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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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BALTIMORE, MARYLAND
FRIDAY, 6 JULY 2001 |
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Today:
Cramer vs. Cramer
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*** Why would anyone care what Cramer thinks? The S.S.
Cramer takes on water...
*** Euro sinks too...almost at the new record lows I
said it wouldn't hit....
*** Americans getting poorer, faster than anytime since
the Great Depression...consumers still spending, but not
so fast...Charm City...and more!
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Let's begin by going directly to Eric's report from New
York...
******
Eric Fry on Wall Street:
- "Why would anyone care what James Cramer thinks?" Bill
asked rhetorically in yesterday's column. "Because
knowing what Cramer thinks can be very rewarding...but
only if you remember to do the opposite."
- How true that is. Contrary indicator enthusiasts, your
ship has come in - and its name is the "S.S. James
Cramer." About 3 months ago, Cramer began posting his
"personal stock portfolio" on realmoney.com. So how's he
doing so far? Not too well, I'm afraid. Through the end
of trading yesterday, Cramer's portfolio had slipped a
little more than 1% since he first posted it on April
1st. Over the same span, the S&P 500 and the Nasdaq
Composite advanced more than 6% and 16%, respectively.
- Of course, the time frame in question is too brief to
be conclusive. Still, I recalled my 10th-grade geometry
teacher, who'd surely be telling Mr. Cramer what he so
often told his struggling students, "Mr. Cramer, a blind
monkey selecting at random would have fared better than
you did on this test." Pity the monkey.
- Cramer's not-so-model portfolio was not the only one
to suffer large losses yesterday. Stocks fell across the
board - rebounding energy stocks being among the few
standout winners of the session. The Dow fell 91 points,
while the Nasdaq dropped a more disquieting 61 points,
or almost 3%. Despite the rate cuts and all the blather
that "the bottom is in," the Nasadaq flirts with 2,000
once again.
- "Are markets headed for a Summer Rally?" the Wall
Street Journal asked hopefully yesterday. Strictly
speaking, a summer rally is inevitable, the question is
from what level. The Journal might not, for example,
exult in a rally from Dow 5000 to Dow 6000.
- At the current levels, the S&P 500 sells for about 28
times its earnings for the past 12 months, which as
hedge fund manager Michael Lewitt points out, is "far
greater than the post-World War II average of 15.3 and
previous bear market low of 7 times earnings in 1974..."
- Over in the currency markets, Europe's beleaguered
single currency - you know the one - slid to a new
eight-month low against the dollar. At 83.6 US cents,
the euro stands less than a penny away from its all-time
low of 82.7 pennies.
- European auto manufacturers aren't complaining. The
June sales numbers are in and the American car companies
lost market share to the foreign competition...again.
This time the Big 3's combined market share fell to
63.9% in June.
- "In 2001's first quarter, the household-sector's
liquid financial assets [i.e. assets readily convertible
into cash] fell by 12.5% from a year earlier," Moody's
John Lonski observes. "Perhaps not since the Great
Depression have the liquid financial assets of
households plummeted so deeply year-to-year. Yet,"
Lonski marvels, "household expenditures still grow."
- Lonski: "First-quarter 2001's yearly drop by the
liquid financial assets (LFAs) broke under the former
plunge of record depth - the 8.0% year-to-year decline
from 1974's recession-bound third quarter."
- Grantsinvestor.com muses, "Maybe the current mood
among those who watched their wealth balloon in the
bubble market is one of 'easy come, easy go.' Of course,
should the downturn in the stock market and the economy
as a whole continue to siphon off liquid financial
assets in the months ahead, American consumers may at
last be forced to abandon their jaunty brand of devil-
may-care complacency. Only time will tell."
- Intriguingly, yesterday's notable stock market losers
included Federated Department Stores - owner of Macy's
and the high-brow Bloomingdale's - which lowered both
its quarterly and annual earnings forecasts. Federated
shares fell almost 6%. "The consumer" is still spending,
but he seems to be spending less.
- At "Gray's Papaya" - a hot dog stand on Manhattan's
Upper West Side famous for its "Recession Special" - a
papaya drink and two all-beef franks retails for $2.45.
The special cost $1.95 when proprietor Nicholas Gray
cooked up the idea back in the 1990 recession. But as
memories of the 1990 recession faded, Gray altered his
sign to read: "The Recession Special: For the one that
was and the one that is to come." Gray doesn't know if
the recession "to come" is here yet, but he says that
hot dogs sell well in a recession, and that business is
booming. You figure it out.
*****
Back to Bill in Baltimore:
*** "Silicon Valley Becomes a Ghost Town for a Week,"
says a headline on the SF Gate website. The tech world
is suffering. Tech funds, reports Lipper, are down 22.4%
this year. To save money, the firms are requesting that
employees take off this week - which an estimated 25,000
workers are doing.
*** And the bust in technology shows no signs of being
over anytime soon. A British telecom maker, Marconi,
announced yesterday that it saw no 'second half
recovery' coming. Instead, it admitted that earnings for
the year would be only half of what was expected and
said that perhaps, maybe, things might be better in
2002.
*** Meanwhile, "Over the past 40 years," writes IL's
Kathie Peddicord from the 'Valley of Flowers and Eternal
Spring' - Boquete, Panama - "this country's inflation
rate has averaged less than 2% - that's simply unheard
of south of the United States. This country is an
anomaly in Central America. And right now... it's still
very cheap. A full-time, live in maid costs $120 a
month... first-run movies cost $1.50."
*** Plus, Panama boasts the most attractive "pensionado"
program in the world, Kathie says, "giving you discounts
of up to 50% off everything from public transportation
to movies and sporting events...from doctor's visits to
your electric bill...from restaurant dining to
airfares..." see: The World's Best Kept Retirement
Secret - Won't Stay That Way For Long)
*** Here in Charm City things go on in their own quirky
way. There was no boom in the city of formstone and
beehive hairdos... but neither is there a bust.
*** "But have you seen the prices houses are selling for
down near the harbor," asked a colleague. "I bought my
house for $62,000 just 8 years ago. Now, the house
across the street is selling for $350,000." Even in
Baltimore, it seems, easy money finds an outlet. Stocks
are not moving - but, in many parts of the country,
property prices are still rising.
*** A hard rain storm drove through Baltimore last
evening. It came just as a band was warming up in the
park in front of my office. Dark clouds rolled over, the
wind picked up, there was a crack of lightening...and
suddenly it poured.
*** The musicians, standing up on stage, clutching their
microphones and electric guitars - wires running
everywhere - must have felt the crack of doom
approaching. They unplugged themselves in seconds and
ran for cover.
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THE WORST POSSIBLE WAY
Rumors are circulating.
It is said that Alan Greenspan would like to retire in 2
years. Naturally, the Fed chairman would not like to
leave office in a recession or immediately after one.
Greenspan has more name recognition than any public
servant since Pontius Pilate. And he got it by nurturing
the idea that he can keep an economy growing and
resurrect a fallen stock market.
It might have been different, of course. The Fed
chairman seemed to spot the beginnings of a bubble
economy several years ago, when he made his "irrational
exuberance" remark. But rather than fight it, Greenspan
decided to join it - adding even more exuberance by
ballyhooing a 'productivity miracle' and the wonders of
information technology.
"Greenspan wants to avoid a recession in the worst way
possible," said one commentator.
What would be the 'worst way possible?' In answer to
that question, I offer the following reflection.
"Consumers are still hanging in there," said one Fed
governor recently. 'Buy, buy, buy' says another regional
Fed governor. 'Lend, lend, lend,' says the chairman to
member banks. As long as consumers are willing and able
to increase their spending, they reason, there can be no
recession.
But consumers' household debt is now equal to 100% of
disposable income. It was only about 70% when Alan
Greenspan became Fed chief.
And consumers just suffered the worst hit to their ready
cash since the 1930's... as Eric points out above...
with households' liquid financial assets falling 12.5%
from the previous year. Yet, they continued to increase
spending more than twice as fast as the increase in
their incomes. (Those salaries - like the Fed funds rate
- are increasing barely more than the inflation rate.)
The only way consumers can continue borrowing and
spending is by going further into debt.
What is the worst thing a person who is deeply in debt
can do? Borrow more money, of course. And when would be
the worst time for a debtor to borrow more? Just before
a period of major deflation. And there we have our
answer: the worst possible way for Greenspan to try to
avoid recession would be by tempting American consumers
to borrow in advance of a serious decline in prices.
Thus, we have an answer to a number of mysteries:
Why has the dollar failed to fall - even as the Fed cuts
rates and the current account deficit rises?
Why does the price of gold go nowhere - even when the
world's central bankers attempt to destroy their
currencies?
Why have long-term bond yields failed to decline - even
when the Fed was pushing down on the short rates?
Why does the gap between inflation-adjusted TIPS and
regular 10-year notes remain stubbornly near 2% - even
when the inflation rate has only been at such a low
level once in the last 30 years...and even now is nearly
twice that number?
Why, why, why.
And why are we not already in recession?
"In May," writes James Grant, "for the 8th consecutive
month, industrial production declined...and factories
operated at 77.4% of capacity, down from 79.2% in April,
the lowest level of utilization since August 1983. High-
tech production fell by 1.2 percentage points, to 70.3%,
the lowest rate in a quarter-century."
A chart in Grants' newsletter puts the figures into
perspective. Every period in which industrial production
fell by 5 or more months - since WWII - was accompanied
by recession. We are already at 8 months. The record is
only 3 months away - at 11 consecutive months of
declining industrial production, set in 1960, coincident
with the recession of '60-'61.
"Given that the indicators that define a recession -
industrial production, employment, manufacturing and
trade sales - are going down in a way seen only during
recessions," says Anirvan Banerji, an economist at the
Economic Cycle Research Institute, "either we are in a
recession, or this is the worst non-recession ever."
Is it only a matter of time before a non-recession
becomes a recession...and the debts, so light and
portable on the carefree backs of consumers in the last
decade of the 20th century, become almost impossible
burdens in the 21st?
In a moment of philosophical weakness, we are tempted to
ask another question: what kind of God would invent such
a pernicious world...where ordinary people are lured
into imprudence and insolvency by the very person who is
supposed to be the custodian of the national accounts?
"There is always some leveling circumstance that puts
down the overbearing, the strong, the rich, the
fortunate, substantially on the same ground with all
others," wrote Ralph Waldo Emerson in his "Compensation"
essay. Americans have enjoyed nearly twenty years of
falling interest rates, low inflation, rising equity
prices, and full employment. Debt has been no problem.
Thanks to the strength of the dollar and easy money
policies of the Federal reserve, American consumers have
become the freest spenders and most indebted consumers
in the world.
And now, Mr. Greenspan brings his 'leveling
circumstance' - setting up consumers so they can be
knocked down hard by the coming deflation.
Your correspondent,
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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