Contributed by Bill
Publisher of: The
Fleet Street Letter
THURSDAY, 26 JULY 2001
The Great O'Neil
*** Earnings fall...stocks rise...consumers dip into
their 'savings accounts'...
*** When will the economy recover? A billion Chinese
with credit cards....might that do it? Or a 7th rate
*** Doctoring doesn't pay so well...Social Security
heads for bankruptcy...oil prices retreat...and more!
|Dow Jones CEO, Peter Kann: "We have no reason to |
expect an advertising turnaround in the third quarter,
and we have certainly not seen one so far in July."
Earnings at Dow Jones fell by more than half on 18%
lower revenues in the second quarter.
Kodak: "we have yet to see signs of economic
recovery." Dana Corp: "we're less optimistic today
about the rate of recovery in the North American OE
markets than we were at the outset of the year."
From almost every industry, the reports are the
same. On Tuesday, Amazon was hit for a 25% loss...after
investors figured out what 'pro forma' meant.
Yesterday, Compaq reminded them, again, that the real
world of creative destruction is a dangerous place.
Compaq's profits fell 81% in the second quarter. GM's
Siemens reported losses of a billion dollars this
week; Dupont lost $213 million in the second quarter
and announced significant job cuts. Lucent - having
gotten whacked in the market for a 16% loss on Tuesday
- announced that 20,000 jobs are on the block...
The only thing new about the "news" these days
seems to be the names of the companies announcing
missed estimates and layoffs...
What else? Well, Eric is on vacation today...and
Addison is keeping an eye on Wall Street in his
absence. Addison, what's going on?
Addison Wiggin, writing from Paris:
- "There is no economic theory that I ever heard of,"
sez the Mogumbo Guru, "that espouses continual,
accelerating debt...as a magic-bullet method of
- Still...Greenspan, speaking before Congress on
Tuesday, said: "should conditions warrant, [the Fed]
may need to ease further." Of course, it should be no
surprise to DR readers...we ask simply, even naively:
if six cuts ain't enough... what will seven do?
- "The situation is bigger than any one man, government
or entity," an analyst told the Industry Standard
yesterday... "[Greenspan] has to have more than a band-
aid to fix this. He has to have a tourniquet."
- "When will the recovery will begin?" asks Mogumbo,
"The answer is simplicity itself; when some big group
of people get the financial wherewithal to buy a deluge
of global output. The Americans are just about tapped
out, bless their greedy little hearts. If Greenspan
were the hotshot that people think he is, he would be
pushing for Visa and MasterCard to send unsolicited
credit cards to the Chinese, Russians and Indians. When
that huge group of debt-free people starts consuming,
THEN the global recovery will begin."
- The Dow rallied big yesterday - up 164 to close
10,405 - reversing the 335 point slide it had coming
out of Monday and Tuesday. The S&P 500 and Nasdaq rose
more modestly - 18 to 1,190 for the former, 25 to 1,984
- Still, the Dow is off more than 3 percent for the
year, the S&P down nearly 10 percent and the Nasdaq has
fallen close to 20 percent.
- Americans are nothing, if not optimistic... the
Dismal Scientist reports: most consumers recently
surveyed believe that "business conditions will improve
six months hence and 92% expect job availability to be
the same or better than it is today."
- And they are refinancing their homes in order to keep
spending. According to the WSJ, half of GDP growth in
the first quarter came from home refinancing. The
typical homeowner took $20,000 to $40,000 out of his
equity...a total of nearly half a billion dollars in
the first half of the year. One of the people profiled
in the WSJ used the money to pay off credit card debt
and buy a home theatre system. Another bought a
vacation home, which he considered an "investment."
Another, an airline stewardess, said she "just didn't
want to let $70,000 sit in my home."
- People are treating home equity as though they were
"savings accounts," says the WSJ. What kind of saving
account is it that you have to make a mortgage payment
on every month...or you lose your home? In 1945,
American homeowners owned 86% of the value of the
houses. Now, they own only 55% - losing 10 percentage
points in the last decade alone.
- Gold traded evenly - as always, it seems - at $267.
The dollar fell again... down to almost 88 cents per
- "What if the market decides it no longer believes in
the dollar as a safe haven?" asks the Prudent Bear's
Marshall Auerback... "What if views on the dollar shift
as rapidly as they did in respect of the Korean won or
Thai baht in 1997?" One thing is for sure...my cheaper-
than-water liter of red wine begins to get a lot more
expensive. (see: Cracks In The 'Strong Dollar'
- "The retreat in the oil price - bothersome as it is,"
says our energy man John Myers, "is not entirely
unexpected, given a couple of very important factors:
the slowdown in the U.S. economy and the previous sharp
runup in prices. But fret not; the long-term trend
towards higher prices is as powerful as ever."
Back to Bill in Baltimore...
*** "The world is aghast at the admission of Treasury
chief O'Neill that there are no assets in the Social
Security Fund!," writes Richard Daughty. "Well, duh!
Congress has been taking the money and putting in IOU's
for decades, and suddenly this is news!"
*** There seems to have been some doubt as to what was
actually in the Social Security system's vaults. So, a
presidential commission headed by former senator
Patrick Moynihan was appointed to have a look. Sure
enough, when they peeked into the nation's retirement
hidey hole, what they find? Nothing!
*** The system works like all government programs - by
robbing Paul in order to pay Peter. The trouble is,
there will be a lot more retiring Peters in the years
*** "The only question," says a comment from the
Independent Institute, "is whether the government will
shore up the system by 1) enacting huge tax increases
(the recent tax cut was one-tenth the size of the $12
trillion current Social Security shortfall); 2) cutting
Social Security benefits significantly; 3) cutting
other government spending; or 4) increasing public debt
(i.e. delaying a tax increase). Like the old Midas
Muffler TV commercials that said, 'You can pay me now
or you can pay me later.'
*** And, last but not least, a comment on Henry's
career choice from a DR reader - "My wife, married 21
years, is a physician, as is her father and brother.
I've got lots of doctors as friends. The next time
Henry says he can make lots of money as a doctor, you,
as his father, should tell him to...RUN, not walk.
Seriously, as you probably already know, he can make
lots of money as a doc, but the 'hourly' wage is a heck
of a lot less than most people realize."
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The Great O'Neill
"Rise from bed - 6:00AM
Dumbbell exercise and wall-scaling - 6:15-6:30
Study electricity, etc. - 7:15-8:15
Work - 8:30-4:30PM
Baseball and sports - 4:30-5:00
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The Great Gatsby
by F. Scott Fitzgerald
"I came across this book by accident," said the old
man. "It just shows you, don't it?"
"It just shows you."
"Jimmy was bound to get ahead. He always had some
resolves like this or something. Do you notice what
he's got about improving his mind? He was always great
I picked up Fitzgerald's 1925 novel out of curiosity. I
wanted to recall how the story ends. What happens to
these thoroughly American self-improvers...these
Gatsbys, Babbitts and Citizen Kanes?
The question arose as I read the latest issue of
Grant's Interest Rate Observer. A profile of the
"nation's CFO," Paul O'Neill, triggered an emotion. I
could not tell whether it was pity, envy or an
irritating irony. Or it was perhaps the sense of
delicious dread you have just before a pompous man
makes a great fool of himself.
"If your organization is not striving to be the best in
the world at everything you do," said the Great O'Neill
to the Economic Club of New York in April, "then you
are unlikely to be truly excellent as an organization."
Paul O'Neill is the type of character who exists only
in America. He is a straight talker, and an optimist by
avocation as well as vocation. He believes that all
problems can be solved by direct assault - making lists
and applying oneself to the tasks at hand.
"None of you will be surprised to learn that I have
brought my devotion to the idea of excellence to my new
pursuits in the government," he announced to no one's
"Excellence, to O'Neill," opines Jim Grant, "is a
quality to be achieved through discipline and
management. There is no place in his worldview for sub-
optimal outcomes, including recessions, bear markets,
debt liquidations, currency crises and hedge-fund
implosions. Listening to the secretary, one gets the
sense that there is no such thing as an unmanageable
event. Excellence overcomes everything."
But a man who speaks of excellence so freely cannot
really understand it...or know how to get it. He tosses
the word out as though he were giving fashion advice.
For O'Neill, excellence is merely a suit of clothes -
you choose to wear it or not as you might choose to put
on a fedora one day and a baseball cap the next. In
O'Neill's mind, those who are not excellent are merely
too lazy or too contrary to go to a decent haberdasher.
He does not seem to realize that that "excellence" -
like so many other things in life - depends on the
situation. A hat that may look good on one man, may
make another look like a clown. And a style that looked
smart on a man 10 years ago, may make him look like a
hopeless dork today.
And so I arrive at today's modest insight: fashions
"Even when I play a game of pure chance, like slot
machines..." said a friend at dinner last night, "when
I have a winning streak, I begin to think I'm a
Paul H. O'Neill has been having a winning streak. A
self-made man, he earned his degree in economics from
neither Harvard nor Yale, but from Fresno State
College. He went to work for the U.S. Veterans
Administration in 1961 as a computer-systems analyst.
In 1977, he joined International Paper Co. and rose to
become president of the firm in 1985. Hired away by
Alcoa in 1987, he had such success, Grant's tells us,
that he was made the subject of a Harvard Business
School case study.
Now, he has brought his can-do winning ways, including
his pursuit of excellence to Washington, as Secretary
of the Treasury.
But O'Neill takes on the job at a difficult moment. All
the excellent work done by previous Treasury
secretaries - aided and abetted by the excellent
policies of the still-sitting head of the Federal
Reserve System - have brought the nation to such a peak
of excellence that the entire world should hold its
breath in envy.
Instead, it holds its breath in anticipation.
America has been on a winning streak paralleling that
of its Treasury Secretary. Indeed, looking more
closely, one might guess that both winning streaks came
from the same splatter of chance. Rather than O'Neill's
genius for excellence...or America's genius for hard
work and innovation...the real grease of the U.S.
economic miracle may be nothing more than its genius
for credit creation.
And now, approaching the threshold of the Post-Credit
Bubble Economy...and carrying bags of debt like a man
brings home his Christmas shopping - America seems more
likely to stumble upon it than to stride across it.
"The American economy, O'Neill told the National
Association of Business Economists, "will remain the
great engine of prosperity for the world because
innovation thrives here. If you have a good idea, this
will always be the best place to make it happen....
"...the U.S. has recaptured the lead and we are not
ever going to back down again. We are determined to
lead the world. That is how we have actually gotten the
huge tax surpluses we have in Washington today. They've
come from hardworking Americans making things, creating
jobs, improving productivity and achieving higher
Twelve years ago, almost all of these things might have
been said by a shorter man about a smaller, but - at
the time - no less dynamic economy: Japan. Then, it was
the Japanese who were on a winning streak. It was they
who seemed to have a genius for hard work and
But even ardent self-improvers stumble. And fashions
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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.