Contributed by Bill
Publisher of: The
Fleet Street Letter
THURSDAY, 30 AUGUST 2001
17 Year Itch
*** U.S. economy still growing - barely...
*** But Wall Street down...as Tokyo races it to the
*** Housing refi loans soaring...GE drops 2%...a
timber company...and more!
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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
*** 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
*** 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
*** 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
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
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
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
"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
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.