In Today's Daily Reckoning:
*** CPI increasing at twice the expected rate � but it's
*** Retailers getting hit � the 'wealth effect' has
really lost its mojo.
*** A 'digital man' for President...offensive
language...and other absurdities
*** Yesterday's Consumer Price Index report showed
inflation rising at twice the expected level � that is at
0.2% rather than 0.1%. Small numbers. Who cares?
*** But this measure only applies to the 'core' rate of
inflation � a sweet confection of the Bureau of Labored
Statistics which excludes the bitter, but essential to
life, ingredients: energy and food.
*** Na�ve readers might ask � how can you have a cost of
living index that doesn't include the cost of calories �
the fuel that runs man's body, heats (and cools his
buildings) and powers his machines? What kind of hocus-
pocus is this?
*** Stephen S. Roach, now with Morgan Stanley Dean
Witter, but formerly with Federal Reserve Board, recalled
recently how the core rate came to be (Grant's
7/21/2000...[http://www.grantspub.com]). Jim Grant sets
the stage: "After the quadrupling of oil prices in 1973,
the redoubtable Arthur Burns, Fed chairman and renowned
business-cycle scholar, called his staff together and
demanded that they present him with a CPI stripped of
energy costs. After all, if there ever was an exogenous
event � one over which the Fed had no control � the Yom
Kippur War was it."
*** "Little did we know at the time," confessed Roach,
"that we were creating the first gauge of core
inflation... A few months later, Burns called us back
together and noted an alarming pick-up in the rate of
food inflation... So he instructed us to take food out of
the CPI as well."
*** Readers old enough to remember the mid-'70s may
recall that this 'core' measure of inflation had a
serious flaw � it completely failed to detect the huge
wave of inflation that was about to wash over the U.S.
*** Likewise undetected by July's core inflation figure,
oil rose yesterday to $31.80 a barrel. It is at a 10-year
high. And shipping rates are at a 30-year high. There is,
of course, plenty of oil in the ground. But there are not
as many oil tankers as there are stars in the sky. Both
oil and shipping rates may increase further.
(see: Oil in Crisis
*** The Dow shrugged off the CPI report, closing down
only 58 points for the day. Most seriously damaged were
the retailers. A Financial Times headline announces that
"Nordstrom profits fall as expected." Walmart � the
nation's most important retailer � closed below $50. Home
Depot is not far behind. And Heilig Meyers, a furnishings
wholesaler, went bankrupt.
*** Also on the consumer front, housing starts dropped
3.3% in July.
*** Why is retail slipping? Because the 'wealth effect'
has lost its mojo. People look at their portfolio
statements and figure they should wait for a pick up
before spending money. This trend � away from spending
towards saving � threatens to throw the 'good times'
economy into reverse, Japanese style.
(See: The Real Meaning of 'Savings Collapse'
*** 1,594 stocks rose yesterday. 1,243 fell. There were
103 new highs on the NYSE; 41 new lows. Most likely,
there will be little movement in the Dow until after the
Fed meeting on the 22nd.
*** The Nasdaq managed a very modest increase � up 9
points. Amazon is doing well � it rose to more than $38.
*** Gold � perhaps spotting a weakness in the dollar �
*** The battle between the euro and the dollar raged
overnight. But neither side gained much ground.
*** Speaking of raging...Bill King tells us that the band
"Rage Against the Machine" is entertaining protest groups
gathered in Los Angeles. Reporters have begun referring
to Al Gore "the machine." Could it be that Mr. Gore is
one of the Digital People � heartless, soulless, with a
brain like a Pentium chip? He IS the father of the
Internet, isn't he? It's all starting to make sense.
*** The news was unusually rich in absurdities this
...in Argentina a top surgeon killed himself...and a
government employee threatened to jump off a radio tower
unless he got paid (no mention as to whether anyone
intervened) � because of an economic slowdown.
...A Wisconsin man, who raped and murdered a 9 year old
girl was just awarded a settlement from a trash
collection company after the firm refused to hire him.
Discrimination, he charged. He should have been treated
differently. Much differently.
...In New Jersey, a 6-year-old and his two accomplices
were kicked out of school after they "used their fingers
as pretend guns and said they wanted to shoot each
... From Access to Energy comes the story that at
Stockport College in Greater Manchester, England, such
phrases as "normal couple," "history" (sexist), "lady"
and "gentlemen," "slaving over a hot stove" (minimizes
horrors of slavery) - have been declared offensive
*** And a friend reports from Boulder, Colorado: "I'm
not making this up...the city's ordinances have been
rewritten and all references to animal or pet "ownership"
have been changed to "caregiver" so as to strengthen the
bond between the "caregiver" and the pet."
When the Fed raised the discount rate from 5% to 6% on
Aug. 9, 1929, it launched the worst economic contraction
in history. Did today's Fed do the same thing? Dr. Kurt
Richebacher thinks so. Find out where the world's
preeminent Austrian economist thinks the stock market and
the economy are headed and what you can do to protect
your assets. Read Dr. Richebacher's latest report on the
fate of the New Era. www.agora-inc.com/reports/RCLF/Econ-Analysis2/
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
"The analog folks believe that booms inevitably lead to
Yesterday's email brought this promotional message from
"Predictions are that by 2003, there will be more
Internet-ready handsets than personal computers connected
to the Web. When it comes to future trends, they don't
get much closer to 'a sure thing' than wireless does."
The Fools proposed to sell me a report that would clarify
the near 'sure thing' opportunities presented by
But I am no stranger to wireless technology investments.
Years ago I traded advertising space in one of our
publications for a chance to win a cellular phone
license. Winner that I am, I was notified not long after
that my ship had come in. A motley crew of investors and
publishers, myself included, won a cellular franchise for
an area of western Nebraska.
But this ship proved to be a ship of fools. If we had
been able to persuade cattle to use cellular phones, it
might have been different. But as it turned out, there
were too few people out on the high plains to make a
cellular system profitable. And most of them, as I
recall, were analog humans, not digital. They were still
tied to land lines. Though perhaps it is different now.
The cellular license carried the obligation of building a
system � which proved more expensive than the actual
business would justify. We sold it off � at a loss. In
one of the great paradoxes of investing � 'sure things'
almost always end in losses.
Yesterday's letter recalled how the sure thing of the
late 19th and early 20th century � railroads - proved a
disappointment to investors, too. Almost every
technological innovation � from air-conditioning to
airlines to the internal combustion engine � has gone
through the same boom-bust cycle.
Warren Buffett says, for example, that the airline
industry has failed to make investors a single penny �
net � since Orville and Wilbur Wright flew their first
plane at Kitty Hawk. I don't know if that is true of
automobiles, but nearly 500 auto manufacturers went
broke, got bought out or merged since the industry began.
Your odds of choosing the winners were less than 1 in
But all of these innovations were developed by the soon-
to-be-extinct Analog Men. Maybe the Digital Man of Ed
Yardeni's imagination will do better.
So far, the results are not encouraging. Internet
companies - run by people who 'got it' long before
Yardeni - are going bust. Nothing wrong with the business
models, of course � the fault, again, lies in the lack of
vision of analog investors. Living.com, for example,
which went belly up on Tuesday, did not run out of
vision. It ran out of cash.
"Everyone thought that subsequent financing would not be
a problem, and were shocked to find that the stock market
would not support a secondary offering and that private
investors had become skeptical," said Ken Cassar, analyst
at Jupiter Communications, a research firm in New York.
But maybe wireless will be the big breakthrough for
Digital Man. Barely a discouraging word has been heard
about wireless. Investors are still behind it.
"In the next few years," Grant's quotes the chairman of
Deutsche Telekom, "growth of mobile phones in the U.S.
will be larger than the growth in Germany, Italy, France
and the U.K. put together."
But it is not as if there weren't some things that could
go wrong. Building out cellular systems is expensive. And
governments are using the license fees as a major source
of finance. "Thus, one point of significance of the
wireless phenomenon," Grant's reports, "is that, at the
margin, leveraged telecom debt is replacing sovereign
debt in the world's bond portfolios."
The questions for the giant telecoms turn out to be the
same ones we face in our pathetic Nebraska franchise...
and the same ones that every business must ask: What is
the likely stream of income? How much is the investment
really worth? How much debt can the enterprise support?
So far, Mr. Market has been sympathetic and supportive.
Like the railroads at the end of the last century, the
wireless industry is drawing in huge amounts of capital �
both debt and equity - and losing vast amounts of money.
Nextel, to use the example described in Grant's, saw its
stock price rise 337% in 1999, and was able to raise an
additional $7 billion in "additional outside capital
commitments" during the second half of 1999, a year in
which it's net profits are listed as minus $1.462
billion. Nextel's capitalization, meanwhile, surpassed
that of Boeing, Merrill Lynch, Texaco and Dow Chemical.
As a group, the wireless companies in Grant's sample
carried about $26 billion in debt by the end of 1999 and
lost $4 billion on $27 billion in revenues.
Will they be able to make a profit in the future? "The
fact is," continues Grants, "that prices for monthly
services have been declining as a result of
Ah...competition. What kind of profit margin might a
cellular phone company expect in a fiercely competitive
market? And how does the industry manage to turn around a
$4 billion loss...plus pay the interest on $26 billion in
debt...with only $27 billion in revenues?
Revenue growth? Already, 53% of the eligible subscribers
are signed up. Cows, as far as I know, have still not
learned to use the equipment. The math doesn't look good.
Nor does the math look good for the entire technology
sector. Tech's contribution to GDP is only 8%. But it
represents more than 30% of S&P 500 market
Since 1993, the value of the tech portion of the S&P 500
has jumped from $271 billion to more than $3.5 trillion.
"Naturally," as Grant's puts it, " Mr. Market can change
his mind..." Which is exactly what Mr. Market is likely
to do. Each technological innovation seems to be
accompanied by a psychological wave that lifts investors
up...and then dashes them to the ground. Extraordinary
amounts of money are pumped in � based on extraordinary
expectations of profit. The money � both debt and equity
� reaches levels that the business model cannot possibly
support. Eventually, Mr. Market discovers his mistake.
But by then, it is too late.
Each boom in technology leads to a bust, just as the
analog folks say.
Your still-analog correspondent, unable to kick the
P.S. Today is Francois's last day of work on the farm.
After more than 50 years � he came a small boy and began
work when he was 14 � Francois is retiring and moving to
a nearby hamlet. The place won't be the same without him.
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Last modified: April 01, 2001
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