Contributed by Bill
Publisher of: The
Fleet Street Letter
MONDAY, 2 JULY 2001
The World Safe For Profligacy
*** Greenspan cuts rates - and nothing happens the way
it is s'posed to...
*** Why have long term rates refused to fall? Why has
the dollar gone up? Why didn't stocks go up? Inquiring
minds want to know...
*** Cutting salaries at HP - pretty please...JC Penny,
up more than 100%...airport insecurity ... countries
going public ...and more !
|Yesterday, we returned to America for our summer |
vacation. No one at Charles de Gaulle airport asked if
we packed our own bags. Nor did anyone care if a
stranger had given us something to carry on-board. That
only seems to happen in America...
"Oh yes," you might be tempted to reply, "a nice
man with a turban on his head gave us this little box to
take to his mother. It's a clock; see, you can hear it
ticking..." But you don't. Because you know that the
half-wits at the airport security stations take
Nobody seems to be interested in blowing up Amtrak
trains, greyhound buses or crowded escalators. But who
can honestly say that they have not tried to blow up a
747 at least once in their lives?
Actually, almost everyone. According to the
International Herald Tribune, the last and only reported
domestic incident happened in 1955 - when a man gave his
own mother a bomb to take on airplane, in the hope of
claiming the insurance money. Because of this,
supposedly, for nearly half a century, Americans have
been forced to submit to such remarkably transparent
questions that a terrorist or matricidal maniac would
have to be a total imbecile to get tripped up by them.
I found more evidence of this cultural difference
driving into work this morning. No one dared to drive
faster than 75 mph - despite the fact that it was a 6-
lane highway at 4 am. The French would be driving at 100
mph and more.
A friend of mine in France was astonished recently
when I told him I had made an honest income tax
declaration. "Why would you do that?" he asked. "Nobody
but a fool would tell the government the truth."
Are we law-abiding Americans fools?
I don't know, dear reader. So, let's change the
subject. Here's Eric's report from Wall Street:
- A technological glitch shut down a promising tech-
stock rally last Friday. With an hour left in the
trading day, the Nasdaq's systems seized up. Nasdaq
officials tried to keep the party going by allowing
trading to continue until 5 PM. But most of the guests
had already left.
- When trading finally ended, the Nasdaq Composite Index
clung to a 35-point gain - capping off a 6.3% advance
for the week. The Dow finished 64 points lower on the
day and lost 1% on the week.
- Interestingly, even after Greenspan's "cautious"
quarter-point rate cut, bond yields soared higher. The
30-year Treasury bond yield climbed to 5.76% Friday from
5.68% the day before. Maybe inflation is not quite dead
- Nor has Greenspan's helping hand been enough to keep
stocks from falling into the red during the first six
months of the year. None of the major stock market
indices gained ground. The Dow fell 2.6%, the S&P 500
dropped 7.3% and the Nasdaq brought up the rear with a
12.6% decline. "Fighting the Fed" has been a profitable
stance so far this year.
- However, within the losing indices were some very
notable winners. S&P 500 member JC Penney topped the
other 499 stocks with a 139% year-to-date gain.
- The CBOE's Volatility Index - a measure of investor
fear reflected in stock options trading - is now below
the bearish levels that correctly predicted last year's
initial puncture of the tech bubble. Illustrating
complacency in full-flower, smartmoney.com's Igor
Greenwald observes, "The herd is back to graze on tech
bargains, meaning apparently the shares of any chipmaker
whose warning falls short of outright bankruptcy."
- Hewlett-Packard Chief Carly Fiorina, must think the
1960s have returned to San Francisco, man. The latest
wacky idea out of Fiorina's HP is to ask each of its
45,000 US employees to take a voluntary pay cut. That's
right, it's optional. They don't have to, if like, ya
know, they don't want to.
- The best that anyone can say about this touchy-feely
cost-cutting effort is that it is not the worst
initiative to emerge from HP since Fiorina took charge.
That distinction belongs to the knuckled-headed idea of
spending billions of dollars over the last couple of
years to buy Hewlett-Packard shares. Thanks in part to
the extravagant buyback campaign, the thousands of
employees now being asked to forego pay are certainly
not "feelin' groovy."
- Don't think that Fiorina will not share their pain,
however. Spokesman Dave Berman says that she might be
turning in her company car.
- Lucent spinoff, Agere Systems Inc, said it plans to
cut about 4,000 jobs, or about 24% of its remaining work
force (any volunteers?), as it tries to deal with the
severe downturn in the semiconductor industry. These
latest cuts are in addition to the 2,000 announced in
- Thanks to these job losses and the many others
occurring in the tech sector, more folks are leaving San
Francisco than are moving in. USA Today reports: "Nor-
Cal Moving Services...says 60% of its Bay Area traffic
is outbound this year, vrs. 20% last year. 'It's a
dramatic shift in population,' says company President
- Lucent also reported this week that a single strand of
fiber optic glass could transmit ten times more
information than previously imagined. "So what?!" asks
the DR Blue's Dan Denning. "We already have too much of
the stuff anyway. There are 39 million miles of glass
fiber ready for use in the U.S - and only 5% of that
fiber is lit - the definition of overcapacity." But
optic fiber is just the beginning...
- "There is so much unsold product on the shelf,"
explains Denning, "that 'capacity utilization' -
currently at 77% - is at its lowest rate in 18 years. In
other words, companies are going idle just to draw down
- "So here's the question of the week: with too much
inventory, falling profits, and a slowdown in consumer
spending, why would any sane CEO take advantage of Alan
Greenspan's generosity to take on more debt - to build
more factories to make more products - which they can't
even sell right now? This is not a trick question." (See
this week's DR
BLUE: It's The Economy, Chairman...)
Back to Bill in Baltimore...
*** Hmmm...Greenspan lowers rates...and long-term
interest rates go up! They're supposed to go down. And
the dollar goes up; it's s'posed to go down too. And
stocks - which are supposed to go up - have come down
since Greenspan began cutting rates in January.
*** Do rate cuts have any effect? Edward Leaner,
director of UCLA's Anderson Business Forecasts: "We're
like a primitive tribe, in which we want to pray to a
god and have him cure the problem. The god happens to be
Alan Greenspan. When that volcano is going off we pray
to him, and if the volcano stops, we think he did it.
Right now we're praying pretty hard to him."
*** All over America, graduates of high schools and
universities - that is, people who have no idea how the
world actually functions - are being encouraged to
*** But my old friend, Doug Casey, has been trying to
change the world for many years. His most recent
newsletter reveals how: "In case you're wonders what my
other hobby, besides polo, is, it's pitching this plan
to Third World governments. They've bought every
cockamamie scheme that's come down the pike since the
days of Karl Marx. Why shouldn't they go for something
that actually makes sense?"
*** What makes sense to Doug is to take one of these
basket-case countries, such as Haiti or Surinam, public!
Doug made his pitch to Haitian officials recently. Watch
this space for the IPO.
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MAKING THE WORLD SAFE FOR PROFLIGACY
"Things do tend to regress to the mean," explained a
Daily Reckoning reader, (or words to that effect). "But
there's no law that says they have to. What we're seeing
is just the feedback loops in nature that tend to limit
change. And yet, men today are much taller than men used
to be. Does this mean that they will soon be shorter
And so, dear reader, the much-anticipated second half
arrives today. And we greet it with a familiar question:
will there be a 'recovery' as predicted...or must the
economy and the stock market sink lower, so that the
long-term averages can be re-established?
Since this is a new half, a new answer would be nice.
Either affirmative or negative, either way, a simple
'yes' or 'no' would be an improvement on the 'who knows'
long-time Daily Reckoning sufferers have come to expect.
But some things never change. Here at the DR, we put our
faith in the eternal verities - including the
inalterable, inevitable ignorance of our species. We did
not know what the future would produce in the last half.
Nor do we know what the second half will bring.
Still, we daydream about what the future might bring -
so that we may be ready for it.
Since WWII, Americans have suffered only fairly mild
recessions and a relatively few casualties of war. So
long has this period of peace and prosperity lasted that
most people feel it is permanent.
Our greatest enemy - the Soviet Union - is not only in
retreat; it has ceased to exist! And we get richer as we
are getting bigger and taller, year after year, with no
While the total amount of credit in our economy has
doubled in the last 8 years - from $15 trillion in '92
to an estimated $30 trillion today - the risk of default
has been spread out all over the globe. The trillions of
dollars... and U.S. dollar-based assets (stocks, bonds,
business, real estate)...all depend on the continued
economic health of the U.S. economy and the strength of
As described in these pages, government-sponsored
agencies, Fannie Mae and Freddie Mac, have been the
fastest-growing lenders of the last decade. Borrowing
money and selling shares in the capital markets, these
GSE's use the money to buy mortgages, taking advantage
of an implied federal backing. Formerly, banks
themselves bore the risk of default on their own
mortgage lending. Now, the risk is globalized - banks
are insured by the Federal Reserve, whose dollars are
held by Bavarian dentists... as well as car dealers in
"Re-packaging and transformation of various kinds of
debt instruments from mortgages to credit card
receivables has led to layer upon layer of financial
intermediation," writes economist Paul Kasriel.
"Financial risk can be more easily shifted today. But
risk shifting is just that - shifting. The amount of
risk is not reduced."
Just the opposite. In the pernicious way nature works,
the appearance of smaller risks encourages people to
take bigger ones. While everyone, individually, may feel
protected by hedges, counter-trades, swaps, derivatives,
and flexible capital markets...collectively, all are
exposed to a risk roughly equivalent to the sum of open
>From 1952 to 1982, Kasriel reports, total debt as a
percentage of capital stock never exceeded 52%. But as
new means were found to spread the risk around -
apparently reducing the risk to individual players - the
total amount of credit grew spectacularly. "Debt as a
percent of the capital stock had moved from about 48.5%
in 1982 to 92% in 1999."
Globalization of risk is not new. During the last 19th
and early 20th centuries, the governments of Europe
globalized their security risks, by entering into an
extended web of alliances. If Germany invaded Serbia,
Russia would come to its aid. If France were to attack,
Austro-Hungary, Germany would defend it. Each nation
figured that these alliances reduced its exposure to
>From 1870 until 1914, Europe enjoyed peace and
unprecedented prosperity. People began to think that
they had grown in stature and would never again have to
go to war with one another. Marxists believed the
working classes of all nations would make common cause
with one another and refuse to fight. The bourgeoisie
believed that economic growth and education would make
war a thing of the past.
As it happened, the system of globalized security risks
may have reduced small conflicts, but it made big ones
much more likely. Could the globalization of financial
risk do the same?
The Financial Times, commenting on Greenspan's rate
cuts: "This just might work, though the success of
central banks in rescuing post-bubble economies is
decidedly limited. But it may also merely postpone the
economy's day of reckoning. The central bank risks
making the world safe in the short run by rendering it
still more dangerous in the long run."
More on this tomorrow...
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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.