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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
THURSDAY, 30 AUGUST 2001 

 

Today:  The 17 Year Itch

*** U.S. economy still growing - barely...

*** But Wall Street down...as Tokyo races it to the 
bottom...

*** Housing refi loans soaring...GE drops 2%...a 
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*** Eric is traveling to visit me in France, so I am 
going to check on what is happening on Wall Street 
myself. Let's see...

*** Well, the GDP number came out. It was not 
negative. It was positive, but barely...0.2%. So, no 
recession yet, officially.

*** Whether the GDP numbers prove it or not, it feels 
like a recession to many people. "What is that BS," 
writes a Daily Reckoning reader, "THE RECESSION IS 
HERE!...This is the mother of all recessions, a global 
financial meltdown is imminent!"

*** Kathleen Peddicord, who lives in south-east 
Ireland and has reported on the real estate boom going 
on there, now reports that real estate has dropped 
dramatically - in some cases by as much as 20%.
(See: What Goes Up...)

*** The IMF revised its growth targets downward. 
Corporate profits fell for the 3rd quarter. And the Dow 
fell another 128 points. If it does that again today, 
the index will once again be below 10,000...

*** The bear doesn't like to advertise his intentions. 
And, as I explain below, he has a lot of time to do 
his work. He will want to keep what Gary North refers 
to as the "illusion of a generation: capital gains" 
alive for as long as possible. 

*** A drop below 10,000 today would be very 
discouraging. Coming just before the September/October 
period - which is typically dangerous for stocks - it 
could even set off a panic.

*** Who knows. But one way or another, Mr. Bear will 
have his way. Stocks will eventually return "to 
trend." You, dear reader, will want to be sure that 
you are not in the bear's way. Sell pricey stocks now, 
if you haven't already done so. That way...you can sit 
back and enjoy the spectacle.

*** Bonds are hitting new highs; gold rose $1.40. 
The euro hasn't moved much - it's still at 91 cents.

*** Amazon is still below $10. GE fell 2% to just 
above $40. (Investors are almost certain to lose a lot 
of money in GE in the months ahead.)

*** Housing prices, meanwhile, are rising at 8% per 
year. The 30-year fixed rate has finally dropped back 
down to the levels of late last year - about 6.83% 
currently. People, eager to spend the "savings" they 
think they've found in their houses, are refinancing 
faster than ever. The refi rate rose 15.7% last week.

*** Speculating on housing seems to have taken the 
place of day trading stocks. The rule used to be that 
a family should spend no more than 20% of its income 
on housing. But a recent study found that one in five 
households where both husband and wife work spends 
more than half its income on housing. 

*** "All bubbles meet their makers," writes Caroline 
Baum. It wouldn't take much of a setback to cause 
serious problems in the housing bubble. What if one of 
the wage-earners loses his job? He defaults. Fannie 
Mae takes a loss. The house goes on the market with 
thousands of others. Housing prices fall. And the 
"equity," against which so many homeowners have 
borrowed, disappears.

*** I should talk - I probably spend an inordinate 
amount of my own income on housing. But in a pinch I 
could easily move to a cheaper apartment - or even 
give it up. That's one of the unappreciated benefits 
of renting - there's no capital risk. 

*** Another DR reader follows up on our note about 
planting trees with a suggestion: "A good timber stock 
to buy is Evergreen Forests of New Zealand. It trades 
in the U.S. as an ADR under EVFSY. It is a pure play 
forestry company with some savvy investors including 
Jean-Marie Eveillard of SoGen and Hambrecht and Quist. 
Dan Case, CEO of H&Q, owns some personally and has put 
his children into it. Jim Grant has recommended it in 
his newsletter. It is trading very low right now due 
to the strength of the U.S. dollar." (I will look into 
Evergreen Forests and give more details in an upcoming 
letter.) 

*** Improvement on the tax front? Perhaps..."The 
distinction between what is 'offshore' and what is 
'onshore' is rapidly disappearing," says the Sovereign 
Society's Mark Nestmann. "Propelled by the realization 
that more than 50% of the world's wealth now resides 
offshore, high-tax countries are rapidly lowering 
taxes, decreasing regulatory barriers and rolling out 
the red carpet for outside investment."

(See: The Onshore-Offshore Convergence)

*** "I'm going to be a veterinarian," said Henry, 
announcing his latest career objective (after studying 
"The Dog Book" for the last two weeks). "But I'm not 
going to be a regular veterinarian. I'm going to do 
genetic engineering on the dogs. You know, fix the 
collies so they don't shed hair all over the place. 
And you know how Dalmatians are always biting people? 
I'm going to fix that too. And then I'll sell my new, 
improved breeds for a lot of money. Or maybe I'll just 
write a newsletter about them..."

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THE 17 YEAR ITCH
by Bill Bonner


"Thus is the universe alive. All things are moral. 
That soul, which within us is a sentiment, outside of 
us is a law."
Ralph Waldo Emerson

Oi chusoi Dios aei enpiptuousi

(I'm sure you know what that means. But I had to 
look it up. "The Dice of God are always loaded.")


Yesterday's news brought new evidence, not necessarily 
of a moral universe, but of a symmetrical one. 
Nature gives...but it takes away too. 

Far from Wall Street, the law of regression to the 
mean...of "return to trend"...has been invoked. A 
sentence has been handed down and carried out. 
"Japanese Stocks Plunge to New Low," the BBC reported. 

Ten years ago, the Dow in Tokyo and the one in New 
York were 35,000 points apart. Fewer than 1,000 points 
separate them today. 

Yet, there is still a big difference between Tokyo and 
Manhattan. Wall Street is still on top of the world, 
the way most people view it. Tokyo is on the other 
end. 

Daily Reckoning masochists will recall the Japan 
story. It has been recited often in this space, once 
as a cautionary tale, then as moral lesson, and most 
recently as a preview of things to come in America.

In 1989, it was hard to find something negative to say 
about the Japanese economy. Every word was flattery as 
the Nikkei Dow rose towards 40,000. The triumph of 
"Japan, Inc.," as it was called, was thought to be 
inevitable. Japanese labor was more disciplined and 
harder working than labor elsewhere. Japanese 
management was willing to look farther ahead and take 
bigger risks than its competitors. The Japanese 
government was thought to be capable of guiding the 
economy more artfully than Western counterparts. 

Japanese terms - such as "kaizen" - sprang from the 
mouths of investors in January of 1990, as they rolled 
the dice again, expecting to win as they had in every 
year since the "Japanese Miracle" began. Little did 
they know that the dice were loaded. 

The head follows the heart, reasons dress up reality, 
and markets make opinions. In January of 1990, the 
Nikkei began its descent. Eleven years later, it is 
hard to find a good word to say about Japan. 

Columnists - so recently busily trying to explain why 
the Japanese would dominate the world economy for a 
very long time - now explain why Japan will not 
recover anytime soon. With an alarming lack of 
imagination, they turn to the familiar reasons, merely 
giving them a spin in the opposite direction. 
Japanese government is out-of-date, managers are 
incompetent, and Japanese laborers will never learn 
the secret of a healthy economy; that is, borrowing 
and spending!

Rarely, (perhaps not since the peak of the Nasdaq) has 
the financial press been so unanimous. Every headline 
about Japan makes the country sound hopeless. 
Yesterday, not only did we learn that stocks "Plunge 
to a New Low" in Japan, we also discovered that 
"Japan's Jobless Rate Surges" to its highest level 
since WWII (USA Today) and "Japan's Industrial 
Production Falls for 5th Month" (Financial Times).

The Nikkei dropped to 10,9779...below 11,000 for the 
first time since 1984. It has taken more than a 
decade, but Japan has erased 17 years of stock market 
gains. Over a period of 11 years, investors have lost 
75% of their money as the Nikkei Dow has come from a 
high of nearly 40,000 to within 900 points of Wall 
Street's most popular index. 

Tokyo's unemployment rate - once almost a non-existent 
number - has risen to 5%...almost exactly the same as 
America's current level.

Even Japan's GDP growth and that of the U.S. have 
converged - both presently at about 0.2%...an 8-year 
low for the U.S...and very nearly an 8-year average 
for Japan.

My, my...might not other things converge too? How long 
will it be before American reputations are flattened 
by a bear market just as those in Japan have been? 
Will people come to see that U.S. stocks, U.S. central 
bankers, U.S. corporate managers, and U.S. politicians 
are big losers...just like their Japanese 
counterparts? 

"There is a crack in every thing God has made," 
explains Emerson. "It would seem there is always this 
vindictive circumstance stealing in at unawares, even 
into the wild poesy in which the human fancy attempted 
to make bold holiday, and to shake itself free of the 
old laws - this back-stroke, this kick of the gun, 
certifying that the law is fatal; that in nature 
nothing can be given, all things are sold."

"Great bear markets take their time," says Jeremy 
Grantham. "In 1929, we started a 17-year bear market, 
succeeded by a 20-year bull market, followed in 1965 
by a 17-year bear market, then an 18-year bull. Now we 
are going to have a one-year bear market? It doesn't 
sound very symmetrical. It is going to take years."

"Every one [bubble market]" adds Grantham, "went back 
to trend, no exceptions, no new eras, not a single one 
that we can find in history."

Japanese stocks have returned to their 1984 trend line 
- 17 years later. The U.S. bubble market began in 
1995. If the U.S. repeats the Japanese experience, 
stocks may be expected to return to their 1995 trend 
line...with the Dow below 4,000 in the year 2012... 
almost the very moment at which America's baby boomers 
will most need the money.

Nature in her wisdom...and God in his grace...always 
make sure people get what they've got coming, not what 
they expect.

Your correspondent,

Bill Bonner
 
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: September 03, 2001

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