Contributed by Bill
Publisher of: The
Fleet Street Letter
FRIDAY, 24 AUGUST 2001
*** 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
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
- 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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By Bill Bonner
"What are we waiting for?"
"We're waiting for Godot."
Waiting for Godot
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
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 -
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
And while we recognize that we cannot know the future,
we have not outgrown the habit of making some guesses
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
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
Your correspondent, hoping for redemption, but doing the
best he can in the long pause of life...
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The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand 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 upnot 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 90sopening offices in Florida, London, Paris, Ireland, and
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.