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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
MONDAY, 27 AUGUST 2001 

 

Today:  Planting Trees

*** Day trading houses? Sure, why not...

*** Stocks boom after Cisco tells investors that things 
are not worse than expected...maybe...

*** Commercial rents collapsing...bankruptcies up nearly 
25%...killing chickens...planting trees...and more!

Day trading stocks didn't work for you? Try day trading 
houses.

"Liquidity always heads towards a rising market," wrote 
Marc Faber at the beginning of the year. Marc was guessing 
that the Fed's rate cuts might find their way into the 
real estate market rather than the stock market. It now 
looks as though he was right.

New home sales rose 4.9% in July. But the real action is 
in existing home sales. Believe it or not, back in the 
late '60s, the annual number of existing home sales was 
scarcely more than the number of new sales. Today, 
existing homes are flipped nearly as often as hamburgers - 
with about 4 times as many old homes trading hands as new 
sales.

Prices rose 4.9% in the first quarter...and then 6.4% in 
the second. According to the National Association of 
Realtors, housing prices are going up at double digit 
rates in 35 metro areas, such as Orange Co., CA, where 
houses rose 15% in the month of July...Refinancing 
applications are up 65% over last year...and the refi 
index alone rose 3% last week.

"How smart is it to takes loans against most of the value 
of your home?" asks Jane Bryant Quinn in the Washington 
Post.

"As long as prices keep rising, people will feel 
reasonably wealthy despite the drop in stocks. But ask 
yourself how good you would feel if you borrowed to the 
hilt and house prices didn't rise. With little or no home 
equity, you couldn't afford to sell and pay off your loan.

"That last happened in the 1990-91 recession. High-flying 
real estate markets plunged. Condominium owners, in 
particular, found they couldn't afford to sell.

"Whether the slowdown technically registers as a recession 
remains to be seen. But businesses are going to keep 
cutting workers loose. Unemployment, which is at 4.5 
percent, is likely to top 5 percent before the slowdown 
ends. Fewer jobs means fewer home buyers. In many hot 
markets, sales have already slowed...This is no time to be 
adding to debt."

Ms. Quinn might have added that bankruptcy filings are 
rising at a 24.5% annual rate. And a real estate bubble 
pops just like a stock market one. Except that when stocks 
go down, you don't have to continue making payments on 
them. 

Eric, what else is happening?

*******

Eric Fry, reporting from Manhattan...

- An accident waiting to happen usually does, although 
sometimes it takes a while. The stocks of both "sub-prime" 
credit card lenders and savings and loan companies have 
been accidents-in-waiting for some time. Finally, last 
week, some of these stocks buckled under the realization 
that lenders are sailing into stormy seas.

- Even though loan delinquencies in most consumer loan 
categories have been rising for several quarters, the 
shares of most consumer credit companies have been 
soaring. . .Stocks like Americredit, Washington Mutual, 
Golden West Financial and Charter One Financial have each 
posted all-time highs within the last two months. 

- But Friday, the world suddenly seemed to change for 
these stocks. Mr. Market roughed them up a bit, along with 
everything else remotely related to consumer credit.

- Adding gasoline to the fire, Goldman Sachs analyst, 
Michael Hodes, weighed in Friday morning with negative 
comments about sub-prime credit card lender Providan 
Financial.

- "The company continues to be challenged by the effects 
of a continued weak economy, high and volatile charge-
offs," said Hodes, "and uncertainty into the 2002 
macroeconomic outlook."

- But the consumer credit stocks were the exception to the 
rule on Friday as the market soared.

- The Dow spiked 194 points, nearly 2%, to 10,423, while 
the Nasdaq jumped 4% to 1,916. All the major indexes 
finished the day near their highs for the day and the 
week.

- Cisco led the charge, by announcing that it would be 
rearranging the deck chairs - so to speak - within its 
titanic operating structure. The networking giant 
announced it would replace its three main divisions with 
11 technology groups subdivided according to the equipment 
they sell. Chief Executive John Chambers also said sales 
are stabilizing. Although Chambers didn't really say 
anything very different from what he had forecast two 
weeks ago, Cisco's shares advanced 9%.

- But still, the stock market stands on the clay feet of 
feeble national balance sheets. Both consumers and 
corporations carry so much already that it will be 
difficult for them to borrow enough money to do the 
spending and investing that our economy needs.

- The latest Newsweek cover story, "Maxed Out," observes, 
"As the expansion slows to a crawl, many Americans carry a 
dubious legacy: too much debt. Together consumers owe $7.3 
trillion, according to the Federal Reserve - double the 
amount they carried into the last recession...The present 
danger to everyone - debt-ridden and debt-free - isn't 
that millions of Americans suddenly become deadbeats. It's 
more subtle: that their big debts act like a giant 
headwind, limiting the consumer spending that's helped 
fend off a recession."

- "Watching so many households reshuffle their I.O.U.s is 
a sobering reminder of how complex financial life has 
become...As so many other families rebuild their balance 
sheets amid this teetering economy, we'll all have a stake 
in their decisions."

- The Wall Street Journal reports, "The decline of the 
Internet economy has produced a physical legacy scattered 
across the countryside - enormous warehouses, sometimes 
equipped with state-of-the-art refrigeration, freezer 
systems, conveyor belts and loading facilities." Now, many 
of these big boxes are empty. 

- "The dot-com debacle has left some large buildings in 
its wake, many ranging anywhere from 100,000 to 800,000 
square feet. That makes the possibility of finding one 
tenant to occupy space unlikely."

- Offering up what is probably the understatement of the 
year, Webvan's director of real estate, Alan Arthur, 
admitted to the Wall Street Journal, "We ended up leasing 
a lot more space than we ended up needing." If memory 
serves, the amount of space Webvan now needs is zero. 
Didn't it file for bankruptcy protection in July?

- Among the vast space no longer needed by the Webvan is a 
360,000-square foot warehouse near Chicago, IL. Webvan 
signed the lease in 1999, moved in in 2000 and moved out 
in 2001. Such was the dot-com life-cycle. About one-third 
of the now-empty space consists of "cooling, freezing and 
food-production space waiting for something to chill," 
according to the Wall Street Journal.

- Reuters reports, "As U.S. technology and telecom 
companies shutter operations in a lagging economy, the 
office furniture that once filled their lively workspaces 
is now stacked high in warehouses around the country. 
Cliff Schorer, president of Bottomline Exchange in Boston, 
said that never before has he bought such great quality 
furniture at such dirt-cheap prices. In addition to a 
packed warehouse, Schorer stores office furniture in 119 
trailer trucks in two parking lots..."

- "To get an idea of how cheap furniture can get, consider 
Herman Miller's Aeron brand chair - one of the most 
expensive and plush office chairs around. The Aeron 
models, which sell for $745 when new, are now available in 
some cases at a 75% discount, for $170.

*******

Back to Bill in Ouzilly...

*** Here in Ouzilly, we're beginning a series of seminars 
and conferences...so things are getting even more hectic 
than usual. Our guests are coming from all over - South 
Africa, Poland, Romania...and, of course, many from the 
U.S.A.

*** The first event, a writer's conference, began last 
night.

*** But other things continue according to the pace and 
traditions of rural France. I noticed that Edward, 7, has 
been getting up early and going out to the chicken yard. I 
thought he was collecting eggs, feeding the ducks or 
enjoying the bucolic charm of dawn.

*** "I just want to help Mr. Deshais kill the chickens," 
he explained cheerfully. 

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PLANTING TREES
By Bill Bonner


"How is the garden doing?" I asked Mr. Deshais yesterday.

Our gardener has been a disappointment to me lately. He's 
stopped talking to himself. I used to enjoy his comments - 
spurting out of his mouth like water out of a hole in a 
garden hose.

But now I have to work to have a conversation with him, as 
if I were laboring on a rusty old pump handle.

"Oh, it is too dry. We need rain."

"Wasn't there a lot of rain this summer?" 

"Yes, but that was earlier in the summer...It has been dry 
for the last three weeks."

"I thought it rained hard a couple of nights ago."

"Ah, but that was the wrong kind of rain. Too hard. We 
need a soft rain...so the water gets down to the roots."

"You're getting very picky..."

"Well, water is the key ingredient...There are only three 
things that really matter," he continued. "Earth, sun, and 
water...

"If I had a lot of money, I know what I would do with it - 
I'd buy land. You can't own the sun. And water...some of 
the best companies in France are water companies. But I 
don't trust people who run big companies. I would buy 
land."

"But agricultural commodities are near all-time lows..." I 
protest. "It's very hard to get a decent return on 
farmland."

"No, I wouldn't bother farming. Farming is finished in 
Europe. All the farmers have such big, expensive 
equipment..."

He pointed towards Pierre's huge new tractor.

"Sooner or later they're going to eliminate the subsidies 
and the farmers are going to be out of business. No, I 
would buy land and plant trees on it. Hardwoods, like oak 
and walnut. Every year, the trees grow. I'd rather leave 
my children land with timber on it than money.

"Children would just waste the money. Or money might waste 
them! But land and trees is a good patrimony. The land 
doesn't go away and the trees just keep growing. Every 
year they're more valuable.

"And you know what else...," he continued, thinking big. 
"When you clean up around the good trees...you cut out the 
bad trees and thin out the plantation...you can use that 
wood to heat your house. So, they're another line of 
profit."

"In real terms," wrote Porter Stansberry recently, 
"according to Julian Simon, one of the most well respected 
economists of the 20th century, the typical American 
worker produced about $2-$3 worth of output every hour in 
1900. Today that figure is between $20-$25 - a ten-fold 
increase."

Porter and many others believe there is a direct 
relationship between higher productivity, higher profits, 
and higher stock prices. That was, after all, the promise 
of the New Era. Information technology was supposed to 
increase productivity - justifying much higher stock 
prices than Americans were accustomed to.

Like a man who might have enjoyed a ham and cheese 
sandwich, but for the fact that he had neither bread, ham 
nor cheese, American investors might have enjoyed the 
benefits of a productivity-driven profit boom...except 
that there was no extra productivity and even if there had 
been it would not have led to greater profits.

The rate of productivity growth today is still 50% less 
than it was in 1917-'29. And Jeremy Grantham of Grantham, 
Mayo, Van Otterloo explains (in Barron's) why productivity 
doesn't lead to profits and higher stock prices:

"People say productivity justified higher P/Es through 
higher profits. But I'll give you a simple thought 
experiment...Say you come out with a seed corn that is 
twice as productive - that is, for every dollar of seed it 
will grow twice as much corn in an acre. Give it to 
everybody at the same price as the old seed. Productivity 
will double. But what will happen to the price of corn and 
what will happen to the profits of the farmers in the 
following year? I think it is fairly obvious to everybody 
that they will be drowning in red ink and there will be 
corn coming out of every silo...The whole productivity 
argument was interesting but it has no relevance to how 
much money the system makes and how high a P/E you should 
pay for it."

A report from the U.S. Agriculture Dept. tells us what 
happened in the real farm economy. "Productivity growth is 
a more important source of output growth in agriculture 
than it is for other industries," it says. Working the 
earth, in other words, has benefited more from 
productivity gains than working computer terminals. Thanks 
to machinery, even a Democrat, out on the plains, can 
produce more wheat than thousands of farmers before the 
Industrial Revolution. (Think what he might have done if 
he had had access to the internet!)

Yet, a quick glance at Forbes' list of the richest 
Americans reveals not a single person who has made his 
fortune tilling the soil. On the contrary, farmers have 
become so productive that they have shrunk as an 
occupational group from 70% of the population in 1840 to 
less than 5% today...and those few who are still planting 
and hoeing are now almost all sustained - in America as in 
Europe - by taxpayer handouts.

If rising farm productivity has not produced investment 
profits...what has?

According to Jeremy Grantham, "timber is the only low-
risk, high return asset class in existence. People are not 
familiar with it. What they are not familiar with they 
avoid. But timber is the only commodity that has had a 
steadily rising price for 200 years, 100 years, 50 years, 
10 years. And a unit of wood, just the price of a piece of 
wood - in real terms - beat the S&P over most of the 20th 
Century, from 1910 to 2000."

Thus does Mother Nature, in her wisdom, reward patient 
investors while punishing the day traders...and give the 
highest profits to a business which has benefited little 
from productivity enhancements. Even in this Information 
Age, dear reader, it can take 50 years for a hardwood tree 
to mature. But the annual return from planting trees has 
been 40% higher than the S&P.

"The price of a piece of wood actually outgrew the price 
of a share of the S&P, which is an unfair context, because 
there is some growth embedded in the share of the S&P and 
there is no growth embedded in a single cubic foot of 
wood. The yield from timber averaged about 6.5%. The yield 
from the S&P averaged 4.5%. The current yield on the S&P 
is 1.25% and the current yield on timber is 6.5%." 

Not only have trees proved to be good for good times, 
they've also proven good investments for bad times. "In 
each of the three great past bear markets...1929-'45 and 
1965-'82, and a third one that's off everyone's radar 
screen, which is post-World War I, 1917-'25 - the price of 
timber went up. It is the only reliably negatively 
correlated asset class when you really need it to be.

"One reason for that is that you can withhold the forest. 
If you find the price of lumber is no good, you don't cut. 
Not only is there no cost of storage, the tree continues 
to grow and it gets more valuable."

But no investment is risk free.

"What about what happened two years ago," I remind Mr. 
Deshais, "when that storm flattened forests all over 
France? Nobody expected it. And the trees weren't insured. 
Growers must have lost a fortune."

"Well, at least they had plenty of firewood to heat their 
houses."

Until tomorrow,

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 28, 2001

Published By Tulips and Bears LLC