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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

LONDON, ENGLAND 
FRIDAY, 7 SEPTEMBER 2001 

 

Today:  Paying Dearly

*** Shares slump worldwide...Dow down 192 points...

*** British manufacturing suffers "worst collapse since 
early 1990s"... US investors mired in the Sisyphus 
cycle...

*** Smacking toddlers, naked chefs, beggars 
castigated... and more collective insanity! 

"Shares slump as recession grips industry," 
announces today's headline in THE TIMES of London. 
"Rising fear over the economy sent the stock market 
crashing to its lowest level in nearly three years 
yesterday..."

The stock market THE TIMES referred to was the 
London exchange. But the same might have been said for 
almost any of the world's leading markets yesterday... 
including the NYSE.

Manufacturing in Britain, as in America, is 
"suffering its worst collapse since the depths of the 
last full-blown recession in the early 1990s," 
continues the TIMES article. 

Marconi, recently Britain's largest industrial 
company, has seen its bonds downgraded to junk status. 
The stock has collapsed by 95% in the last year and on 
Tuesday announced another 6,000 layoffs - including the 
chairman and CEO. 

Also front page news in the TIMES: "Smacking of 
toddlers to be a crime." On page 3, we learn that a man 
won $800,000 in a jumping contest on a lame horse. And 
on page 5, we find a photo of a model who is to replace 
Liz Hurley in perfume ads.

Nobody with any sense takes the news seriously. 
The 'news' is merely a compilation of the latest fads, 
group-stupidity and collective insanity. The media 
merely focuses and amplifies the effect - helping 
stupid people do stupid things all together.

Unlike the U.S. papers, the British press has few 
pretensions of High Purpose. "Naked Chef tells of bun 
in the oven," informs us that a TV chef is going to be 
a parent. And later, we discover that "Britain faces a 
climate as cold as Canada," a news item that warns of a 
slowing in Gulf Stream. Get out your overcoats. If the 
Gulf Stream flow keeps weakening at the same rate - 
Britain will be 40 degrees cooler in half a century! 

Meanwhile, across the gutter, that is...on the 
facing page, "Beggar castigated," reports the TIMES. 
Ouch...that should discourage them...

But back to the financial news. Addison reports 
from Paris:

*****

Addison Wiggin watching "The Street" from France:

- "The tunnel at the end of the light," Andy Serwer of 
The Street Life called it this morning. "Remember back 
in the spring of last year, when the Naz was at 5000? 
Well, there were bears out there then saying stuff like, 
'I wouldn't be surprised if the Nasdaq traded down as 
low as 1600 or 1500!' That was pure hooey, right? I 
mean DOOMSDAY scenario." 

- Well, surprise...er, again. 

- By the time the dust settled yesterday, the Dow 
was down 192 points and the Nasdaq sank for the seventh 
of eight sessions - leaving all major U.S indexes 
precariously close to "new" lows. Consider, with my 
compliments to USAToday, these figures:

* The S&P 500 - "a proxy for the broader market" - slid 
more than 2% to 1106, less than 4 points above its 
April 4 low of 1103.

* After falling 53 points to 1705, the Nasdaq need only 
fall 67 more points to retest its own April 4 low of 
1638. 

* If the Dow slips another 451 points - it will be 
sitting smack dab on its March 22 low of 9389.

- Investors in the US have entered the "Sisyphus" cycle 
of the bear market...

- Sisyphus, you may recall from Homer, was the wisest 
and most prudent of mortals... but having stolen 
secrets from the Gods was banished to Hades. His 
punishment there was to perpetually push an enormous 
boulder up a steep incline... only to watch it slide 
back down lower than its original point, from whence he 
was condemned to begin again - and so on, for eternity.

- Investors in the US stock market have been laboring 
for "profits" - under the illusion of a "second half 
recovery" - for 5 months... only to find themselves 
exhausted and the market straining to maintain a 
foothold against former lows. 

- How long will this downward part of the cycle last 
before investors can begin pushing upward again? Well, 
it's anybody's guess. But, here may be a clue...

- "Japan is in outright recession," writes Daily 
Reckoning cohort John Mauldin, "monetary deflation is 
the order of the day. Their market is now where it was 
in 1984 - a 17 year low! And there appears to be no 
bottom...

- "Ten years ago people were writing about Japan Inc. 
and telling us that the future was Japan. The US was 
but a fading star. Now we find the Japanese miracle was 
but a mirage, built on false premises and manufactured 
money."

- Our sake drinking brethren are rooting around for a 
foothold back to a time when Caspar Weinberger had opinions 
you might have cared about.

- Meanwhile, "we have warned this would happen," wrote 
Dr. Richebacher in August. "This traumatic profit 
disaster ... has an obvious reason: Poor profitability 
in large parts of Corporate America over the past few 
years was obscured by deceptive propaganda and large 
windfall gains in the booming stock market."

for more see: Profit Meltdown

*****

Back to Bill in London:

*** I got a call from my wife at 5:30AM this morning. 
Elizabeth was still in Paris, but preparing to take the 
train up to London for the weekend. Just one problem... 
I had taken her passport.

*** So I rushed over to Waterloo Station and looked for 
someone with an honest and helpful face. What I found 
was a pair of women with rather nice faces...So I threw 
myself on their mercy...explaining the situation, I 
asked if they would take Elizabeth's passport on the 
train with them to Paris. They were very accommodating 
and happily agreed to undertake the mission.

*** Thank God for the kindness of strangers.

*** Which gives me an idea....

*** Every day, I write to you. You let me into your 
home, your office and your thoughts. I tell you about 
my home, my family, my gardener...things you have no 
reason to care about. But, you put up with my opinions, 
rants and personal news. 

*** Have I ever thanked you?

*** Probably not. 

*** Well, thank you, all you kind strangers...

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PAYING DEARLY
by Bill Bonner

"Much has been written about panics and manias, much 
more than with the most outstretched intellect we are 
able to follow or conceive; but one thing is certain, 
that at particular times a great deal of stupid people 
have a great deal of stupid money..."

- Walter Bagehot


Who is dumber - I revisit yesterday's question - the 
Americans who think they can spend their way to 
wealth... or the Europeans who enable their delusion by 
lending them money?

There are a great many lunkheads in the world, as many 
in Europe and Britain as in America. But today I write 
to praise them, not to criticise. For, as Erasmus tells 
us, we are all fools in our own time and in our own 
charming way. And so much the better.

Rational consumers, as Robert McTeer explained 
yesterday, would have cut back spending and lopped off 
the economic expansion a long time ago. Rational 
investors would have sold dot.com and tech shares long 
before the bubble even began to lift off.

Thank God for all of us fools. We allow bull and bear 
markets to fully express themselves - and put on a good 
show doing it!

The newspapers are full of stupid people doing stupid 
things. Some of the fools are news makers. Others are 
just reporting it. Whatever their role, fools make the 
World go around.

Reading the news in 1989 - as I have mentioned ad 
tedium - would have left you with the impression that 
Japan was a booming economy where everyone was getting 
rich. In fact, it was beginning a downturn that would 
last for more than a decade and wipe out 3/4ths of all 
stock and real estate values.

Reading the news in 1999 would have given you a similar 
impression of America. You, dear reader, can recall 
those days as well as we can, so there is no need to 
remind you.

Yesterday, the Dow went down nearly 200 points. If 
historical patterns hold, we will look back in a few 
years and realize that, today, we are just entering the 
second stage of a major bear market. The bear has 
mauled the outlying tech stocks. Now, he is moving in 
on the center of the herd - the Dow stocks...IBM... 
GE...Microsoft.

In fact, if this bear market repeats the pattern of the 
last two major bear market cycles in the U.S., many if 
not most people reading this Daily Reckoning will never 
again see share prices at these levels in their 
lifetimes. Investors should be preparing for more than 
15 years of falling prices and a collapse of their 
assets prices to about a quarter of today's levels.

Markets make opinions, as they say. Eighteen years of 
rising share prices has led to the opinion that share 
prices always rise. 'Nothing beats a well-diversified 
portfolio of long-term stockholdings," the mutual fund 
ads promise. 

Recent history has also left many people with the 
opinion that the entire secret of successful economic 
management lies in manipulating consumer demand by 
running interest rates up or down. 

"Since the introduction of active demand management 
policies in most capitalist countries after the Second 
World War," writes Anatole Kaletsky in today's TIMES, 
skillfully making the macro-economic apology for the 
spendthrift attitudes in the Anglo-saxon world, 
"economy-wide recessions have always been caused by 
demand reductions that were provoked by monetary or 
fiscal squeezes and never by supply shocks in one 
particular industry such as energy, property or IT. 

"The present economic cycle looks like a classic 
example," he continues. "Interest rates have been cut 
dramatically in America. At the same time, the U.S. 
Government is sending out large tax rebates. As a 
result, the American and British economies seem to be 
starting to accelerate, after exactly the six to nine-
month lag suggested by experience."

Nine months after what, readers may want to know. Oh, 
after the most aggressive attempt at demand management 
in history...

Markets make opinions, I repeat. 

And the press disseminates them, disguised as 'news'. 
To be more precise, markets make the stupid opinions 
that you hear in the media....the very opinions that 
permit the fad du jour to reach its culminating peak of 
madness. "...At intervals," as Walter Bagehot put it, 
"... the money of these people - the blind capital, as 
we call it, of the country - is particularly large and 
craving; it seeks for someone to devour it...there is 
'speculation'; it is devoured, and there is 'panic'"

Bob Woodward helped give American media hacks their 
conceit of high-mindedness with his Watergate fandango. 
It was no accident that he also brought American 
investors a book lauding Alan Greenspan as 'Maestro' on 
the very eve of the bear market in the Fed chief's 
reputation.

No one manipulates demand better than Alan Greenspan. 
And few doubted that the Maestro's effort would pay off 
when, in early January, Greenspan began his rate cuts. 
Perhaps you recall this comment: "Even if this doesn't 
work," said Ed Yardeni, or words to that effect, "there 
are 600 basis points between here and zero."

Since then, rates have been cut an additional 6 times, 
leaving only 325 basis points to zero. So far, there 
are no real signs of recovery. In fact, things seem to 
be getting worse. Here is a description of the current 
situation from Frederick Sheehan, reported on 
Prudentbear.com:

"Equity ownership in homes, as a percentage of market 
value, has not been this low since World War II. Home 
sales are at an all-time high and prices are rising. 
[T]his 'day-trading' of houses is a good indicator of a 
speculative asset. The installment debt of U.S. 
consumers, as a percentage of disposable income, has 
never been higher. The ratio stands at 21.7% today, 
compared to 17.9% in 1992, the post-recession low, 
after a 19.6% high in the Greedy Eighties. 

"Another ratio: U.S. mortgage payments as a percentage 
of disposable income is at an all-time high: 6.5% 
today, 5.7% in 1992 and 6.3% at its peak in the 
eighties. Credit card balances are rising, as are 
credit card delinquency ratios. Since durable and non-
durable goods sales have gone nowhere this year, 
households are adding more debt - including home equity 
loans - and hoping they can bail themselves out. How? 
Maybe VerticalNet will come back."

Maybe VerticalNet, Amazon and Cisco will come back. But 
it is not likely. It has never happened before. When 
the leading stocks of a bubble go down - they rarely 
come back....ever.

And...gradually....opinions change as stupid people 
wise up, having paid dearly for their instruction.


Bill Bonner,
helping to make the World go around.


P.S. "The industries that are likely to lead the next 
economic expansion are coming into the financial 
headlines. And they are exactly the businesses - 
property, retailing and consumer finance - that usually 
prosper in an environment where investment in machinery 
is still declining and the stock market remains 
shaky..."

Ah...that is the hope....that demand can be stimulated 
once again....and that real estate will give consumers 
the purchasing power to allow them to continue 
spending. 

Will it? Can it? I will take a wild guess about Dr. 
Richebacher's answer - "Rubbish!' - and rejoin the 
question on Monday.

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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: September 09, 2001

Published By Tulips and Bears LLC