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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

BALTIMORE, MARYLAND 
FRIDAY, 20 JULY 2001 

 

Today:  Serial Dishonesties

*** A second half recovery - right on time? Maybe not.

*** Poor consumers have gotten even poorer! And nearly 
twice as burdened with debt. Will they shrug?

*** Dollar drops...real estate rises...and a note from 
Jim Cramer...

For a moment, early yesterday, it looked as though 
the 2nd half recovery had arrived - right on schedule. 
There were the Finns, telling Wall Street that Nokia's 
earnings fell only 16% in the latest quarter...and that 
things would get better.

But then, other companies reported in - bad 
earnings, layoffs, no recovery in sight.

And the international news was no better. Japan's 
banks say bad loans are worse than expected. Argentina's 
unemployment rose to over 16%. Brazil warned of 
recession. And stocks in London fell to a 3-year low.

And those poor consumers! Household wealth fell 
for the 2nd quarter in a row - the first time this has 
happened in a quarter century. 

But in 1974 at least, common householders were not 
carrying such a huge debt burden. They skipped along 
with total debt of less than 150% of GDP. But since 
1982, Americans have borrowed so much money you'd think 
they were planning to skip town. Debt has risen to 272% 
of GDP. 

Consumers are beginning to sag under the weight. 
The only thing that keeps them going is the rise in real 
estate values - up 11% in the last 12-mo. reporting 
period - which gives them something else to borrow 
against.

Of all the things that might happen in the next 
few years, this seems most likely: these consumer 
atlases...schlepping the entire world economy on their 
backs...will shrug.

Yo, Eric! 

*****

- Nokia, the Finish cell phone giant, wowed Wall Street 
yesterday by prophesying that its sales and profits will 
rebound later this year. The stock jumped more than 14%.
This implicit all-clear for tech stocks emboldened 
investors to buy their favorite NASDAQ issues - driving 
the tech-leavened index up 1.5%. The Dow rallied 40 
points.

- But after the close of trading, Microsoft wowed Wall 
Street with a prophecy of a different sort. The company 
said its sales and profits would fall short of forecasts 
for the current quarter because fewer customers are 
buying PCs loaded with Microsoft software. Say it ain't 
so, Bill.

[Actually, Eric, it's worse. I read a news item this 
morning - PC sales worldwide have fallen, for the first 
time since 1986! -Bill]

- Is the dollar beginning a stealth bear market? Or just 
taking a breather? Whenever the case, the greenback 
seems to find it easier to fall these days that to rise.

- Maybe America's yawning current account deficit is 
starting to make its presence felt. Like the world's 
neediest teenager, we seem to need a few extra dollars 
every day in order to maintain our carefree lifestyle. 
Just maybe, "Dad" is growing a little tired of coughing 
up pocket change for Junior.

- All else being equal, if foreigners don't plug the gap 
between what we earn and what we spend, the exchange 
rate falls, just like it's doing at this very moment.

- In only two weeks, the dollar has dropped more than 4% 
against a newly revitalized euro.

- If the dollar continues weakening, it might just pay 
to keep a wary eye on the gold market (as boring as that 
can be). There's wisdom in the old Wall Street adage, 
"Never sell a dull market short." One of these days the 
yellow dog will stir. Just maybe, the time is drawing 
nigh.

- Most of the tortured souls on Wall Street these days 
lack a similar faith, although they may be starting to 
get religion. Kenneth Scheinberg, head of listed trading 
at S. G. Cowan, tells Bloomberg News, "People are 
starting to write off the third quarter and to pray for 
the fourth quarter, and if praying doesn't come through, 
we are in some serious trouble."

- What time do we get in to Penn Station?" I asked the 
Amtrak conductor. "6:22," he says. "But that depends on 
God's will and that the creek don't rise." I couldn't 
resist asking which of these two factors he considered 
more important. He answered with a smile, "Well, God's 
already on Amtrak's side, so I think more about the 
creek."

****

Bill writes:

*** One thing I was not looking forward to, returning to 
Baltimore for the summer, was the hazy, hot and humid 
weather. But, this summer, it's been surprisingly cool 
and dry. If this is global warming...what's not to like?

*** TheStreet.com wrote to offer me investment advice. 

"For years," says the letter, "the market's top 
journalists, money managers and investors have looked to 
Jim Cramer for insightful market commentary and 
analysis."

Are any of them still solvent? If so, Cramer now offers 
"to share his stockpicking secrets with the world, and 
make trades for his own personal account. And you can 
get these Premium Stock Picks delivered to your email 
inbox absolutely FREE."

This proposal sounds almost diabolical. Cramer, you may 
recall, has a remarkable track record - remarkable for 
the fact that he is reliably wrong about almost 
everything. But TheStreet.com is still in business, and 
so is Cramer....

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SERIAL DISHONESTIES

A DR reader tells me the Fed has opened a museum in 
Chicago:

"There's supposed to be an exhibit in which you are 
presented an economic problem, and are supposed to 
figure out what the Fed should do...raise interest 
rates, lower them, do nothing, etc. After you make a 
guess, you get to hear the "right" answer...what Alan 
did in the same real-world situation."

President Lincoln's innovations were many and long-
lasting. In the South, he introduced the use of 
monumental force against Americans. In the North, he 
preferred fraud.

The greenback - an IOU with no intention to ever pay up 
- is still with us. Both the currency and its managers 
are regarded with suspicion by only a few economists, 
conspiracy buffs and crank commentators. Otherwise, they 
enjoy the kind of reputation that is usually reserved 
for live war heroes and dead bank robbers. 

But things that need to be managed will soon be 
mismanaged, at least that is today's cheerful 
hypothesis. And even Alan Greenspan will someday come up 
with the wrong answer. This is not merely a matter of 
chance....but one of destiny. The use of force and fraud 
- whether by dead presidents or with dead presidents - 
carries with it a deadweight loss. Sooner or 
later...somewhere and somehow...the dead weight has to 
fall on someone. 

It is hard for us to imagine, but there was once a time 
when the nation's money had no central managers. 
Economic historians - believers in the unrelenting 
forward march of progress - describe the antebellum 
banking period as one marked by frequent crisis, 
instability and bank failure. Thus, Lincoln's new 
centralized monetary authority - and even his unbacked 
paper money - looked to many like an improvement.

But the Jacksonian era, says Jeffrey Rogers Hummel, "was 
probably the best monetary system the United States has 
ever had. The alleged excesses of the fraudulent, 
insolvent or highly speculative "wildcat" banks were 
highly exaggerated. Total losses that bank note holders 
suffered throughout the entire antebellum period in all 
states that enacted free-banking laws would not equal 
the losses for one year from today's rate of inflation 
(2%) if superimposed onto the economy of 1860."

It did not take the currency managers of 1863 long to 
get into bad habits. They had printing presses back 
then, too. And by the next year, the greenback had 
already fallen to 35 cents worth of gold. 

Much of Lincoln's central banking apparatus was 
dismantled in the late 19th century. But you can't keep a 
bad idea down for long. The Federal Reserve system was 
put in place in 1914, after the Panic of 1907 convinced 
bankers that they could dress up their cartel in the 
'cloak of philanthropy' and sneak through Congress. 

"From its humble beginnings as primarily a decentralized 
backup system encompassing twelve districts across the 
U.S....." writes William Anderson, "the Fed quickly 
gained importance during World War I as a huge holder of 
short-term government debt. Its place secured by its WWI 
performance, the Fed went on quickly to inflate the 
currency, leading to the short but drastic recession of 
1920 and 1921. Led by Benjamin Strong, the head of the 
NY Federal Reserve Bank, the Fed really turned on the 
crank during the 1920s in order to prop up the British 
pound..."

"Turning on the crank" is what the Fed tends to do. In 
fact, it is just about the only thing the Fed does. 

"The Fed continues grasping at the only straw within its 
grasp," writes the Mogambo Guru, "flooding the world 
with funny money and appropriating the meager savings 
income of the little people so as to drive interest 
rates artificially down... The Fed drives the markets by 
committing serial "we're-so-clever" dishonesties, one 
after another, in desperate response to the disasters 
consequent to the entire previous series of lies, frauds 
and intellectual corruptions that they, and associated 
others, perpetrated."

Greenspan has been confronted with several crises, 
imagined and real, during his spell at the Fed - the 
recession of '90-'91, LongTerm Capital Management, Asian 
Currencies, Russian default, Y2k... Each time, he has 
turned the crank a little faster. Now, he faces his 
biggest challenge. Industrial production has fallen for 
9 months in a row. A chart in Grants Interest Rate 
Observer records 10 recessions since WWII. The longest 
period during which industrial production fell was 
between '60 and '61, a period of 11 mos. The only other 
period of longer decline was in the early '80s. And 
never, in any previous decline, has the consumer been so 
light on savings and so laden down with debt. He has no 
margin of error. A month or two of unemployment - and 
he's insolvent

"The signs of an investment collapse are everywhere," 
writes Dr. Kurt Richebacher, "particularly in the 
steepest and most rapid slump of profits in the whole 
postwar period." American businesses - seeking to 
maximize shareholder value by cutting costs - will put 
more people out of work in the months ahead. Even with 
lower-interest short-term rates, those people will not 
be avid shoppers (see: Pushing On A String).

Still, today's managers are thought to be smarter than 
Salmon P. Chase in the 1860s or Benjamin Strong in the 
1920s. Alan Greenspan will always come up with the 
'right' answer, it is widely believed...

But Greenspan's dollars are no less fraudulent than 
those of Chase. Spreading them around does not make 
people richer. It only makes them feel richer...and 
leads them to miscalculate. The consumer, feeling flush, 
tosses around $20 bills with greater ease and abandon... 
The businessman, feeling the fresh flood of bills headed 
his way, misinterprets it as a sign of real, durable 
demand; he hires more workers and builds a new factory. 
The investor, seeing the new capital spending, mistakes 
it for a New Era of higher earnings and permanently 
higher stock prices.

Even a Fed chairman, watching the flow of new investment 
and higher profits, like the warm water filling his 
bath, mistakes the ersatz boom for the real thing and 
imagines, as Mr. Greenspan did recently, that "there is 
still, in my judgment, ample evidence that we are 
experiencing only a pause in the investment in a broad 
set of innovations that has elevated the underlying 
growth rate in productivity."

And yet, it is all a mass delusion built on a fraud...a 
riot of cash and credit incited by the central bank and 
whipped up by Wall Street and the financial press, while 
the financial gendarmes, like the Irish cops in the NYC 
draft riots of 1863, conveniently disappear.

The deadweight loss of a riot is unmistakable - broken 
windows, burned out cars, looted shops - and often, dead 
bodies. The deadweight loss of a central banker's fraud 
falls heavily too...but on whom? When?

We will see.

Bill Bonner

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About The Daily Reckoning:

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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Last modified: July 20, 2001

Published By Tulips and Bears LLC