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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
WEDNESDAY, 15 AUGUST 2001 |
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Today:
Greenspan's
Peak Was Nasdaq's
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*** Wall Street still sliding sideways...tough market to
make a buck...
*** Japan and the U.S. - into the Petrie dish of
history...the IMF disses the "productivity miracle"...
*** "Civilization is merde!"...James Grant takes issue
with the Fed chairman...and other holiday surprises!
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*** Oh, ho...can this be a good sign?
*** The Bank of Japan announced in a "surprise decision"
Tuesday that they would further open the spigots on
their already torrentially loose monetary policy... in
an effort to pull themselves back from the edge of
recession and "ease the pain of [necessary] structural
reforms."
*** "There still exists such general views," reports the
BBC, "that around the end of the year, ongoing inventory
adjustments in IT-related goods worldwide are likely to
peak out and overseas economies - PARTICULARLY THE U.S.
- will start to recover." Emphasis added, of course.
*** It will be laboriously clear to Daily Reckoning
readers that "ongoing inventory adjustments in IT-
related goods" are precisely the challenge faced by a
spiraling U.S. economy. And furthurmore, that 6 rate
cuts and a loose, loose monetary policy have thus far
been completely ineffectual at avoiding a Kamakazi-style
post-bubble nosedive in the U.S., too.
*** "Japan and the U.S. are now in the financial Petrie
dish," writes Bill King. "Since the Great Depression,
many economists, monetarists, and financial solons have
averred the Great Depression could have been avoided by
copious money pumping." Now, we will truly see if money
pumping - which we have opined was the source of the
bubble in the first place - can double as its remedy.
*** Meanwhile, on Wall Street...Eric?
*****
Eric Fry reporting from New York:
- Yawn, yet another summer snoozer...The Nasdaq fell 17
points to give back most of Monday's gain. The Dow
dropped a whopping 4 points to bring its two-day loss to
5 points.
- In other words, the stock market is doing a whole
lotta nothin'...it's tough to make a buck in a market
like this. But that's not stopping Warren Buffett from
trying. According to a filing with the Securities and
Exchange Commission, Buffett's Berkshire Hathaway Inc.
purchased a 5-million share stake in Office Depot Inc.
during the first quarter.
- "Buffett is not the 'value investor' people say he
is," writes Lynn Carpenter of The Fleet Street Letter,
who first recommended Office Depot in April of 2000. "He
simply buys good companies, at a good price, at the
right time. Even when it fell last year, [FSL advised
readers very strongly in January to hold on, load up, or
get in at the bargain price of $8.19] Office Depot
turned around and is up 86.5% so far this year."
- Continues Lynn: "In December, we recommended H&R Block
in the Fleet Street Letter at $18.60 - Buffett announced
a position in Block shortly thereafter - and it just hit
another new high today, up 98.7% in 8 months so far."
- The dollar dropped to a 3 1/2 month low against the
euro yesterday to 90 cents and change - the greenback's
fifth losing day in a row. This is starting to look like
a trend, folks.
- The flip-side of the weak dollar is of course the
strengthening euro. "The Eurozone's strong net creditor
position relative to the rest of world's is reflected in
its stable Aaa foreign-currency [rating]," reports
Moody's. "Above-average gross domestic product, moderate
inflation, low interest rates, and declining
unemployment have helped these nations sustain a
declining trend in government deficits and debt."
- Several commentators blamed the IMF for the dollar's
weakness yesterday. Isn't that a bit of a stretch? It's
true that the bureaucrats had a few unkind words for the
U.S. economy and its currency, but we musn't confuse
cause with effect.
- On July 27, 2001, the Executive Board of the IMF
convened to chat about various macroeconomic trends over
which they exercise absolutely no control. "Directors
[of the IMF Executive Board] indicated that the size of
the U.S. external current account deficit did not appear
to be sustainable in the longer-term," says a summary of
the meeting, "and it raised concerns that the dollar
might be at risk for a sharp depreciation, particularly
if productivity performance proved disappointing." No
argument there...
- But "what productivity?," asks the latest Moody's
Credit Perspectives. "Many analysts tripped over each
other to offer praise for the increase in measured
productivity in the second quarter. Notwithstanding an
increase in quarterly productivity growth, corporate
profits plummeted, credit rating downgrades held a wide
lead on upgrades and job losses mounted. Some
productivity miracle!"
- On a related note, Moody's observes that "The U.S.
credit card loss rate has seen its steepest increase in
four years. The amount of bad loans written off as un-
collectable rose to 6.39% in June 2001 compared with
5.26% in June 2000..." Credit delinquency trends are
unlikely to improve until the unemployment rate
improves.
- Maybe exports will buoy our economy until the consumer
regains his financial footing...maybe.
- "Unlikely," says grantinvestor.com's Andy Kashdan. "It
was the bursting of the U.S. technology bubble - both in
terms of share prices and real economic activity - that
kicked off the slowdown in world growth. Now the rest of
the world is in a position to return the favor by
cutting back on demand for U.S. goods and services just
as exports are becoming increasingly important in
deciding the fate of the U.S. economy.
- "None of the major export markets is stepping up to
help Uncle Sam in his time of need...In Singapore, for
example, the government is forecasting 0.5% to 1.5% GDP
growth this year, a mere shadow of last year's booming
9.9%. Industrial production fell 16.1% year-over-year in
June... Those calling for a bottom in the U.S. economy
will be right eventually, but the lack of strong export
markets is just one more force restraining the mighty
U.S. economy."
*****
Back to Addison Wiggins, in Paris...
*** Today is Fete de la Vierge here in France - a quiet
bank holiday in honor of the Virgin Mary. We Americans
in the office - three of us today - have developed the
awful habit of working through the French holidays. The
French have given up asking "Why?".
"Er, The Daily Reckoning?...It must go on?" I offer
sheepishly. To which they simply shake their heads in
dismay and head off for parts unknown. Just as well, the
office is quiet and the atmosphere relaxed.
*** These holidays do seem to bring out the crazies.
Last night in the Metro, Jennifer and I happened upon a
man yelling directly at anyone who would listen. He was
saying: "They all run away...everyone I speak to - runs
away... look there you go again!"
"Maybe you should stop yelling at them," I thought.
When he noticed Meritt, our 20-month-old son, perched in
a backpack on my back, he started cooing in the curious
voice all French people are apparently trained to use
when they see young children.
"The little one is so cute," he said.
"Don't let that man touch him," Jennifer said with a
smile.
*** Another lost soul I happened upon while traversing
rue Monge this morning was talking very loudly. There
was no one else on the street.
"Civilization is merde!" he decried. "Why must the
Frenchman pay taxes to the United States?! The United
States is merde!"
I walked a little faster so I could pass. He may have
had a point... I don't know. His voice trailed off
behind me as I turned the corner toward Notre Dame and
the Hotel de Ville.
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The Daily Reckoning Presents: A Guest Essay by James
Grant, editor of Grant's Interest Rate Observer
(www.grantspub.com).
The first of a two-part essay in which the author
explores Fed Chairman Alan Greenspan's culpability in
accommodating, celebrating, and defending the most
excessive investment bubble in the history of mankind.
GREENSPAN'S PEAK WAS NASDAQ'S
By James Grant
Sen. Phil Gramm (R., Texas): "If this is the bust, the
boom was sure as hell worth it. You agree with that,
right?"
Alan Greenspan: "Certainly."
The Wall Street Journal, which last week reported this
committee-room exchange, omitted an important detail.
The Federal Reserve chairman is no impartial observer of
the boom he was asked to appraise. He seeded it,
accommodated it, celebrated it and defended it from
those who believed they saw it turn into a bubble. He
was as uncritically and besottedly bullish as the
luckless brokerage-house analysts who have fallen under
the gaze of the Washington inquisitor, Rep. Richard H.
Baker (R., La.). Not long ago, Greenspan even believed
the analysts.
The chairman's analytical record, hazy in most memories
(though not in that of the vigilant Bill Fleckenstein,
author of the daily Market Rap on
www.grantsinvestor.com), constitutes an important piece
of the U.S. interest-rate equation. The structure of
forward rates is set by the market in partnership with
the Second Most Powerful Man in the World. Insofar as
Greenspan leads the market, it is a case of a one-eyed
man leading people with two. Perhaps, after they refresh
themselves on the chairman's errant judgment -
especially off the beam on the eve of the 2000 stock-
market peak - the sighted will have more confidence in
their own judgment.
As it is, they seem to yield to the chairman. The money-
market interest rate and domestic equity markets are
priced for a prompt recovery from a downturn neither
unusually severe nor protracted. By the shape of the
forward Eurodollar curve and the bull-market P/E affixed
to the S&P 500 (33 times trailing net income), Mr.
Market has thrown in his lot with Greenspan and Gramm. A
few quarters of weak GDP growth? A collapse in capital
spending offset, in part, by the indomitable leveraged
consumer? Is that all there is?
No, it seems to us. In support of this contention, we
offer two preliminary propositions. No. 1: Booms not
only precede busts, they also cause them. No. 2: Busts
are indispensable. At least - behold Japan - no proper
boom can be built on the uncleared debris of a preceding
boom.
What is this debris? Business and financial error as
reflected in misbegotten investment projects, bad debts,
impaired balance sheets, wild expectations. The job of
the bust is to redress these mistakes - in effect, to
mark them to market. Americans, quick to acknowledge
their own error and quick to forgive it in others (after
the resolution of pending litigation, of course),
disposed of the wreckage of the 1980s in short order. As
the bubble of the late 1990s dwarfed that of the late
1980s, the cleanup will take longer than the market
currently seems to allow for. Thus, we believe, money-
market interest rates will continue to fall, the pattern
of business activity will describe no letter "V," and
the long-awaited recovery in corporate earnings will be
pushed well into 2002.
With the telecom and Internet bubbles popped, some would
say that the adjustment is nearly complete. In the last
cycle, the pace of adjustment was checked by the nature
of the problems - overvalued buildings and illiquid
banks.
Neither was susceptible to an instant cure. In contrast,
stock prices, when they get around to falling, fall
fast. However, we think, the millennial adjustment is
far from over. Telecom and tech were not the whole
bubble, only the most visible portion. The bubble was
global. It distorted not only the structure of the U.S.
economy but also the patterns of world trade. It
exaggerated the economic feats of the one and only
superpower and enlarged the U.S. current-account
deficit. It caused an even greater round trip of dollars
- into the hands of overseas creditors and back into
U.S. securities markets - than might have otherwise
occurred.
It would be just like Gramm and Greenspan to agree that,
with respect to these huge foreign inflows, "no harm, no
foul." So concluding, however, they would underestimate
the risks of investing in highly valued markets in a
highly valued currency. The sheer persistence of
overvaluation in the United States has dulled investors'
perceptions of it. News that $10.6 billion had flowed
into U.S. equity mutual funds in June did not elicit the
logical question: At these valuations, why was there
any? Commentators, instead, wondered why there wasn't
more. ("Asset levels for equity mutual funds are much
higher now than in 1998 or 1999," writes a dissenting
commentator, James Bianco, proprietor of Bianco
Research, Barrington, Ill. "Despite the stock market
sell-off, only two months have seen outflows since the
market peak in 2000.")
The fundamental cause of the bubble was the mispricing
of capital and credit, therefore of risk. In the
hottest, most bubble-like sectors of the economy,
investment projects were undertaken purely because money
or credit was available to finance them. The viability
of these ventures depended on the continued availability
of ultra-cheap financing. When capital and credit became
less cheap, the boom-time ventures became less viable.
The massive write-downs of goodwill by Nortel Networks
and JDS Uniphase begin to suggest how far from viability
it is possible to wander. In the case of JDS, $44.8
billion of acquisitions made during "The Fabulous
Decade" (to borrow the title of a new book on the 1990s
by Clinton Fed appointees Alan Blinder and Janet Yellen)
turn out to be worthless.
Money was easy late in the decade, and when the capital
markets chose to make it tight, as in the wake of the
1998 Long-Term Capital Management affair, the Fed
insisted on making it easy again. The Fed raised the
funds rate three times in 2000, at last to 61/2% on May
16, two months after the Nasdaq peaked.
Was the Fed therefore leaning against the wind? Not the
chairman, who contributed to the pro-cyclical gale in a
speech on March 6, 2000, before the Boston College
Conference on the New Economy. His subject: "The
Revolution in Information Technology." As he spoke,
orders for high-tech durable goods in the second quarter
were on their way to registering a year-over-year gain
of 25%.
Four quarters later, in April-June 2001, following a
sharp rise in the cost of speculative capital, they
would register a 31% decline, the steepest on record.
John Lonski, Moody's chief economist, aptly describes
the nearby graph (which depicts the surge and plunge) as
"the picture of a bubble."
It was no bubble to the chairman when he rhapsodized on
information technology and productivity growth. Thanks
to computer technology, Greenspan declared, business
managers were increasingly able to formulate decisions
using "real-time" information. Not anticipating how rare
a commodity "visibility" would shortly become, he said
that this knowledge had reduced uncertainty. "When
historians look back at the latter half of the 1990s a
decade or two hence," he told his Boston audience, "I
suspect they will conclude we are now living through a
pivotal period in American economic history. New
technologies that evolved from the cumulative
innovations of the past half-century have now begun to
bring about dramatic changes in the way goods and
services are produced and in the way they are
distributed to final users. Those innovations,
exemplified most recently by the multiplying uses of the
Internet, have brought on a flood of start-up firms,
many of which claim to offer the chance to revolutionize
and dominate large shares of the nation's production and
distribution system. And participants in capital
markets, not comfortable in dealing with discontinuous
shifts in economic structure, are groping for the
appropriate valuations of these companies. The
exceptional stock price volatility of these newer firms,
and, in the view of some, their outsized valuations,
indicate the difficulty of divining the particular
technologies and business models that will prevail in
the decades ahead."
Striking the pose of a benevolently optimistic monetary
statesman, Greenspan appeared hopeful, yet heedful of
the risks. Heedlessness set in a few paragraphs later.
"At a fundamental level," he said, "the essential
contribution of information technology is the expansion
of knowledge and its obverse, the reduction in
uncertainty. Before this quantum jump in information
availability, most business decisions were hampered by a
fog of uncertainty. Businesses had limited and lagging
knowledge of customers' needs and of the location of
inventories and materials flowing through complex
production systems. In that environment, doubling up on
materials and people was essential as a backup to the
inevitable misjudgments of the real-time state of play
in a company. Decisions were made from information that
was hours, days, or even weeks old."
Thanks to the clarity afforded by instantaneous
communications, Cisco Systems had to write off only
$2.25 billion in excess inventories during its third
fiscal quarter, in addition to just $1.17 billion in
restructuring and other special charges. Using the older
technologies -telephone, fax, the mails, citizens' band
radio, etc.- the loss would undoubtedly have been
greater.
Throughout Silicon Valley, makers of PCs, chips,
servers, printers and other digital products have
admitted to monstrous miscalculations of final demand.
Lucent, Corning, Nortel and JDS Uniphase have been
devastated by one of the greatest misallocations of
investment capital outside the chronicles of the Soviet
Gosplan.
Who can conceive of the size of this waste had there
been no e-mail?
More tomorrow...
James Grant,
for The Daily Reckonning
James Grant is the founder of Grant's Interest Rate
Observer (www.grantspub.com), and author of several
books including Money of the Mind: Borrowing and Lending
in America from the Civil War to Michael Milken, and The
Trouble with Prosperity. Mr. Grant recently hosted "Time
Machine: The Crash" on The History Channel and is a
regular commentator on CNN and a panelist on "Wall
Street Week with Louis Rukeyser," as well as a frequent
columnist with the Financial Times and Forbes.
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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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