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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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BALTIMORE, MARYLAND
TUESDAY, 3 JULY 2001 |
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Today:
Bells Ringing
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*** Consumers still 'hanging in there.' In May, spending
grew twice as fast as income. How long before they are
hung out to dry?
*** The financial news is not good...but not as bad as
it might be. Is that good?
*** Cheer up, things could be worse. In fact, they are
worse...Forget the Nasdaq! And more...
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Consumers are 'still hanging in there.' Personal
spending rose in May by 0.5%, more than twice the 0.2%
increase in incomes.
How can you spend more than you make? You have to
dip into savings. If only there were some savings in
which to dip! The savings rate, a pathetic negative 1%
in April, fell to a negative 1.3% in May. Lacking
savings...and expenses exceeding income...Americans made
up the difference with more debt.
"Bankers more careful on all but mortgage loans,"
notes a headline at The Prudent Bear. Why? Because, as
the article explains, mortgage loans are easily
securitized - allowing banks to pass risk on to
investors, often foreign investors. And Fannie Mae and
Freddie Mac, chartered by the federal government, have
effectively turned private debt (mortgage loans) into
government bonds. Lenders and investors can't lose, can
they?
From the dark mist of the above facts, one obvious
question emerges: how long can this go on? And then,
another: if markets give people what they deserve,
rather than what they want or expect, what will befall
such a nation of debtors?
Ah, the sun is beginning to burn off the fog. And
what do we see? Deflation...what debtors deserve but
least desire.
Eric Fry reports from Wall Street:
*****
- Yesterday's report from the National Association of
Purchasing Management (NAPM) reminded me of my
grandmother's cheese souffle - bad, but not as bad her
well done pot-roast. And if it's the pot-roast you're
expecting, the cheese souffle is a pleasant surprise.
- "The manufacturing sector continued to decline in
June," the NAPM reported. But, "the rate of decline
slowed somewhat during the month." Specifically, US
manufacturing declined for the 11th month in a row. But
the good news is that the Purchasing Managers' Index
improved to 44.7 in June from May's 42.1. Any reading
under 50 is bad...but at least it wasn't as bad as in
May.
- Trouble is, "less bad" is a long way from "getting
better." And until orders pick up - something that isn't
happening - "getting better" is still a ways off. The
NAPM's Backlog of Orders Index shows that order backlogs
have declined 14 months straight.
- No matter, thanks to the okay NAPM report, the giant
industrial stocks inside the Dow grabbed the baton from
the Nasdaq and raced ahead 91 points. An apparently
fatigued Nasdaq took the day off - falling 12.
- "The Economist [cited] various studies suggesting that
the decline in the U.S. household saving rate is the
result of a faulty definition of saving," writes Paul
Kasriel, head of economic research at Northern Trust Co.
"The message of the article is: 'Cheer up. Things could
be worse.' [But] My message is the punch-line to an old
joke: 'So, I cheered up. And sure enough, things got
worse'... [A]ll you have to do is look at the behavior
of the current account deficit in recent years to know
that Americans are spending more than they are
producing."
- Kasriel notes that between 1952 and 1982, total debt
as a percent of the nation's total capital "ranged from
approximately 42% to 51 1/2%. But national leverage
started on an uninterrupted upward trend in 1983. Debt
as a percent of the capital stock has moved up from
about 48 1/2% in 1982 to 92% in 1999."
- Given our rising indebtedness, Kasriel expects the Fed
to err on the side of inflation, rather than risk
deflation. "There are more voters who are debtors than
who are creditors. As a result, it's politically correct
now to inflate."
- Debtors might love inflation, but the US dollar does
not. The greenback has been weakening lately against the
Canadian dollar. Does the Canuck buck "know" something?
Weldon's Money Monitor traces the Canadian dollar's
recent strength to Canada's "high and rising trade
surpluses with United States." Helping to boost Canadian
exports, Weldon notes, are exports of electricity and
natural gas into the U.S. Northwest and California.
*****
*** "You can forget the Nasdaq," Fleet Street Letter
contributor, John Mauldin wrote recently. "That was a
bubble and that 50% drop had nothing to do with a
recession. It was mass insanity or momentum investing
gone amok. It will drop another 20%-40% if we do, in
fact, go into recession."
*** "What worries me are non-tech stocks..." Mauldin
continues, "They have not fallen by anywhere close to
20%, let alone 40%. If you measure just non-tech stocks,
you could make a strong case that we have yet to enter a
bear market. Will we see a drop in the market [from
here]? History tells us yes."
(see: Is That Churning Sound My Stomach - Or The
Market?)
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BELLS RINGING
"Dr. Greenspan's medicine may be starting to work," says
a Washington Post editorial. "And if not, the Fed can
always cut again."
No need to roll your eyes. What follows is not another
polemic about the ineffectiveness of rate cuts. Instead,
today's reverie begins where others have ended: suppose
the Fed does cut again...and again...and again...and
things don't get better. What then?
You will recall that an interlocking system of military
alliances in Europe seemed reassuring a century ago.
Today, it is a cross-rigged web of financial alliances
that offers the mirage of safety.
In 1914, all of Europe was trussed up together, like
climbers roped one to another on a dangerous rockslide.
Tethered to the line, each felt safer. But, if any of
them lost his footing, all would be pulled down.
That is, of course, what happened:
"The mobilization began with bells and drums," according
to a book by Pierre Miquel, Les Poilus. "In the
villages, where half of the French lived, the sound of
bells ringing seemed to announce a cataclysm."
Farmers came in from the fields, merchants from their
shops... Mothers, wives and children looked out at the
town squares all over France with a mixture of
fascination and dread.
The bells rang as they did when the Vikings approached
in the middle ages, or when the Cossacks attacked in
1814. But ever since 1870 - when the Prussians invaded
France - the bells of war had been silent. For nearly
half a century, France had enjoyed peace.
And what an extraordinary time it had been! Trains,
electricity, automobiles and tractors, Mr. Eiffel's
tower - never before had France enjoyed such prosperity.
And Paris, what a spectacularly beautiful city it had
become. Baron Haussmann had knocked down what must have
seemed like half the city in order to build it up again
- grander and more beautiful than any city ever was. The
rows and rows of apartment buildings you see all over
the city - including the one in which I live - were
constructed during this period.
In the Belle Epoque, it seemed as though things just
couldn't be better. New technology was transforming
every aspect of commercial life - making things faster,
more efficient, and more productive.
These new innovations were supposed to guarantee
prosperity - perhaps forever.
And peace? Would the proletariat of one nation ever
again be willing to take up arms against their fellow
workers in other nations? Or, would not the new
bourgeois ideals - democracy, compulsory public
schooling, support for the arts, a free press, and
liberal trade policies - make war a thing of the past?
Was not war a creature of ignorance, envy and retrograde
aristocracy?
And yet, in August of 1914, the bells tolled, summoning
the French to arms. After 44 years of peace, Europe
began a very mean regression.
Soldiers rushed to their assembly points, fearful that
they would miss the action. French troops might already
be on the other side of the Rhine before they got there,
they worried. Almost everyone was sure that the war
would be over by Christmas. Whatever the outcome, they
were confident of a 'second half recovery.'
The peace of the world's financial systems has been
threatened many times in the late '80s and 90s. Paul
Kasriel lists a few of the archdukes who have fallen:
"Mexico/the oil patch/Continental Bank, the U.S. stock
market, banks and S&Ls, Mexico again, Asia, Russia,
Brazil, Long-Term Capital [Mis]management, the US stock
market, Turkey, Argentina."
Each time, financial analysts held their breath as the
web of financial connections stretched. But, each time,
it held. And Greenspan and other central bankers added
more threads of easy money and credit, which seemed to
reduce the risk of loss still further.
American consumers did their part too. Throughout the
entire post-war period, Americans tended to be the
world's consumers of last resort. But as Greenspan made
more cash available, American consumerism shifted into
overdrive. Overseas nations found that they were able to
'export their deflation' as U.S. shoppers stepped up to
the cash register to buy excess production - on credit,
of course.
By the first quarter of 2000, Americans were running a
current account deficit equal to about 4.5% of GDP,
which Kasriel notes, is "the highest absolute and
relative borrowing from the rest of the world in over 40
years."
What would happen if U.S. consumers ever took their foot
off the gas pedal? As late as early this year, it was
still believed that the slowdown in the U.S. would be
offset by strong growth in Europe and Asia.
Instead, one by one, the world's economies are being
drawn towards recession as they were drawn to war 100
years ago.
"What Happened to Economic Growth?" asked last week's
headline in the Figaro in Paris, where unemployment is
rising again and GDP growth and consumer confidence
figures are falling.
To the east, economist Anirvan Banerji reports that
"Germany may also be headed toward a recession. German
Economics Minister Werner Muller warned last week that
the German economy could see zero growth in the current
quarter. You can read between the lines.. If Germany
goes into recession, which now appears to be a serious
possibility, it would be the first time since the first
oil shock a quarter of a century ago that the world's
three largest economies would be in synchronous
recessions."
All over the world, economies are slowing down:
"Australia, Korea, Taiwan and Mexico are clearly in
recession and getting worse," writes my friend John
Mauldin. "The US is in a global economy. If the rest of
the world slows down, it will affect us. We have only
seen the beginnings of woes on the international front."
What's next?
"They left as though on a crusade," writes Pierre Miquel
of WWI French draftees. But each man knew, deep down in
his heart, that the days of plenty were over...and that
the hour had come to pay tribute to death."
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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