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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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BALTIMORE, MARYLAND
FRIDAY, 20 JULY 2001 |
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Today:
Serial
Dishonesties
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*** 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...
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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: |
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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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