in which this didn't
happen - because information technology was thought to
require less in the way of capital investment (less
savings) and because it was supposed to reduce costs so
fast that it generated huge savings and huge profits. Money
would not have to be taken out of the consumer economy.
There are many new things about our economy. But what if
the most important new thing really has nothing to do with
technology...and everything to do with aging populations?
What if Japan's deflationary economy, rather than America's
recently booming one, represents the wave of the future...
the NEW new economy?
Imagine millions and millions of people preparing for
retirement. They no longer borrow money to finance a bigger
home. They no longer buy bigger cars for taking family
vacations. They have all the time savings devices and
household appliances they need. And they are no longer
buying stocks 'for the long run.' They bought stocks 'for
the long run' 10 or 15 years ago. Now the long run has
A Japanese investor who was 65 years old in 1989, is now
72. And if he had $300,000 worth of retirement savings -
invested in stocks in December of '89...and left there
until yesterday - he now has only about $75,000. What will
he live on?
Nor do public social security systems offer much comfort or
hope of fiscal stimulus.. "We are living in a fool's
paradise," writes Dr. Gary North., "as all citizens of
Western industrial democracies [including Japan] have pay-
as-you-go funding (i.e., unfunded) for their government-
guaranteed retirement and medical insurance systems. Every
Western nation has a birth rate lower than 2.1 children per
family, which is the replacement rate. The number of
workers coming into the economy will be insufficient to
fund the old-age pension systems."
The U.S. benefits from young immigrants, who help support
America's retirees. But Japan has never cottoned to
immigration. The Japanese look only to themselves. Is it
any wonder they save their money?
"For the U.S. the day of demographic reckoning may be as
far away as 2017, but 2011 should see preliminary signs of
crisis in the Social Security/Medicare systems," Dr. North
concludes. "For Japan, the crisis will begin soon: in
Did it begin, in fact, 13 years ahead of schedule - as baby
boomers anticipated their retirement years and decided to
take precautions? Did the shock of falling asset prices in
the early '90s frighten Japan's 50-something population
into taking a more modest and conservative approach to
their personal finances? And could this New Economy arrive
in America years ahead of schedule too - as 76 million baby
boomers begin to scale down their lives, pay down their
debt, reduce their spending and their stock market
Could it be that whether Mr. Greenspan's Fed heads East or
West...sooner or later it will find itself in Japan?
Maybe, dear reader, maybe.
Your editor, thinking about cutting back...
P.S. Deflation has its bright side. You can buy a hamburger
in Tokyo for only half what cost a year ago. Shirts are
down by 60%. Other consumer items - from houses to golf
club memberships - are available at deep discounts.
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.