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Co-brand
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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
THURSDAY, 16 AUGUST 2001 |
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Today:
The
Second Most Powerful Man In The World
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*** "Kamakazi" policy on both sides of Pacific - look
out below..."Forget The Fed, Save Yourself!"...
*** Nasdaq drops to a 4-month low..."capacity
utilization" to a 18-year low...
*** Daytraders down 77% on average - quelle surprise?...
Insiders expect 4 to 5 year hiatus for IPO market...many
are the blessings of IT...and still more....
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*** "ohayougozaimasu" - the saga continues...yesterday
we noticed Japan's economic minister announced a
"surprise" drop of interest rates in the hopes that they
can stave off recession until the U.S. economy gets back
in gear this fall. Economic minister Heizo Tekenaka has
labeled the new quantitative ease "super-zero rates"...
*** Meanwhile, on the front lines of the global economic
"resurrection" effort...things are looking bleak.
"Forget the Fed," urges a Financial Post headline, "save
yourself."
*** "Investor confidence in Mr. Greenspan rests on a
string of Federal Reserve successes," the article
suggests. "Rate cuts brought us safe landings after the
1987 crash, and again during the Asian crisis in 1998.
But it's Mr. Greenspan's very success that is to blame
for today's difficulties. Believing in the omnipotence
of the Fed, consumers and businesses have imprudently
racked up unsustainable levels of debt."
*** But why, we ask with tedious regularity, won't the
Fed's elixir nurse the U.S. economy back to health this
time?
*** Here's a clue: Since January 3rd of this year the Fed
has chopped rates 6 times... a feat they're likely to
repeat on Tuesday. The Fed funds rate has fallen from
6.5% to 3.75%... But interest rates on credit card debt
- at over 15% - have barely budged. Consumers - with
U.S. $650-billion of debt - are not getting any relief
from Fed inducements to pile on more debt.
Furthermore, banks have taken the Fed's cue and slashed
the interest they pay on cash accounts. Those who rely
on short-term interest income are likely to be hit with
a 30% decline in "interest income". Mortgage rates are
heading down, but the refinancing binge is simply paying
down personal debt.
*** "Students of economic history will know we've been
here before," the FP reminds us. "In Japan, stock prices
are down 65% from their 1989 peak - even though interest
rates have been cut to nearly [super]-zero. In the Dirty
Thirties, interest rates fell from 6% to 1.5% [oh, so
similar to our current pace], but it was not enough to
prevent stocks from delivering their worst performance
in history.
"Both crises had this in common: They happened in the
aftermath of heavy speculative bingeing, massive buildup
of public and private debt and steep declines in
personal savings."
*** Modest prediction: when the glow of summer evenings
fade, so will "investor confidence" in the Fed and its
chairman. Then what? Look out below.
*** So it goes...what's up on Wall Street, Mr. Fry?
*****
Eric Fry reporting from New York:
- During the nuttiest phase of the bubble, Charles
Schwab Inc. just had to have a Wall Street address. And
so...last year, the discount brokerage firm opened a
gleaming new office just down the block from me on Wall
Street. Across the front of the office, a very large
sign continuously flashed price updates for the Dow, the
Nasdaq and, of course, the Schwab Index.
- During the bubble, it became a pleasant daily
diversion for the local office workers passing by to
gaze up at the sign, watch the stock market go up for a
while and mentally recalculate their soaring wealth. Now
the sign is dark. In fact, it has been dark for weeks.
It is not missed.
- Yesterday was a good day for new lows. The Nasdaq
slumped to a four-month low; the dollar dropped to a
three-month low; and capacity utilization, at 77%, hit
an 18-year low.
- The Nasdaq tumbled 45 points to 1,919, its lowest
close since April 16. The big stocks in the Nasdaq
seemed to suffer the brunt of selling, as the Nasdaq-100
dropped 3.6%. The Dow fell 66 to 10345.
- Lately, the commodities markets are playing host to
the hottest trading action. Yesterday, natural gas
grabbed the excitement with its largest one-day gain in
eight months. Kicking off the rally was a report from
the American Gas Association indicating that natural gas
supplies are well below expectations. Gas for September
delivery rose 37.4 cents, or 12.1%, to $3.47 per million
British thermal unit.
- Natural gas stocks soared as well. The rally was
probably overdue, as these stocks have suffered mightily
during the past couple of months. You'd think the
natural gas companies were struggling to make money.
They aren't. At current gas prices, most companies in
the sector are minting money.
- Moody's points out, "In contrast to the 6% revenue
growth rate and the 20% decline in profits of all U.S.
companies, oil and gas concerns posted aggregate revenue
growth rates of around 86% year-to-year and aggregate
profits growth of nearly 57% year-to-year." Keep a close
eye on this group, folks.
- Elsewhere in the commodity sector, U.S. gasoline
inventories fell for a fifth consecutive week. Come what
may, we Americans still drive our cars. Amazingly, even
in a slowing economy, gasoline demand since June 1st is
3.8% higher than during the same period last year.
- Finally, as noted in the Daily Reckoning earlier this
week, coal prices remain very strong. "Although natural
gas prices have dropped about 70% this year," reports
Bloomberg News, "market prices for coal had remained
strong. In July, prices for low-sulfur coal...reached
their highest levels since 1989."
- And while commodities climb, so do most foreign
currencies against the greenback. The euro shot up to
more than 91 cents yesterday. The dollar is looking a
little worn (pun intended).
- Are you sitting down? Last year, a Senate study found
that 77% of all day traders lose money (It's hard to
believe, I know). Ironically, one Harvey Houtkin
testified before Congress to refute these claims.
- As (bad) luck would have it, Mr. Houtkin, the self-
proclaimed father of day trading and also chief
executive of All-Tech Direct Inc., a Montvale, N.J.-
based brokerage for active investors, has had more than
a few bad trading days. He lost $392,000 in 1998 trading
a company account.
- The news of the loss became public in an arbitration
that four former clients of All-Tech brought against the
firm, claiming they were misled by the company's
aggressive advertising. Do you think they have a case?
- The high-end home construction industry is living off
of last year's harvest. Friends of mine who build $2
million to $5 million homes tell me that business is
slowing... future business that is. Says one,
"everyone's living off projects commissioned one or two
years ago. I'm not seeing anybody getting new jobs for
next year and beyond."
- Says the other, "The spec market for $2 million homes
is dead, but my bread-and-butter custom home
construction business is booked for the next twelve
months. After that, who knows. I just hope things pick
up by then."
- So do I, my friend. So do I.
*****
Back to Addison Wiggins, in Paris...
*** What else? How about this e-mail I recently received
from friends "in the business" in New York. The CEO of a
firm that hosts conferences for venture capital
professionals and tech start-up entrepreneurs seeking
funds wrote to his troops recently:
"Although our customers are startups and those who
provide them with capital, we have been relatively
unaffected by their troubles - until recently. Now,
however, we are suffering, too, and we must adapt.
"The process of creating new companies, of which we are
a small part, seems to be returning to its historic
patterns. This year, I look for fewer than two dozen
technology IPOs; that's down from 300 last year. Going
forward, I expect four or five years to pass before the
typical start-up is ready to sell shares to the
public...as opposed to the 18-month pace of last year
and the year before."
*** The e-mail goes on to announce the closure of the
San Francisco office, layoff of the staff there, and the
early retirement of its biggest cheese.
*** Apart from the usual "negative drivel" we normally
publish at the Daily Reckoning...it might be worth
noting that the author of this e-mail is a CNN
correspondent, a columnist for Fortune Magazine and the
Wall Street Journal and a personal adviser to Bill
Gates, Michael Dell and Steve Jobs.
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The Daily Reckoning Presents: A Guest Essay by James
Grant, editor of Grant's Interest Rate Observer
(http://www.grantspub.com).
The second 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.
THE SECOND MOST POWERFUL MAN IN THE WORLD
By James Grant
The Fed chairman did not get to where he is in life by
forgetting to hedge. Yesterday, you'll recall, we
posited that Greenspan contributed to the current bubble
by heedlessly ignoring the risks of the technology boom.
"[L]arge voids of information still persist," Greenspan
told the Boston College Conference on the New Economy on
March 6, 2000, "and forecasts of future events on which
all business decisions ultimately depend will always be
prone to error."
Unfortunately, he neglected to point out that high-tech
revolutions inflame the right portion of the brain even
as they enable the left-hand side. They stir up the
speculative juices, thereby introducing a new source of
potential business error. It is an especially potent
source as when, late in the 1990s, the chairman of the
world's leading central bank lends his imprimatur to a
supposed new age.
Many are the blessings of information technology,
Greenspan proceeded. He mentioned the mapping of the
human genome, the refinement of financial derivatives
and the explosion of big-company mergers: "Without
highly sophisticated information technology, it would be
nearly impossible to manage firms on the scale of some
that have been proposed or actually created of late."
Yet, he noted, "At the end of the day, the benefits of
new technologies can be realized only if they are
embodied in capital investment, defined to include any
outlay that increases the value of the firm. For these
investments to be made, the prospective rate of return
must exceed the cost of capital.
"Technological synergies have enlarged the set of
productive capital investments, while lofty equity
values and declining prices of high-tech equipment have
reduced the cost of capital. The result has been a
veritable explosion of spending on high-tech equipment
and software, which has raised the growth of the capital
stock dramatically over the past five years."
Having climbed so far into a logical trap, the chairman
pulled the door shut behind him. "The fact that the
capital spending boom is still going strong indicates
that businesses continue to find a wide array of
potential high-rate-of-return, productivity-enhancing
investments. And I see nothing to suggest that these
opportunities will peter out any time soon." At least,
not for the next 96 hours (the Nasdaq peaked on March
10).
Here was a remarkable set of ideas. What drives a
capital spending boom, said the central banker, was not
- even in part - an excess of bank credit or an
artificially low money-market interest rate. It was the
cold and detached analysis of cost and benefit. Here the
chairman was being unwontedly modest.
Fearful of a Y2K calamity, the Fed stuffed tens of
billions of dollars of credit into the banking system
late in 1999. Not for the first time in monetary
history, excess credit raised speculative spirits,
inducing a sense of optimism bordering on invincibility.
Greenspan spoke only 18 months ago, but it was an
eternity in speculative time. In March 2000, B2B
promotions commanded preposterous valuations, which the
chairman proceeded to validate. "Indeed," he said, "many
argue that the pace of innovation will continue to
quicken in the next few years, as companies exploit the
still largely untapped potential for e-commerce,
especially in the business-to-business arena, where most
observers expect the fastest growth...Already, major
efforts have been announced in the auto industry to move
purchasing operations to the Internet. Similar
developments are planned or are in operation in many
other industries as well. It appears to be only a matter
of time before the Internet becomes the prime venue for
the trillions of dollars of business-to-business
commerce conducted every year."
The Gartner Group had forecast that business-to-business
commerce would generate $7 trillion of volume by 2004.
Greenspan, a more experienced forecaster, gave no date
and said only "trillions," but even that was wide of the
mark. B2B stock prices crashed, and hundreds of Web
sites went dark. He was, however, prophetic on one
important detail: The potential for e-commerce remains
"largely untapped."
The Fed was slow to raise the funds rate in 1999 and
early 2000. It was slow to reduce the rate when, in the
second half of 2000, boom turned to bust. The Austrian
School economists who originated the theory of the
investment cycle prescribed aggressive monetary ease in
the bust phase, lest a depression feed on itself to
become a "secondary depression."
Greenspan, having failed to call a bubble a bubble, was
slow to recognize a bust as a bust. In his New Economy
talk, he did acknowledge a connection between interest
rates and technology investment. However, because
information technology was an absolute and unqualified
good thing, it followed that it could not be held
responsible for a bad thing - for instance, the bottom
falling out of capital investment and, therefore, out of
the GDP growth rate. Blame for the downturn must lie
elsewhere - with inventories or even the weather, as he
proposed to the Senate Banking Committee on February 13,
2001. "[A] round of inventory rebalancing appears to be
in progress," he told the senators.
"Accordingly, the slowdown in the economy that began in
the middle of 2000 intensified, perhaps even to the
point of stalling out around the turn of the year. As
the economy slowed, equity prices fell, especially in
the high-tech sector, where previous high valuations and
optimistic forecasts were being reevaluated, resulting
in significant losses for some investors...the
exceptional weakness so evident in a number of economic
indicators toward the end of last year (perhaps in part
the consequence of adverse weather) apparently did not
continue in January." However, he added, the FOMC
"retained its sense that the risks are weighted toward
conditions that may generate economic weakness in the
foreseeable future." What portion of the future was
"foreseeable" the chairman did not specify.
He refused to waver from his previously established
line, the transforming significance of new technologies.
Productivity growth and the availability of real-time
information would cut short this inventory and profits
slump, he said.
Besides, Wall Street wasn't worried: "[A]lthough recent
short-term business profits have softened considerably,
most corporate managers appear not to have altered to
any appreciable extent their longstanding optimism about
the future returns from using new technology...
Corporate managers more generally, rightly or wrongly,
appear to remain remarkably sanguine about the potential
for innovations to continue to enhance productivity and
profits. At least this is what is gleaned from the
projections of equity analysts, who, one must presume,
obtain most of their insights from corporate managers.
According to one prominent survey, the three- to five-
year average earnings projections of more than a
thousand analysts, though exhibiting some signs of
diminishing in recent months, have generally held firm
at a very high level. Such expectations, should they
persist, bode well for continued strength in capital
accumulation and sustained elevated growth of structural
productivity over the long term."
Such expectations, needless to say, have not persisted,
and the Wall Street analysts who held them have been
scorned and mocked. Not only have earnings plunged, but
sales have weakened, undercut by the unforeseen
disappearance of demand. "Business sales," observes
Moody's Lonski, "are down minus 0.7% in the second
quarter of 2001 from the second quarter of 2000. This is
the sum of retail sales, manufacturing and wholesale
sales. Manufacturing got clobbered - it is down 4.5%.
The last time business sales were down year-over-year
was the three quarters from the first quarter of 1991 to
the third quarter of 1991.
"Before that was the five quarters from the first
quarter of 1982 to the first quarter of 1983. And before
that, it was in the 1970s, when inflation made the
numbers do funny things, but it was in the first quarter
of 1970. All the previous declines occurred in and
around recessions."
Alan Greenspan never understood the problem. This defect
does not mean he will never hit on the solution. What it
does suggest, however, is that he will come to it
belatedly, and likely for the wrong reasons.
James Grant
for The Daily Reckoning
James Grant is the founder of Grant's Interest Rate
Observer (http://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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