In Today's Daily Reckoning:
*** Techs and Internets hit...bio-techs surge
*** This time IS different...investors are more na‹ve
*** The Madonna-like Fed - giving investors what they
want
*** Stocks fell yesterday...led by the Nasdaq 100, which
was down 155 points. Even before yesterday, the index was
down 20% for the year.
*** Internets and techs were hit pretty hard. The magic
is gone. It is only a matter of time until the spell is
broken completely and they are priced like other
companies. How much will Amazon be worth at 12 times
earnings? A rhetorical question, of course, the great big
river has no earnings.
*** The Wall Street Journal seems to have picked up on
the `debt' theme. "The numbers are startling," says the
WSJ article. Businesses and consumers together are
carrying more in debt than the total GDP of the country.
Debt has risen more than 60% in the last 5 years.
*** The Dow did not escape the damage - it fell 75
points. There were 1486 advancing stocks and 1446
declining ones. 64 stocks hit new highs; 20 hit new lows.
*** But one sector did pretty well - the bio-techs. The
cover of TIME magazine heralds "Cracking the Code" -
which probably got the amateurs excited. Normally, the
appearance of major story such as this would be clear
sell signal. By the time this kind of news reaches the
masses who read TIME it is plainly too late to take
advantage of it as a new investment opportunity.
*** This time IS different. There are so many new players
in the market...so many inexperienced investors....the
old rules don't apply quite the way they did. It takes
more time, and more than TIME, to deter these pilgrims
from their route to riches.
*** While the lumpeninvestoriat was loading up on bio-
techs the pros were loading up on bonds. Bonds went up
yesterday. Clearly bond buyers are the one, and perhaps
only, group in the country who do not think things only
get better. If employment were continue to tighten...and
oil and housing continue to rise...surely there will
another rate hike next month...and surely the whiff of
inflation from an overheating economy would drive the
price of fixed-interest obligations down. Bond investors
seem to think that a slowdown, maybe even a recession,
will lower interest ratest, not increase them.
*** Oh that heartbreaker metal - gold fell $6.20
yesterday. And, whew, platinum - which is supposed to be
heading to $800 this year - fell $24.10.
*** "History shows you can't have a stock bubble without
a credit bubble;" says Bill King "and you can't have
either without a Madonna-like Fed." The Fed is on record
as being willing "to accommodate whatever amount of money
and credit the economy may require."
*** Even more disturbing details: the average US
household's credit card balance, $7,500 as reported here
yesterday, has grown 250% since '90. Household debt is
101% of income. Bill King: "Pollyanna analysts say
consumers are in good shape because their stock
portfolios have soared... these analysts are ignorant of
one of the most important (and immutable) laws of finance
- asset prices are transitory, debt is constant. The next
recession will be ungodly, and US policy makers are
likely to face the same deflationary, debt contraction
spiral that Japan had to face when its bubble economy
collapsed."
*** "Last week," according to the Sovereign Society, "the
29 member, rich nations Organization for Economic
Cooperation & Development declared a "blacklist" of 35
tax haven nations OECD has targeted for reform or ruin."
Reform, in this case, apparently means cooperating with
the US and other major nations to make sure none of their
taxpayers escape. The blacklisted nations are threatened
with economic sanctions if they fail to go along.
(http://www.sovereignsociety.com)
*** Did Janet Reno really describe `cultists' as I quoted
her the other day? Maybe not. Many people think that
quote is just one of the many Internet-borne hoaxes that
make their way through our collective intellectual
digestive system.
*** Yesterday, by the way, was P.T. Barnum's
birthday...and the date on which the bikini made its
debut here in Paris, in 1946.
1929 Again? Low inflation lulls investors into a false
security. But there's a lurking danger. In 1929, one of
the worst asset bubbles in history, consumer price
inflation was near zero. That encouraged loose monetary
policies and fed the bubble. Truckloads of easy credit
money are being dumped into the stock market today. And
most investors are clue-less concerning the dangers.
Could another Depression be coming? Read the 5 Myths of
the New Paradigm... free. http://www.dailyreckoning.com/corprofits3
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
How did the U.S. government get so big? How could a such
a dynamic people, whose country was formed in the shade
of the Liberty tree and dedicated to the concept of
freedom, allow themselves to become nearly as tax -and
bureaucrat-ridden as France?
I asked myself this question as I stood on the quai,
waiting for the train to Paris.
When the train pulled into little Lathus this morning at
6:21, I was the only passenger to mount. The conductor
was an attractive, almost coyishly seductive, woman of
about 30...dressed in a SNCF uniform - with grey wool
pants and a blue jacket with brass buttons.
She opened the door for me and welcomed me aboard. "Nice
service," I thought to myself.
Then, I saw that I was the only passenger on the train.
Not a single person had come aboard since the train its
departure from Limoges an hour before.
But upon arriving at Montmorillon there was a flurry of
activity. The conductor got down from the train and
greeted others on the dock. There were about 7 of them.
They all shook hands. Then, one put on his conductor's
hat, picked up a bicycle that was leaning against the
office and rode it about 50 meters up the tracks, where
he seemed to change a sign before returning.
Even including the passengers who got on board at
Montmorillon, the ratio of railroad personnel to
passengers was still about 2 to 1.
The French railway system is a government enterprise. It
employs thousands of people - many of whom it probably
doesn't need. A round-trip ticket from my house to Paris
costs about $100. French taxpayers, of whom I have
reluctantly become one, pitch in another $100 or so - to
cover the real cost of the trip.
"Whatever your weakness," says Richard Russell, "the
market will find it and exploit it." Greed, sloth, fear,
hubris - the market takes advantage of them. But the
market is a moralist. It not only exploits character
weaknesses and moral failures - it corrects them. "Greed
is a self-correcting sin" as James Grant put it.
Investors who expect to double their money in a bio-tech
stock, are soon joined by many others. The price of the
stock rises far beyond what it is worth. Finally, it
crashes...and the sin is punished.
That is what is so nice about markets. They improve us,
irrepressibly taking money from weak hands and moving it
to strong ones...punishing sin... rewarding
virtue...taxing stupidity and bad luck. Unprofitable
railroads, for example, go bankrupt... they are sold off,
cut up, and paved over.
Markets make it easy for fools and their money to part
company ...continually refreshing the capital pools with
new investors and new money....while the old scum is
skimmed off and piled on the banks to dry up and
disappear.
Politics resembles markets. Politicians exploit low
motives and character weaknesses just as stockbrokers do.
They promise something for nothing. They count on the
herd instinct and the fear of missing out or being left
behind. They use the same empty blather...and hollow
slogans....and they rely on the wishful thinking and
credulity of voters just as stockbrokers rely on
investors' gullibility and their amazing ability to sound
as cynical and world-weary as Methusela, while investing
as though they were born yesterday.
But politics is fundamentally different from markets in
that it reinforces sin, rather than punishes it. The old
scum just gets thicker...like the ring around a bathtub
that is never scrubbed.
Employees of the french railway system want to see more
money wasted, not less. They want more employees. More
unprofitable routes. More brass buttons and more
bicycles.
And each superfluous employee increases the pressure to
add still more redundant workers and more brass buttons.
Each of these employees will vote for the politician who
promises to add to the burden on french taxpayers, rather
than reduce it.
Jim Davidson outlines the arithmetic of modern democracy
in a recent issue of Strategic Investment:
"[A] tiny fraction of Americans pays more tax than a
majority which can elect the government," he points out.
"The very structure of democratic government as known in
the early day of the 21st century makes pillage an almost
inevitable feature of tax policy."
(http://www.dailyreckoning.com/body_headline.cfm?id=171)
Inevitably, the impulse to larceny will drive voters to
want to increase taxes on the rich so that the money can
be redistributed to themselves. It would be irrational
for them to do anything different.
That's as far as I've gotten on this today...the train
pulled into the Gare Montparnasse...more tomorrow.
Ruminatingly,
Bill Bonner
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Last modified: April 02, 2001
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