Contributed by Bill
Publisher of: The
Fleet Street Letter
THURSDAY, 28 JUNE 2001
of the Average
*** Another day, another rate cut...what more can you ask
*** Mr. Market doesn't seem impressed...has the point of
diminishing returns from rate cuts already diminished to
*** Consumer confidence... and why things can't stay as
"Fed's Magic Tonic Isn't Working," says John Crudele
in the NY Post. Why not? Because banks are tightening
lending standards to protect themselves from a wave of
defaults. Corporate bonds yields are up since January.
Credit cards have reached minimum interest levels. And
mortgage rates are higher than they were before Greenspan
began cutting rates.
Greenspan can lower the fed funds rate - but that
doesn't necessarily cause the price of credit to fall.
Still, what else can the Fed chairman do?
"If Greenspan were truly a manly man," Eric Fry
reports from Manhattan, "he'd have marched out today and
barked, "Inflation be damned!" and ordered interest rates
cut by one-half a point. Instead, we got a wimpy 1/4-point
cut. Chairman 'Baby-steps' returns to form."
That is the problem with having fame and power, dear
reader, it robs a man of strength. "The President [pays]
dearly for his White House," observed Ralph Waldo Emerson.
"It has commonly cost him all his peace, and the best of
his manly attributes. To preserve for a short time so
conspicuous an appearance before the world, he is content
to eat dust before the real masters who stand erect behind
the throne." There is a price for everything... Every
credit has a debit. For every village idiot there's a
genius. And for every period of above-average returns in
the stock market, there must be a period when returns fail
to measure up. More below...
But first, let's hear from Eric about what happened
on Wall Street yesterday:
From Eric Fry in New York:
- Bloomberg news succinctly captured the Street's view,
calling the Fed's 1/4 point cut "an action that suggests
they expect the economy to rebound and don't want to risk
stoking inflation by reducing rates too much."
- Because the 25-bps reduction seems more measured than
desperate, bonds and the dollar both "liked" the modest
cut. Gold, on the other hand, "hated it" - falling $4.20 on
- Mr. Market's reaction fell somewhere in between. A little
more irrationally exuberant rate cutting from the Fed might
have been nice. On the other hand, the modest rate
reduction means that Greenspan and Co. think the economy is
recovering (right?), which should be good for stocks
- After weighing the pros and cons. Mr. Market reached no
clear conclusion. The Dow dropped 37 points - its fourth
losing session in a row - while the Nasdaq tacked on 10
- America's economy is probably the largest ever to run on
"hope" for extended periods of time. Greenspan, like any
good "Confidence Man," fans those hopes to achieve his goal
of keeping the US economy moving along. With his interest
rate cuts of various sizes, he encourages folks to attempt
heroic acts of consumption and indebtedness they might
- Consider, the impressive resilience of home and auto
sales... while consumers are fully aware that current
economic conditions stink, they remain resolutely persuaded
that the near-future will be much, much better. (Keep hope
- Consumer confidence bounced Tuesday to its highest level
of the year - rising to 117.9 from 116.1 in May. That too
is good, right? Yes, but the consumer is not quite so
confident as he appears. The Consumer Confidence Index
contains two other indices - one that measures current
conditions and one that measures future expectations.
Bridgewater Associates reports that while consumers'
expectations for the future are rising, "consumer attitudes
towards their present situation continue to decline."
Specifically, as the future expectations index surged 7%,
the overlooked present situation index fell 3%.
- Faith in future economic prosperity cannot sustain
consumer spending indefinitely. Only 6.7% of the survey
respondents said that they would buy a car in the next six
months, the lowest number in years.
- Likewise, despite the recent resiliency of housing sales
numbers, consumers' plans to purchase a home dropped in
June. ISI confirms the findings: "Our survey of 13
geographically diversified homebuilders slowed for the
third week in a row...traffic has been slower again in
Northern California, and cancellations are occurring in the
Bay Area. As one [survey] participant puts it, 'The lights
- A lot of folks in the know agree with the consumer that
the "present situation" isn't so great.
- Delta Air Lines' President, Fred Reid, told Business
Travel News this month, "Business travel is dropping off
precipitously... We are in the deepest slump I've seen in a
decade or more... We don't see it getting deeper, but we
also don't see it getting better."
- Anivan Banerji, director or research at the Economic
Cycle Research Institute, speaking to Grant's: "Given that
- industrial production, employment, manufacturing and
trade sales - are going down in a way seen only in
recessions, either we are in a recession, or this is the
worst non-recession ever."
- The "Stock Market for the Next 100 Years" just announced
its first job cuts in 15 years. Blaming - what else? -
"market conditions," the Nasdaq plans to trim its workforce
by 11%. The most debilitating market condition of all is
the fact that the number of IPOs has collapsed 78% so far
this year. When you're in the bubble business, there is
nothing fun about bubbles bursting.
Back to Bill in Paris...
*** Yesterday, I reported that things will either get
better or they will get worse. "The current stagnation of
the US economy is unstable," adds Martin Wolf in the
Financial Times. "The US central bank is in a race against
time. If it does not succeed in re-starting the economy
soon, a further slide seems almost certain."
*** Why is this? "Suppose then that the present stagnation
continued," Wolf explains. "Given the excess capacity,
downward pressure on profits would increase. Productivity
growth would initially remain slow, further squeezing
profits. This would force large-scale redundancies,
accelerating the rise in unemployment. The combination
would threaten a still highly valued stock market. It would
almost certainly shrink investment. Above all, it would
shake consumer confidence. The overwhelming probability
would be a deep recession, followed by a painfully slow
recovery, as in almost all post-bubble economies."
*** But who knows? Yesterday, the Fed put the key interest
rate down to 3.75%. With inflation at 3.6%, this puts the
real rate at near zero. Will free credit have the same
effect in the U.S. as it had in Japan?
*** "In early 1929, after the markets had gone through a
choppy period and just months before the worst stock market
crash of the 20th century," John Myers tells me, "Bernard
Baruch - one of the great speculators of his time said:
'For the first time in history, we have sound reason to
hope for a long period of peace. For the first time, the
business men of all nations are supplied with statistical
information, together with some understanding of the laws
of economics. For the first time, we have sound centralized
banking systems in all the countries and closer cooperation
between those systems internationally. Because all these
factors are favorable, and because of the universal
stirrings of desire and ambition... I believe in the
*** "Baruch was already shorting stocks during that
period," Lynn Carpenter, editor of The Fleet Street Letter,
explained it to me: 'The government asked Baruch to talk up
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PRISONERS OF THE AVERAGE
"Every sweet hath its sour; every evil its good....
For every grain of wit there is a grain of folly...
Nature hates monopolies and exceptions..."
Ralph Waldo Emerson
"We are all going to paradise!"
He sings this popular French song from time to time, but he
is neither a singer, nor French. He might be Chinese,
Korean, or maybe Japanese... He speaks both French and
English...both with a heavy accent. No one seems to know
where he came from nor what he is doing in the neighborhood
where I have my office.
Yesterday, he was stretched out on the rue de la Verrerie -
lying on his back with his head resting on a paving stone,
as peaceful and serene as an abandoned car. His ribs stood
out as though he were starving, with deep hollows where
most men his age have slabs of fat.
All we know about him is that he is our village idiot. He
sings at the top of his lungs, gets drunk, and passes out
on the pavement.
In paradise, dear reader, perhaps a man can drink all he
wants, and stay happily drunk forever. But in this world, a
binge of inebriation comes at a price...a headache, or
perhaps only a period of quiet repose.
That is the way of all nature. Every extraordinary event is
compensated by many boring ones. Every big debt is offset
by a big credit. Every large breath of air we take in must
be followed by one just as large that we let out.
We are all prisoners of the average. This is not merely an
intuition...it is based on observations too varied to try
to organize by genus and phyla. So I will just heap them up
in front of you: darkness and light...yea and nay...heat
and cold...good and evil...sickness and health...wealth and
poverty...beauty and ugliness...subjective and objective...
positive and negative...big, little...high, low...just,
unjust...you name it.
There are times, of course, when things seem to get so out
of balance that it is hard to recall where the average was.
Stock market investors, for example, enjoyed an
extraordinary period of returns from August of 1982 until
January 2000. During that period, the Dow went from under
1,000 to over 11,000, giving investors a rate of return of
18.2% per year.
"Stocks do not always do as well as they did in the '80s
and '90s," notes David Tice. "In fact, those were the best
back-to-back decades for stocks in 200 years." (See: Why
The Bear Market May Just Be Beginning)
After such a binge of profits, is it any surprise that, for
the last two years, the Dow has taken a rest? Dow stocks
have gone nowhere since May of 1999.
The Fed has helped twist the U.S. economy into an
extraordinary, almost grotesque, form. By keeping the price
of credit too low for too long, and giving the impression
that it could guarantee boom-like conditions forever,
America's central bankers have encouraged people to act in
a way that previous generations would have thought
imprudent: buying too many stocks at prices that were too
high, spending too much money, and borrowing too much to
pay for it.
Alan Greenspan nurtured the idea that the U.S. economy of
the late '90s was an exception to nature's demand for
ordinariness. Information technology was supposed to be so
different that the old averages would no longer apply. And
the central bank itself was credited with a talent that no
central bank had ever before had: an ability to keep the
economy expanding forever, without interruption.
Mr. Greenspan was allegedly capable of preventing the
return to average debt levels and average stock prices. His
trick? Cutting rates whenever normalcy threatens. Yesterday
the Greenspan team cut rates for the sixth time. Five
previous cuts failed to produce the desired effect. But
there is always hope for the 6th, or 7th. If a real fed funds
rate of zero doesn't do the job, perhaps - 1% or -3% will.
Paul Kasriel reports that total debt as a percentage of the
nation's nominal capital stock has gone from about 45% in
1982 to more than 90% today.
"The U.S. borrowed from the rest of the world on average an
amount equal to 4 �% of nominal GDP," in the 12 months
ending in March, Kasriel elaborates, adding that this was
"the highest absolute and relative borrowing form the rest
of the world in over 40 years."
Will this unusually carefree spending be followed by a
period of penny-pinching? It seems a good bet.
'Res nolunt diu male administrari," you might say. Of
course, practically no one, apart from perhaps the Pope,
would have any idea what you were talking about. So,
translate: "Things refuse to be mismanaged long."
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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.