Contributed by Bill
Publisher of: The
Fleet Street Letter
WEDNESDAY, 18 JULY 2001
*** Whoa! 9th month in a row of falling industrial
*** Consumers "are going down..." but not gracefully...
*** Well, how did we do? The Daily Reckoning has been
rocking and rolling for 2 years now. What would you have if
you had followed our advice? Gulp...the naked truth, below.
|Whoa! Industrial production fell again in June - for |
the 9th straight month. If this isn't a recession, it is the
worst non-recession in U.S. history. Among the longest-
running periods of declining industrial production since
WWII, our present slump now ties for 3rd place - equal to
the 9-mo. setback in the year I was born - 1948 - and
corresponding to the 13-mo. recession of that era.
What makes the picture look a little brighter today
is that consumers continue to 'hang in there.' And the Fed
continues giving them additional rope to hang themselves
with. In the first half of this year MZM, or 'cash' as we
used to call it, rose at an unheard-of rate of 23.7%.
But Barton Biggs, Morgan Stanley's economic
strategist, doesn't think it's believable that "the toxic
combination of the wealth effect, record layoffs and higher
energy prices won't take its toll on an already leveraged,
undersaved and overspent American consumer."
"In the next couple of months," predicts James
Paulsen of Wells Capital Management, "there will be more
job losses, and the consumer will capitulate."
"I think the consumer is going down..." adds another
Morgan Stanley economist, Stephen Roach.
But these are baby boomers we're talking about. They
won't go down gracefully...or sensibly. Instead, they will
have to be knocked down and carried out. Stay tuned.
Eric, what happened yesterday on Wall Street?
- 'Tis the season for earnings reports. And in the same way
that Christmas has its jingle bells and Thanksgiving has
its turkey dinners, the earnings season has its own
peculiar trappings - namely, manic overreactions to "a
penny shy of estimates" here or "a penny better than
- Let's be serious, if investors really cared so much about
earnings, would the Nasdaq be selling for more than 100
times its component companies' annual profits?
- Center stage yesterday was heavy-machinery maker
Caterpillar. The stock raced ahead about 6% after topping
the consensus estimates by seven cents with earnings of 78
cents a share. "Continued strength in electric power and
heavy construction and improved demand in coal mining and
oil and gas sectors helped fuel second-quarter sales," said
Chairman & CEO, Glen A. Barton.
- Apparently, some parts of the old economy keep on
chuggin'...even as the new economy sputters.
- The stock market celebrated Caterpillar's strong report
with the Dow gaining 134 points to 10,606 and the Nasdaq
climbing almost 2% to 2,067.
- Maybe Wall Street is simply caught up in the global
"feel-good" phenomenon that appears to be circling the
globe at the moment. Consider that inside of one 24-hour
period earlier this week, PLO leader Yasser Arafat had a
face-to-face with Israel's Shimon Peres; Pakastani
President Pervez Musharrat engaged in a "frank and
constructive" private chat with Indian Prime Minister
Vajpayee; and Russian President Vladamir Putin embraced
Chinese President Jiang Zemin.
- Will these centuries-long enemies suddenly become
friends? Not likely. Nor has Wall Street suddenly become a
welcoming investment destination for every rube who gets
off a bus at Pennsylvania Station. For every one
Caterpillar, there are numerous Intels and GMs.
- Intel on Tuesday reported a whopping 76% plunge in
second-quarter profits. General Motors announced a
similarly severe 73% drop in second-quarter earnings.
- What does a bubble look like? David Hale, Chief Global
Strategist for Z�rich Financial Services: "1) 70% of all
technology venture capital funding in the U.S. since 1980
occurred in [only] two years, 1999 and 2000; (2) the value
of venture capital funding shot up to $114.6 billion in
2000 from $4.4 billion in 1995; and (3) the value of IPOs
for the technology sector surged to $37.5 billion in 2000
from levels of $2 to $3 billion per annum during the early
- As Walter Bagehot, who lived and chronicled many 19th-
century panics, once said, "[A]t particular times, a great
deal of stupid people have a great deal of stupid money."
- Does history repeat itself? In "100 Years of Land Values
in Chicago," written in 1933, Mr. Hoyt observed: "Real
estate loans, not failed stockbrokers' accounts, were the
largest single element in the failure of 4,800 banks in the
years from 1930 to 1933."
*** Well, has it been worth it?
*** I pose the question on or about the 2nd anniversary of
the Daily Reckoning. For two years, I have been writing
these letters - with hardly even a pause. Was it
worthwhile, after all, putting up with my gratuitous
reflections on war, politics, love and poetry? You decide,
*** I've mentioned dozens of investments...some positive,
some negative. How did they do? Well...the investments on
which I was bullish rose an average of 13%. Not great, but
better than the Dow or the S&P - and far better than the
Nasdaq. And the stocks on which I was negative fell an
average of 43.21%.
*** So, maybe you won't get rich quick by reading the Daily
Reckoning. But you won't go broke either.
*** Many thanks to you for reading. I enjoy writing; I hope
you've enjoyed reading half as much. And tune in
tomorrow...as a suspicion grows - that the Fed, like
Lincoln's war and all government programs, may be leading
us to a "deadweight loss."
p.s. Sometimes over the past two years, I've been accused
of sounding like a broken record. In an effort to counter
that perception, we offer a Wednesday Guest Essay, by
grantsinvestor.com's James Padhina below.
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Daily Reckoning Presents: a Wednesday Guest Essay in which
the author explains why stock prices have predicted exactly
"nine of the past two recessions."
THE BELLYACHE BRIGADE
by James Padhina
Much as some people want to believe otherwise, this
slowdown is not so bad.
There are a lot of whiny, doom-and-gloom brats out there,
and I want to grab them by the collar, get right in their
teary red faces and tell them, "Quit crying - or I'll give
you something to cry about." These crybabies are filling
the air with desperate warnings that things are going down
Consider: CNBC now flashes its terrifying jobless-claims
chart more frequently than it does close-ups of Maria
Bartiromo and Liz Claman. Not long ago, the mention of
"Challenger" drew blank stares from analysts; now every
good Street moron can cite the outplacement firm's latest
harrowing layoff statistics. There's even a rumor going
around that the manufacturing sector has lost a ton of jobs
lately. Can anyone confirm this?
Quit it already. I don't know how things got this way (I
have in my head visions of overeager beavers combating
contrarian thinking with more contrarian thinking, which
lands us right back at conventional tripe), but this
thinking's all wrong, and it's got to stop. If you think
what's gone on in labor markets lately is nasty, you either
weren't around for previous cycles, or you haven't done
For the whiniest of the whiners, it's both.
When economic growth peaked during the first quarter of
last year, the unemployment rate was hovering at 4% and
average hourly earnings were growing at a 3.7% year-over-
year rate. Now, five quarters later, the unemployment rate
sits at 4.5% and average hourly earnings are growing at a
4.2% year-over-year rate. Since the slowdown began, then,
the jobless rate has climbed by a half-point and wage
growth has accelerated by the same amount.
A brief look at other economic slumps reveals an altogether
different scenario. Five quarters into the 1990 episode,
the unemployment rate had risen by 1 1/2 percentage points
- three times greater than the increase this time around -
and average hourly earnings were growing at a rate half a
point slower than when the deceleration began.
Five quarters into the 1981 episode, the results were more
striking: The unemployment rate was up by 2 1/2 percentage
points - to 9.9% from 7.4% - and wage growth was down by
3.7 percentage points - to 5.5% from 9.2%. The 1968 episode
followed the same pattern, though on a lesser scale. A
little more than a year after the slowdown began, the
unemployment rate had risen by 0.8% and average hourly
earnings growth had slowed by half a percentage point.
Clearly the latest episode is different in that (a) the
unemployment rate hasn't risen much at all, and (b) average
hourly earnings are growing faster, not slower - as was the
case in the three prior instances - than they were when the
deceleration in overall growth began. One major difference
is consumption, which has held up well. Why?
First, because jobs (and the income they produce) are far
and away the most important determinant of consumption.
This isn't intuitive to lots of people out there - not to
the piggish popular press, not to the analysts who feed it
corn and not to the public that happily imbibes from its
teat. They all now believe that as share prices go, so goes
So let's emphasize this: Jobs are important - more
important than the housing market, than who's president,
than the number of alcoholic and depressed Backstreet Boys
- and, yes, even more important than stock prices.
If you're paying an economist or a consultant who's using a
consumption equation in which jobs don't carry the greatest
weight, or in which stocks carry more weight than housing,
or in which the Nascrack predicts retail sales or some such
nonsense, then you've been pointed in the wrong direction
the past few years - and you're wasting your money.
There's a reason that stock prices have predicted nine of
the past two recessions, and it's this: For completely
opposite reasons, traders and investors (i.e., the people
who move stock prices) can't accurately predict such things
any better than a coin toss can - traders trade no matter
what's going on, and investors are looking out over an
obscenely long time horizon.
You can aggregate as many millions of these wise minds as
you like, but the inescapable fact is that their predictive
power is zero.
The second reason consumption has held up is because
average hourly earnings have held up, and that poses a
threat to the kind inflation outlook the Fed embraces (and
encourages us to embrace, too). No, continued acceleration
of wage growth does not guarantee an inflation problem to
which the Fed would react by hiking rates, and yes, wage
growth might well begin to decelerate presently.
Yet the fact that wage growth is proving so sticky this
time around certainly isn't helping the mild-inflation
case. And the longer wage growth stays stubborn, the
greater the chance the Fed's tremendous easing to date will
keep it high and exert further upward pressure. Given that
wages and core inflation are both still cruising at faster
clips than when the economic slowdown began five quarters
ago, one wonders what they might do if the Fed's first-half
stimulus produces a meaningful growth rebound by the year's
Finally, the reaction of the jobless rate and hourly
earnings so far hints at how much longer the economic
slowdown might last and the potential strength of the
rebound once the deceleration has run its course. Income is
still turning in quarterly increases north of 4% because
wage growth has held up so well, and this will put an
important floor under spending for as long as it continues.
That throws cold water on the notion that we're in for a
long, drawn-out, U-shaped recovery. With so much fuel for
spending in the form of income growth, rebate checks, 275
basis points of easing in the pipeline and real interest
rates that, in some cases, are the lowest in 10 years, the
environment is not the kind in which slowdowns remain stuck
For those who argue otherwise, the scanty half-point
increase in the unemployment rate so far threatens their
forecasts. Most doom scenarios seem bound to - and driven
by - a jobless rate that rises all the way up to 5%.
Five percent? Stop with the crocodile tears, people.
That would mark a peak-to-trough increase in the
unemployment rate of just one percentage point, whereas
past economic slowdowns have delivered increases two to
three times bigger than that. And how hard will it be to
rebound from a drawn-out "recession" during which the
jobless rate rises by only one percentage point? About as
hard as it is for Tiger to score a new Buick.
So quit the whining. The employment situation has been much
worse at this stage of previous economic slowdowns. The
fact that it's not so bad this time around makes the
crybabies even harder to bear than usual.
For the Daily Reckoning
James Padhina is a staff writer at grantsinvestor.com. As a
reader of the Daily Reckoning, you are welcome to a 30-day
free trial of grantsinvestor.com. Simply click here:
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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.