Contributed by Bill
Publisher of: The
Fleet Street Letter
FRIDAY, 27 JULY 2001
*** The "encircling gloom" encircles more gloom...
*** Retirement plans postponed...but Wall Street more
bullish than it's been in 16 years...
*** Free "commercial space" in Denver...Centex up 93%...
and the Daily Reckoner takes a break...
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The Financial Times calls it "the encircling
gloom"...the earnings announcements continue. Carly
Fiorina of Hewlett Packard told investors not to expect a
2nd half recovery. HWP fell 7%.
JDS Uniphase will be a source of interest today,
after news last night that the company had managed to lose
$46 a share, a remarkable achievement for a $9 stock.
Dividends from the S&P 500 are off 6.6% this year -
not since the '70s have dividends dropped as much.
Meanwhile, Wall Street strategists are the most
bullish they've been in 16 years. But Wall Street analysts,
once idolized, have become a laughingstock...or a
scapegoat. The same financial press that reported their
recommendations as if they were important, now record the
results of their recommendations with indignation.
Addison, more details on yesterday's Wall Street
Addison Wiggin reports from Paris:
*** "I don't feel too good..." says Tom Ahrens.
Six months ago, Mr. Ahrens, a Canadian soybean farmer, had
approximately $210,000 in Nortel - comprising about 2/3 of
his expected retirement funds. Today, his shares are worth
about $45,000 - and he owes $30,000... to his broker.
"We milked cows for over 10 years," Mr. Ahrens told the
International Herald Tribune. "I should have stayed with
Nortel's stock - trading at $89 when Tom Ahren's retirement
years gleemed brightly - now sells for $12.
*** JDS Uniphase announced it's 4th quarter loss had
reached near $8 billion...HP revised its sales forecast
downward for the second time this year... and both
companies announced another round of layoffs.
*** Japanese electronics maker Sony announced a loss of
$242 million through June. The giant French telecom Alcatel
weighed in with $2.73 billion in losses. British telecom
registered a 70% drop in first quarter profits. As Bill
mentioned yesterday, the only thing new in the "news" these
days... is the names of companies getting mauled, torn-up
and spit out by the worldwide depression in telecom...
*** "When Federal Reserve policies create low interest
rates that lure entrepreneurs into markets that would not
pay a profit without fiat money, the boom is sure to become
a bust," writes Gary North. "That is what has happened
to tech stocks. It is what is in the process of happening
to the conventional markets. I don't mean stock markets as
such; I mean markets in general, i.e., the economy."
*** "The crucial, precarious aspect of the negative saving
rate," writes Dr. Richebacher, "is that it reflects an
unprecedented, bubble-related escalation of consumer
spending. If the Fed's drastic easing fails to revive the
bubble, the massive overspending by the consumer will burst
just like the massive malinvestment of businesses in the
high tech sector."
(See: The Key To Capital Formation: Savings!)
*** All the same, yesterday on Wall Street the investment
horde didn't seem to notice. The Dow gained 49 to 10,455;
the S&P 500 rose 12 to 1,202 and Nasdaq was up 38.64 to
close at 2,026 ... even the Russell 2000 and the Amex
composite rose slightly.
*** John Mauldin points out: "Despite the 20% plus decline
in the S&P in 2001, the current p/e is 29. Comparatively,
the average p/e of the S&P during the boom years 1990-
2000 was 22... even during the greatest bull market in
stock market history 1980-2000 the average p/e on the
S&P was 17.
"If the markets dropped to a more historical p/e ratio
level of just 20 - that would mean a drop to around 900."
That - if you'll permit me to do the math - is another 25%
drop from here...
*** "Commercial real estate is quickly becoming the
proverbial 'next shoe,'" writes Chad Hudson at the Prudent
Bear. "A recent survey indicates the vacancy rate along the
northwest corridor [In Denver] jumped to a whopping 32%
from 3.8% at the beginning of the year." According to Chris
Ball, a real estate analyst in the area, "landlords are
upfront that you can get six, nine, or 12 months of free
*** "Boston is another area that boomed with the
technology," reports Hudson. "Yet the occupancy rate in the
Greater Boston area declined almost 5% in the first six
months of the year" with another 8.6% drop in industrial
*** But consumers are undaunted. Home builder Centex - up
93% since we first covered it here in the Daily Reckoning -
reported its best ever first quarter, with sales up 19% and
backlogs growing 17%. Beazer Homes also announced its best
ever third quarter with revenue and closings up 15%, new
orders and backlog - up 34% and 31% respectively.
*** A DR Reader writes: "This is the biggest bubble in
history. I will wretch if I hear the word 'saving rate'
again. Walk up to a 60-year-old guy. He'll get about
$18,000 in SS, he has an IRA with $75,000, his retirement
from XYZ corp is $20,000 and THE HOUSE HE PAID OFF TWO YEARS
AGO IS $365,000. Get it yet? Need some help with this? It's
all about houses and what they are worth, not about
'savings'. The f***ing house is the savings."
*** Modest question: What happens when on the heels of
commercial real estate... residential follows?
Back to Bill...
*** It's summertime here in Baltimore. And the livin' is
easy. The fish are jumpin' and the cotton is high.
Hazy, hot humid weather settled on Baltimore last night,
like distant relatives arriving for what looked like a long
For every advance in human progress, alas, there is a
retreat. People used to gather on the sidewalks for a
breath of air in the evenings - and talk. Music would come
from open windows and the smells of summer living - both
good and bad - would drift through the fetid air like trash
floating in the harbor.
But air-conditioning and television changed everything.
People now stay indoors - watching "Sex and the City" or
surfing the worldwide web...
Returning from a restaurant late at night, the woman next
door was sitting out on her marble steps - the way people
used to do on hot summer nights. She was beautiful, but
like the neighborhood, touched by decay - a woman who
looked as though she might have retired from a career in
Hollywood or perhaps from playing Blanche Dubois in
She had a serene look, but also a bit of sadness in her
eyes...the kind of look people have when they realize that
they are out of scotch and the liquor stores have closed.
"Nice evening," I said.
"Yes, and so quiet."
"Can I give you a hand?" I asked, noticing that she was
struggling to open a bottle.
"I have always depended on the kindness of strangers," she
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PURSUIT OF MEDIOCRITY
"There is always some leveling circumstance."
Ralph Waldo Emerson, 1841
"Napoleon Bonaparte and his generals did an excellent job.
So masterful were they that they managed to bring an entire
army all the way across Europe, from Paris to Moscow. What
a pity they almost all died on the way home."
Bill Bonner, 2001
Yesterday's modest insight is followed today by an even more
You should always try to do the best you can, dear reader.
But there are things at which it is better to fail than to
succeed...and times when mediocrity beats excellence.
We have enjoyed an excellent boom in America...followed by
an excellent bubble...followed by an excellent end to the
Shares on the Nasdaq are down more than 50%. Those on the
Dow have gone nowhere for two and a half years. Will we
now get to enjoy an excellent bear market...or just a
mediocre one? Will the boom of the last two decades be
followed by a truly exceptional bust...or just an ordinary
The worse thing that can happen to a young man is that he
succeeds too early and too easily. For he fails to develop
a proper respect for failure...and sufficient modesty to
protect him from future mistakes. As Edmund Burke put it,
"No man had ever a point of pride that was not injurious to
Facile good fortune has befallen several men of my
acquaintance - and usually with disastrous results.
Getting rich too early, they became poor later...when it
was much more inconvenient.
My own career, as I informed our employees at an annual
meeting on Wednesday, has been blessed by failure and
incompetence. A more capable man might have taken a
different route...marginally succeeding at one task or
another. But, in my case, my failures were unequivocal - I
was forced to try something else, eventually stumbling upon
something that suited me.
As Emerson put it, "Every man in his lifetime needs to
thank his faults."
All of this is prelude, of course, to revisiting our own
Secretary of the Treasury, Paul O'Neill, a man who seems to
have no faults to thank.
Mr. O'Neill's point of pride is that he brings the pursuit
of excellence to all that he does. There is nothing wrong
with that, in itself...except that it fails to prepare him
for a circumstance in which even mediocrity will be an
"We have amazing flexibility in our capital and labor
markets, broader and deeper capital markets that match
resources to good ideas faster than anywhere else in the
world, creating greater return on capital here than
anywhere else in the world. " said the Treasury secretary
recently. Mr. O'Neill was referring to the same capital
market matchmaker that put thousands of investors' money
together with Webvan.com and telecom bonds, now trading at
pennies on the dollar. But he seemed not to notice.
"We have the world's most productive workers and the
world's freest labor market. Free markets, productive
labor and lower taxes will in turn keep capital flowing
here, even during a downturn like the one we are
That may be. Or it may not.
Stephen Roach, appearing before Congress on Wednesday,
testified as to why even the most excellent treasury
secretary in America's history may not b able to keep
capital flowing here:
"The world is in the midst of what could well go down in
history as the first recession of this modern era of
globalization. It's a recession whose seeds were sown in
the depth of the financial crisis of 1997-98. . America
moved aggressively to save the world nearly three years
ago, it has paid a steep price for those noble efforts.
That rescue mission fostered a climate that took the US
economy to excess -- resulting in a destabilizing asset
bubble, an overhang of excess capacity, and an
extraordinary shortfall of consumer saving. It also left
the United States with its largest balance-of-payments
deficit in modern history.
In Roach's opinion, the current worldwide slump is the
result of the excellent management of previous slowdowns by
previous Treasury secretaries
"It all started in the fall of 1998. The global currency
crisis that began in Thailand had cascaded around the
world, eventually leading to Russian debt default and the
related failure of Long-Term Capital Management. The result
was what Federal Reserve chairman Alan Greenspan dubbed an
"unprecedented seizing up of world financial markets." US
President Bill Clinton and Treasury Secretary Robert Rubin
went even further, both calling it the world's worst
financial crisis since the Great Depression.
"The Fed swung into action to save the world, [and] the
world economy sprang back with a vengeance that few
anticipated. In the midst of the Fed's emergency easing
campaign, America's real GDP surged at a 5.6% annual rate
in the fourth quarter of 1998. Far from faltering, the US
economy was on a tear. I cannot remember when such an
aggressive monetary easing had occurred in the context of
such an outsized gain in economic growth. Although our
central bank began to take back its extraordinary monetary
accommodation by mid-1999, by then it was too late -- the
damage had been done.
Moreover, it was compounded by the Fed's now infamous Y2K
liquidity injection of late 1999. America was on the brink
of a runaway boom. A Fed-induced, Nasdaq-led liquidity
bubble gave rise to the great IT overhang that has since
wreaked such havoc on the US and the broader global
It probably would have been better if the "Committee to
Save the World" - Robert Rubin, Larry Summers, and Alan
Greenspan - had failed. A modest boom would have been
followed by a modest bust. Instead, they succeeded so well
that it looked as though the world's central bankers had
finally mastered the secrets of managed currencies. All
they had to do was to provide liquidity at crucial moments.
That - and not letting markets run their natural courses -
became the definition of excellence in central banking.
And so, investors bought stocks and bonds - particularly in
the most excellent market in the world, the U.S - while
consumers bought cars, houses, and whatever else they
wanted. And here we are.
"The other shoe is about to fall," guesses Roach. "That, in
my opinion is the painful legacy of a financial asset
bubble that took our real economy to excess. Consumers have
over-spent. Businesses have over-invested. And the United
States funded these excesses by borrowing from abroad...
the math is straight-forward: An ever-widening current-
account deficit implies that foreign investors will
ultimately end up "owning" America - unless, of course,
something gives. And it usually does."
But Paul O'Neill is not the sort of man to let things
happen. He would prefer to make them happen. "I don't
think we should accept the notion [of a contagious global
slowdown] as something God intended for us to have."
Here at the Daily Reckoning, we do not presume to know what
God intended. But we feel pretty sure that, whatever it
is, even Paul H. O'Neill's most excellent management will
not stand in its way.
P.S. In a bull market, an investor aims for the stars - for
excellent returns. But in a bear market, he should lower
his sights - if he can merely achieve mediocre results, he
can count himself lucky
P.P.S. Sunday, I leave for a 2 1/2 week vacation. For the
first time in two years, dear reader, you will get a relief
from my letters. I hope you will miss me, but the Daily
Reckoning will continue during my absence with Addison
reporting from Paris...and Eric from Wall Street.
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.