Contributed by Bill
Publisher of: The
Fleet Street Letter
THURSDAY, 19 JULY 2001
*** Greenspan...slumping towards humiliation...
*** Something of a positive nature...on its way for
*** Japanese golf club membership...acid rain in
Baltimore...the 'moment of truth' for consumers...and
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It is sad.
Alan Greenspan - a man who should be enjoying his
retirement...dandling grandchildren on his knee...or
going to the lake with an old sweater on his back and a
fishing rod in his hand - is instead setting himself up
for public humiliation.
It has been 7 months since Greenspan began cutting
interest rates. Then, the world cocked its ear toward
every Greenspan whisper, cough and muddled phrase...
Would he cut rates? When? How much?
Now, the Fed chief promises more rate cuts and
nobody really cares. People are losing faith in rate
"Pressures on profit margins have been
unrelenting...." Greenspan told Congress yesterday,
"...weakness is evident virtually across the board."
Across the map, in fact. The entire world economy
seems to be melting down. And the Fed chairman's only
ice cubes - rate cuts - seem to evaporate as soon as
they are taken out of the freezer.
But let's get more details on yesterday's Wall
Street action from Eric:
- Chairman Greenspan seemed almost mortal yesterday. Not
only did the stock market defy him by falling, even
while he was yacking away to Congress, but also, "Al the
Omnipotent" seemed a little less sure of his power over
- In his testimony - from the twice-yearly speech
formerly known as Humphrey-Hawkins, but now known as the
"central tendencies" report - Greenspan cautioned, "The
uncertainties surrounding the current economic situation
are considerable, and until we see more concrete
evidence that the adjustments of inventories and capital
spending are well along, the risks would seem to remain
mostly tilted toward weakness in the economy."
- And again: "The period of sub-par economic
performance...is not yet over, and we are not free of
the risk that economic weakness will be greater than
- Mr. Market didn't like what he was hearing. The Nasdaq
fell 51 points to 2016. The Dow managed to recover from
triple-digit losses early in the day to finish down only
- Thanks to the Chairman's unsettling commentary, bonds,
historically a beneficiary of slow economic growth, were
one of the day's sexier performers. The 30-year Treasury
bond's price jumped 1 3/32 points to 97 31/32 - sending
yields sharply lower to 5.51%, down from 5.60% a day
- No Greenspan testimony would be complete, of course,
until both sides of his mouth had had a chance to speak.
So, despite his mostly doleful outlook, he did say, "The
rate of deterioration is slowing quite clearly, and
there are the first signs that something of a positive
nature is developing."
- Nice thoughts, but it may require more than a quarter
or two for "something of a positive nature" to blossom
into meaningful economic growth. In fact, it may require
- The problem with financial bubbles is that they never
burst, they deflate. In other words, it takes years to
unwind and work off the excesses. The Japanese bubble
has been deflating for 12 years, and it ain't over yet.
- The Nikkei Weekly reports, "Losses on golf-club
memberships disposed of by 391 listed [Japanese]
companies came to 139.4 billion yen ($1.1 billion) for
the fiscal year ended March, up 250% from a year
- The Japanese paper continues: "A nationwide index
compiled by the Nihon Keizai Shimbum showed membership
prices down 91% in March 2000 from the peak of March
- After the close of the trading session yesterday, IBM
reported its latest earnings. In keeping with the latest
fashion on Wall Street, the computer giant matched
earnings estimates but then warned of hard times to
come. CEO Lou Gerstner said, "We also were not immune
from [sic] some of the problems that affected many of
our competitors in the second quarter...[W]e are now
seeing signs of slowing in our microelectronics business
as our [electronic-manufacturing] customers reduce
- In all, the news from IBM was not great. Happily for
Big Blue and for the stock market in general, investors
these days have become a pretty forgiving lot. They are
adapting remarkably quickly to the new low-earnings
environment. A headline from yesterday's NY Post says it
all: INTEL PROFIT OFF 94% - WHAT A RELIEF!
- For now. "The moment of truth" for the U.S. consumer,
says Stephen Roach, will come in the first quarter of
next year. So many people now have 'flexible
compensation' - based on stock options and year-end
bonuses - that it now shows up in spending patterns.
Typically, consumer spending rises in the first quarter
- because of this end-of-the-year compensation. But this
year, earnings and stock prices - which determine the
size of these bonuses - are off. Spending is likely to
- The big question, as always, is: in the face of
slowing spending, declining share prices and a general
economic malaise, where should one invest? Well... let's
check in with the DR Blue Team. "Even for a hard-core
bear," says Marc Faber, "there is a price at which the
purchase of any market can be justified."
- Dr. Faber: "Natural resource-producing sectors of
countries such as Malaysia, Indonesia, Vietnam,
Australia, and New Zealand will do well, soon, as China
will one day become the world's largest importer of
commodities - such as coffee, cocoa, copper, plywood,
timber, grains, meat, etc. New Zealand rural properties
are another bargain, which are increasingly attracting
the attention of some well-known value investors."
As these markets have been hammered down 50% or more
recently, it may be time to take a look. (see: Financial
Resurrection: Not When, But Where?)
Back to Bill:
*** Sirens began wailing about 5 pm in Baltimore. It
sounded as if a riot had broken out downtown. I was
about to bolt out the door, join the mob and try to pick
up a pair of pants or a TV set, until I learned the real
cause of the excitement: a chemical spill in a nearby
*** Thousands of gallons of hydrochloric acid were said
to be pouring out of the old tunnel entrance near Mt.
Royal Terrace. Suddenly, public servants in all manner
of uniform sprang to action. Lights flashed. Sirens
screamed. A scene that would have cost Hollywood $2
million to stage was acted out live - before our eyes -
at a cost of only $5 million or so.
*** Hazmat bureaucrats wait years, maybe decades, for an
opportunity like this - to rush to the scene, step
before the cameras, and persuade more taxpayer money to
flow in their direction.
*** In our neighborhood, grown men and women walked
around with paper towels over the faces - following the
instructions of some public health official or local
wiseacre. People claimed to be able to smell the lethal
vapors...but I saw no one dissolve on Mt. Vernon square.
*** But even clouds of poisonous gas have their
silverous linings. Eric and I walked up to that new
restaurant from which we were turned away last week -
and got a table, no problem.
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"I ought to go upright and vital, and speak the rude
truth in all ways. If malice and vanity wear the coat of
philanthropy, shall that pass? If an angry bigot assumes
this bountiful cause of Abolition, and comes to me with
his last news from Barbados, why should I not say to
him, 'Go love thy infant; love thy wood-chopper: be good
natured and modest: have that grace, and never varnish
your hard, uncharitable ambition with this incredible
tenderness for black folk a thousand miles off. Thy love
afar is spite at home."
Ralph Waldo Emerson
Baltimore, once known as the 'Monumental City,' has
edifices honoring soldiers on both sides of the war
between the states. Here at the Daily Reckoning, we have
little doubt they died valiantly, or at least
honestly...no matter which fool's errand they were on at
But the whole undertaking turned out to be a deadweight
loss for America, like the 'Cultural Revolution' in
China in the 1960s...or the campaigns of Bonaparte for
France. Or the purges and liquidations in the Soviet
On a per-capita basis, the United States suffered a loss
6 times higher than WWII. Gettysburg alone produced more
casualties than all previous U.S. wars.
And for what? Except for a bloody slave revolt in Haiti,
slavery was eliminated throughout the rest of the
Americas without much violence or expense. The peculiar
institution simply dissolved, like the Soviet Union in
the 1980s. Brazil, for example, outlawed slavery
peacefully in 1888. There was no need for
reconstruction. No carpet baggers. No scalawags. No Ku
Klux Klan. No Jim Crow.
Mr. Lincoln's hard, uncharitable ambition looked to the
outside world like a civil war, but it was really a
revolution. The principles of limited government, self-
reliance, and liberty were overthrown. Lincoln had shown
that he could do pretty much anything he pleased - and
get away with it. Few future presidents or Congresses
missed the lesson.
This revolution has been recognized by historians, but
misinterpreted. They see the philanthropy and miss the
It is frequently said that the U.S. Constitution rests
on two incompatible principles - liberty and equality -
and that prior to Mr. Lincoln, liberty was dominant.
Post-Lincoln, equality has been emphasized. Thus
historians flatter force - dressing up violence to make
it look respectable, like putting a tuxedo on a mass
When a man willingly exchanges a sack of potatoes for a
chicken, both he and the person he trades with come out
ahead. Each gets something he wants.
But when a thief steals a chicken... or a government
confiscates it in the name of income redistribution...
the entire society is poorer. The chicken thief
contributes nothing. And the farmer spends time and
effort trying to avoid another theft - instead of
raising more chickens. If enough chickens are taken from
him, he may even decide to begin stealing chickens
Roughly, the more violence and theft in a society, the
more primitive, poor and barbaric the people are. The
Soviet Union demonstrated how this works.
Claiming to make citizens equal, the Bolsheviks seized
almost all the resources and output of the country and
distributed them as they saw fit. Anyone who resisted or
got in their way was liquidated.
But the gap between rich and poor did not disappear - it
widened. Party bosses and top-level apparatchiks
controlled more wealth, proportionally, than the 'robber
barons' of the U.S. They had their dachas on the Black
Sea...their fleets of chauffeured limousines and
airplanes...their support staffs.
And just like a Gates or a Carnegie, they could 'invest'
resources in huge, capital-intensive projects - dams,
railroads, factories. The only difference was they
didn't have to show a profit, compete for customers,
or answer to investors.
"War is the health of the state,' it is said. But war
does almost no one else any good. Lincoln left a healthy
state - after 4 years of America's most costly war,
while the deadweight of government over the next 135
years did nothing to increase equality.
People are less free since Lincoln's war. But how are
they more equal? Do men enjoy the charms of the
beautiful women more democratically? Do people eat the
same mush in the fancy restaurants as in the cheap ones?
Do they pay the same tax rates?
Or is 'equality' merely the coat of philanthropy...
tossed over the shoulders of a grasping politician?
More tomorrow...as I return to money, I promise!
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.