In Today's Daily Reckoning:
*** Wall Street enjoying the summer
*** The average investor gained 3% in first half of the
*** Al Greenspan - the jazzman...Gates got off easy...and
*** Wall Street looked healthy last week. The Dow rose
260 points - or 2.42%. Friday gave the Dow a big boost -
with a 119 point gain.
*** Twice as many stocks rose as fell over the week. And
there were 3 times as many hitting new highs as there
were hitting new lows.
*** The Nasdaq rose 29 points on Friday. This brought the
index to a small gain for the week - plus 2.
*** So, things are looking up. The summer rally continues
- with the Dow over 11,000 for the first time since
*** Investor's Business Daily's mutual fund index - which
is probably a good measure of how ordinary investors are
doing - is up 3% for the year. This is less than you
could have gotten from a risk-free bond. But, my brother
in law, an investment banker with Goldman Sachs,
explained why people do not pull out of stocks...
*** A group of retailers are reporting earnings this week
- including Home Depot, Toys 'R' Us and Nordstrom. Retail
is 2/3rds of the economy, so this is important. On
Friday, it was revealed that retail sales rose 0.7% in
July, the biggest increase in 5 mo. But Gap shares went
*** Dell computer also fell. Once again, we see the same
problem - expectations are so high that good results
aren't good enough. Dell trades at over 50 times
earnings. You'd have to be growing at 50% per year in
order to justify that kind of a multiple. Dell's
operating results have been flat for the last three
quarters. The stock fell to $37 and change.
*** Japan has been threatening to raise interest rates.
Friday, it finally did so. But no one seemed to notice or
care. You may recall, however, that Japan's zero rate
policy has been the source of much of the money that has
driven the US boom to grotesque proportions. Traders
borrowed yen and bought U.S. stocks and bonds. This 'yen
carry trade' paid off big as long as the yen did not rise
too much against the dollar.
*** Currency markets were mostly quiet on Friday. The
euro is still holding above 90 cents.
*** As long as the dollar remains strong, it is probably
clear sailing for Wall Street and the U.S. economy. Maybe
there will be no huge gains... but there probably won't
be any huge losses either. "The key," writes economist
Bob Anderson, quoted by Gary North, "is trying to
identify the catalyst that will precipitate the loss of
confidence. My own opinion is that it will come from
abroad... the growing foreign asset ownership in this
country cannot continue as it has in the past. At some
point, the 'call' will come, and it will be followed by
*** "The old-economy rules of prudence," said Alan
Greenspan, speaking to a meeting of the Council on
Foreign Relations, "are as formidable as ever. We violate
them at our own peril." This does not sound like the same
'Harry Potter' Greenspan, the Wizard of the World's
largest banking cartel, who was so recently proclaiming
the marvels of the New Era. Gary North explains: "Let it
never be forgotten that Greenspan began his academic
career at the Julliard School of Music, and then toured
with Henry Jerome's swing band. His is a jazz man. He can
carry a tune, but he rarely sticks with it for long. He
improvises." (See: He's a Jazz Man, He Can Carry a Tune
*** "Just tell me what tat is," asked one DR reader
following my letter entitled, 'Tit for Tat,' "and show me
where I can trade it."
*** "A guy gets rich, and suddenly all the
busybodies and crybabies who refuse to produce something
for a living want to bring him down." Dan Ferris
described an ancient tradition. Among Indian tribes of
the Pacific Northwest, a man who failed to give away
enough of his wealth might even be killed. Bill Gates can
take comfort - he's getting off easy. (see: From Whom To
*** And here's a note in the Financial Times "Megawati
set to take more power from Wahid." The headline, which
sounds like it might have something to do with a
hydroelectric dam, actually refers to a shift in
political power in Indonesia, where the president - a man
whose brain has been certifiably damaged by a stroke - is
giving up some of his authority to a woman with no
obvious mental defects.
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"Does a person get richer when the prices of the stocks
he owns increase."
This is among the questions posed by Dr. Kurt Richebacher
in his August newsletter. (What Makes a Nation Wealthy
"Of course, his or her personal wealth has accordingly
risen," says the economist. But what has really changed?
Is the view out his office window any more pleasant? Does
his luncheon hamburger suddenly acquire an added flavor?
Does his wife appear more attractive? Are his labors
eased or is his care-worn brow soothed?
The answer: well...maybe. A few more dollars in Warren
Buffett's account will make no difference. Nor are George
Soros or Donald Trump likely to upgrade their standards
of living. At the upper reaches of the prosperity curve,
money no longer matters - except, as Bunker Hunt once put
it, "as a way of keeping score in life."
But as you travel from Park Avenue to Queens, or from
Kennebunkport into rural Maine, the marginal utility of
money increases. The average American can use a few more
bucks. And when the bucks appear on his portfolio
statement - he is happy to spend them. But, as we will
see, when they don't appear - he begins to act Japanese.
"People are not going to move out of stocks anytime
soon," said my brother-in-law at last night's dinner.
"Yes, they've taken some losses this year...but over the
last five or ten years they are so far up it is
unbelievable. Their lives have been changed."
The Dow ended the first half of this year down almost
10%. The Nasdaq did better - down only 2.5%. Still, the
habit of 20% plus annual gains is hard to break.
"Almost everyone now has a 401(k) or something similar,"
he went on. "If they had $50,000 in the plan in 1995 -
they might have $250,000 today. They are waiting for the
next big pop. And they'll wait years before they give
My brother in law is not giving up. Like most Americans,
I suppose, he has a house with a mortgage in an expensive
suburb. He works in Manhattan and commutes an hour and 15
minutes. He has a mortgage - at about 8% - and a
portfolio of stocks that has risen 400% in the last few
"I didn't begin as a tech investor," he explained. "I
became one because those are the stocks that went up.
Sun, Intel, Nortel - I've had good times and bad times,
but overall, I'm way ahead of the game. And now these
stocks make up maybe 80% of my portfolio."
Hmmm...I thought...maybe you should take some of your
profits off the table...pay off the mortgage...
"And we're looking at a relatively long time horizon,"
his wife added. "We're not worried if the market goes
down for a year or two. We have 20 years to make it up.
We don't believe anything is better over the long term
than stocks. We're in for the long term, so we're in
All across America, there are millions of people who
think like this. It is a reasonable line of thought. And
I am in no position to argue with it. My investment
returns, over the last five years, are a lot lower than
those of my brother in law.
Still, as the SEC is fond of advising us, past
performance is no guarantee of future results.
The lives of millions of people have changed in more ways
than one. First, they discovered that savings were a net
loss. A dollar invested in Qualcomm was worth five or ten
dollars in a money market account. So, why save at all?
It was stocks that made people rich - not savings.
As reported Friday, the savings rate fell from 8.7% of
disposable income in 1991 to 0.6% in the first quarter of
2000. This decline in savings - not technology,
innovation, nor productivity - is perhaps the real reason
for the financial boom of '95 - 2000...the boom of which
Al Gore is so proud.
Much of the money that would otherwise have gone into
savings went into stocks. These were regarded as better
than savings accounts (if you had the proper long-term
orientation), because the rate of return was higher.
Billions poured into stocks - which lifted stock prices
and seemed to confirm the idea.
Second, people looked at their account statements and
discovered that they were richer than they ever had any
right to be. It was easy money. But they recognized that
the gravy train would come to a halt if they took their
'savings' out and spent them. So, they took out only what
they needed - which wasn't much, thanks to the reckless
generosity of the consumer credit industry.
"Consumer spending surged as a share of GDP," reports Dr.
Richebacher, "from a long-term average of 66%...up to 94%
in the first quarter of 2000." The poor Japanese, by
contrast, can't seem to get on the "bullet train of the
New Economy." The silly losers keep saving their money.
Even in Europe, credit cards are rare. I've been here,
off and on, for nearly 5 years. I have yet to receive a
credit card offer in the mail. Instead, people use debit
cards - with each purchase immediately debited from their
bank accounts. And lending in Europe is done by stodgy,
conservative banks. The free-wheeling, aggressive credit
industry of the U.S. does not exist.
But back in the U.S.A. the credit industry makes money
available, when and where you want it. And people wanted
it almost everywhere as long as the 'wealth effect' was
working for them. As long as their portfolio statements
showed dramatic improvements, month after month, they
were happy to borrow, spend - and pump more money into
This year, account statements have been less pleasing to
behold. And the 'wealth effect' seems to have lost its
mojo. Retail spending went down right along with stocks.
Consumer spending increased by 0.5% in January, and 0.8%
in February, after a 5.3% boost in all of 1999. But in
the next three months consumer spending declined to just
0.2%. (Though yesterday's figures showed it has been
growing again in the Summer of Love.)
Meanwhile, savings followed exactly the same pattern. The
savings rate hit bottom in February - with only $21
billion saved. But in May, Americans saved $38 billion.
Is the vast Pacific - which separates the savers of
Nippon from the spenders of North America - finally
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Last modified: April 01, 2001
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