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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
FRIDAY, 24 AUGUST 2001 

 

Today:  Backwards Walking ll

*** Worldwide economic crisis deepens...stocks fall...

*** American investors fire brokers and hire lawyers...

*** The Industry Standard closes up shop...gold stocks 
rise...Amazon falls...Redemption and long pauses...

What a wicked world!

The world's major economies are all in trouble: 
Just look at today's headlines. "Japan's Crisis 
Deepens," says the BBC. "German Economy Stalled," says 
Bloomberg. "Don't count on U.S. recovery," warns the 
Japan Times.

Meanwhile, Microsoft fell below $60 yesterday. 
Merrill Lynch dropped beneath $50. And Amazon.com 
slipped under $10, again.

Things have gotten so bad in the high tech sector 
that the Industry Standard - which like TheStreet.com 
thought it would rival Dow Jones - had to let its last 
20 employees go and close its doors. "Jobless claims 
edge up," summarized CNNfn as the number of unemployed 
hit a 9-year high.

The U.S. press is full of hard luck stories - 
investors who bet the farm on Nortel, Cisco or 
Amazon...and lost. Well, these are not super-hard luck 
stories. Maybe we should say they are semi-hard, like 
those soft-porn movies you find in respectable hotels. A 
man of 45 has been forced to go back to work...a widow 
in her 60s now has to wash her car herself...a high-
rolling workaholic has been forced to take a long 
vacation...Almost all of them are suing their brokers.

But even with these life-changing stock market 
losses, stocks are still very expensive. Krispy Kreme is 
at 105 times earnings. Dell is at 40 times. The normal 
p/e is about 14...yet the Dow is now at 25, and much 
higher by WSJ/GAAP standards...

Richard Russell: "In the past, bear markets have taken 
stocks down to the point where a dollar would buy 17 
cents and even 20 cents worth of earnings and anywhere 
from 6 cents to 10 cents worth of dividends. 

"In today's market, a dollar buys 3 cents or 4 cents 
worth of earnings and no dividend - it's a sucker's 
market. It's a Las Vegas market...Today Wall Street is 
one step away form Las Vegas. The difference - Wall 
Street enjoys greater publicity: over-priced stocks are 
touted around the clock, and millions of people are 
living with the illusion that stocks at today's prices 
are a good holding 'for the long haul.'"

More on "holding for the long haul"...below. But 
let's get the details on yesterday's action on Wall 
Street first. Over to you, Eric:

****** 

Eric Fry writing from Manhattan:

- New Yorkers seems to care more about the sensational 
baseball team from the Bronx that is playing in the 
Little League World Series then they do about the stock 
market. Certainly, it feels good to root for a winning 
team and these "Mini Bronx Bombers" are definitely 
winners. Last night, led by ace pitcher Danny Almonte, 
they defeated the team from Oceanside, California 1-0.

- The results of the game on Wall Street yesterday was 
less pleasing. The Nasdaq fell 17 points to 1,843 and 
the Dow slid 48 points to 10,229. 

- We are now almost two months into the "second half" 
that so many pundits had predicted would feature a 
recovering economy. It was to be a second half in which 
stocks rallied as well. They were partly right. It has 
been a good time for gold stocks. The XAU Gold Stock 
Index has rallied more than 12% so far in the second 
half. By contrast, the Nasdaq has fallen more than 14% 
over the same time frame.

- "The Fed is trying to cure our post-bubble economic 
hangover by the 'hair of the dog' - excess money 
growth," says Northern Trust's Paul Kasriel. "The ECB is 
getting ready to crank up its printing press, too." 

- Increasingly loose monetary policies in the U.S., 
Europe, and Japan will spark a renewed interest in gold: 
"With the Fed signaling that it is no longer prepared to 
guarantee global investors a positive return over 
inflation on their 'parked' funds, folks are starting to 
look for another place for their funds to hang out."

- A kind of paralysis seems to be taking hold on Wall 
Street. All hope is not lost, but its wings are clipped 
a bit.

- I no longer overhear giddy boasts on the street or in 
restaurants like "After the cross-platform integration 
with Digilogicom, we're gonna dominate the entire 
vertical." Or "Yeah, we just closed a $30 million 
mezzanine round, which should carry us to IPO."

- In fact, I don't even overhear comments anymore like 
"I know Cisco's down a little bit, but it's a great 
company, right? I mean, if you're a long-term investor, 
like I am, this is probably a great buying opportunity, 
right?" These days, it's mostly inane conversations 
about anything but the stock market.

- It is hard to believe that it was only a little more 
than a year and a half ago that the Nasdaq put the 
finishing touches on its $25 million "Nasdaq Marketsite 
Tower" in Times Square. Meanwhile, Nasdaq Chairman Frank 
Zarb has been drawing an $8 million-per-year salary for 
presiding over the Tower's construction and for doing 
whatever else Nasdaq chairmen do.

- But now, having spent all this money, the Nasdaq must 
concern itself with layoffs - lots of layoffs - and with 
trying to figure out how to make a dollar in a world 
where people don't like stocks as much as they used to. 
The main problem is that the Nasdaq makes a lot less 
money now than it did during the bubble. In fact, it 
earned half as much money in the second quarter of this 
year as it did in the second quarter of last year.

- "I don't see any respite in sight," the new CEO, 
Hardwick Simmons, told the Daily News Express. Bill...

********

Back to Bill in Ouzilly, France...

*** Here is something interesting. Cleaning up the attic 
in my house in France, I discovered an old photograph. 
It is a picture of 5 American army officers from WWI. 
How it got into this attic, I have no idea, but there it 
is...where it has probably lain for the last 8 decades. 

*** The names are written on the back: C.A. Leland of 
Atcheson, Kansas; H.V. Hayes of Waco, Texas; R.R. 
Reimert of Chicago; H.R. Schultz of the Sanford Ranch in 
Montana, and Dr. R. Arnold, also of Chicago. If any 
family members would like the photo, I'd be happy to 
send it to them.

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REDEMPTION
By Bill Bonner

"What are we waiting for?"

Long pause.

"We're waiting for Godot."

Long pause.

"Oh..."

Long pause.


Waiting for Godot
Samuel Beckett


Investors, waiting for the messiah of the "second half 
recovery" and the resumption of the bull market, are 
puzzled. The second half has been here for two months. 
We have just gotten our 7th rate cut in 8 months. But 
nothing seems to be happening. Why the long pause?

Some stockholders have become weary. A few have become 
surly - biting the hands that once fed them stock tips. 
But most have resigned themselves to wait. "Over the 
long haul," they say, "things will get better. They 
always do."

Or, as Porter Stansberry put it in this space two weeks 
ago: "The reckonings don't last. Redemption follows... 
You see, common stocks afford individuals the 
opportunity to own the means of production - the 
machines and organizations that have produced this 
amazing trend towards wealth. And this is a system that, 
despite its best efforts, the government hasn't yet been 
able to destroy. 

"Capitalists and entrepreneurs continue to make the 
world a better place...and for this, they make a profit 
and their investors earn a return..." 

Porter believes investors will be redeemed by technology 
and the spirit of enterprise. Long-term investors are 
supposed to be redeemed painlessly. "For the long term 
holders of equity," he says, "there is no reckoning - 
only redemption." 

And despite our reckonings, says Porter, "we're getting 
richer, not poorer."

Here at the Daily Reckoning, dear reader, modesty 
forbids us from pretending to know the future. We 
further confess that we are scarcely more certain of the 
past or the present. But when we look through the glass 
darkly at the here and now, we do not see people making 
financial progress. To the contrary, we see them walking 
backwards... 

And while we recognize that we cannot know the future, 
we have not outgrown the habit of making some guesses 
about it.

Regular Daily Reckoning sufferers will find no surprises 
in today's letter. We guess today, as we did yesterday, 
that stocks have further to fall. But today we elaborate 
our theory...further explaining why markets give nothing 
without taking something away...and why redemption in 
investing, as in the rest of life, comes only after much 
suffering. Alas, people do not become wiser without 
becoming older and poorer, too.

We will begin in the beginning. A country that is rich 
is one that has capital - the resources with which to 
create goods and services. "Capital," as economist David 
Ricardo described it, "is that part of a country which 
is employed in production." Increasing capital is the 
very definition of getting richer. A man who takes $10 
out of his wallet to buy a good cigar is not wealthier 
for it. He is $10 poorer - his $10 has gone up in smoke.

There is only one way to get richer - by setting aside 
resources for future wealth creation. "[P]arsimony, and 
not industry, is the immediate cause of the increase in 
capital," explained Adam Smith. Or as Adolphe Thiers put 
it, "It is impossible to create more capital than 
society creates through savings."

A man may sit in his basement and write a new software 
program that could be worth millions of dollars. But he 
will be no richer until the money is actually earned. 
What's more, if he spends all of his earnings, rather 
than save them, he will be no richer at the end of his 
life than he was at the beginning. Wealth equals 
accumulated savings, nothing more or less.

Looking back at the last five years, we see many 
Americans smoking $10 cigars. First, the stock market 
bubble convinced them that they were getting richer - so 
they stepped up consumption. Now, their other major 
asset - their homes - are rising in price. So, they use 
their houses as though they were an extra revenue source 
- spending the additional equity almost as soon as it 
appears. Over a ten year period - from 1986 to 1996 - 
American homeowners' mortgages walked backwards by a 
full 10%. 

In 1945, Americans owned a full 86% of their homes. 51 
years later, the percentage had fallen to just 55%. 
Fannie Mae, Freddie Mac and the third of the three 
amigos, the Federal Home Loan system, have together run 
up $3.2 trillion in debt - an amount equal to a third of 
the entire GDP.

Both stock market and real estate seemed to offer a 
substitute for savings. The first has already proven to 
be a poor substitute. The second will, if we were to 
hazard a guess, turn out to be even worse. When your 
stock market profits disappear - at least you don't have 
to continue making monthly payments. 

With ersatz savings in stocks...and now in real 
estate...real savings have been neglected. 

"During the last few years," explains Dr. Kurt 
Richebacher, "consumption gained its highest share in 
GDP growth in the whole post-war period. In 1999, it 
accounted for 84% and in 2000 for 71.6% of the increase 
in real GDP, and since the third quarter of last year, 
consumption exceeds total output." 

The consumer - still smoking $10 cigars - is still 
confident. Like the investor, he still has a few $10 
bills in his wallet and he expects things to get better. 
But "consider that he supplemented his increase in 
current income of $492 billion in 2000 with $566 billion 
that he borrowed," writes Dr. Richebacher. "Expecting 
him to sustain his spending in the present environment 
is absurdly unreasonable."

"We have always warned," Dr. Richebacher continues, 
"that the plunge in the personal saving rate is the U.S. 
economy's single biggest macroeconomic problem. Yet a 
cottage industry of researchers has been busy 
discrediting the conventional measure of saving. It is 
their most absurd argument that the consumer's balance 
sheet is in excellent shape as stock prices [and house 
prices] have risen faster than debts. These people even 
fail to realize that this burst of phoney paper wealth 
is precisely the key problem. It was the exploding asset 
bubble that lured the consumer into his conspicuous 
borrowing and spending binge. While a lot of that bubble 
wealth has meanwhile been wiped out, the greater part is 
still in existence - destined to follow suit in due time 
with the ultimate effect of restoring a reasonable 
personal saving rate."

But spending beyond your means is a hard habit to break. 
People will not give it up easily. "Men, like dogs," as 
John Maynard Keynes explained, "are only too easily 
conditioned and always expect that, when the bell signs, 
they will have the same experience as last time."

The last time the Greenspan Fed threw a virgin in the 
volcano...I mean, cut rates...the economy boomed and 
stocks went up. For 18 years, stocks have gone up. 
Housing prices have been even more reliable, with only 
localized regressions, for more than half a century. It 
will be a long time before these habits are broken.

Prepare for a "prolonged, very painful adjustment 
process," Richebacher warns.

How long? How painful?

"Just to give you an idea of how far out of historical 
whack the stock market is," writes Ben Stein on 
TheStreet.com, "consider that stocks rise over the long 
term by about 4% a year, with immense deviations around 
the mean. If the earnings depression ends tomorrow and 
profits rise by 4% a year again, it will take roughly 14 
years (not months) for the Dow's P/E to reach historical 
norms...Or to put it another way, the Dow would have to 
fall in half for it to resume historical P/E behavior."

People who believe in automatic redemption over time may 
have a very long wait. Redemption is neither automatic, 
nor guaranteed by the passage of time.

Americans may be redeemed, but they will be nailed to a 
cross first.

Your correspondent, hoping for redemption, but doing the 
best he can in the long pause of life...

Bill Bonner


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About The Daily Reckoning:

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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Last modified: August 24, 2001

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