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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
THURSDAY, 13 SEPTEMBER 2001 |
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Today:
Getting and
Spending
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*** Markets closed...
*** Struggle to stay out of recession grows harder...
*** Markets to reopen Friday...or Monday. Prices to go
up...or down.
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The stock market is closed again today. Never in
the last 50 years has the market been closed for two
days in a row. Nor in the last half century has America
faced a similar financial situation.
But what will come of it? Boom or bust?
"Horror struck investors seek havens of gold and
bonds," reports the Financial Times.
"Struggle to stay out of recession grows
tougher," says the Houston Chronicle. "Shock waves
rattle the economy," says another paper.
"I feel like there is so much human tragedy, you
do not want to be thinking analytically or rationally
about this," the NY Times quoted James Glassman, chief
domestic economist for J.P. Morgan Chase. "But we know
that soon we are going to have to think about the
economy."
Composing himself, Mr. Glassman ventured a guess:
"This is going to make America, and the civilized world,
be defiant...People are going to see this as a threat to
the civilized world, and good things are going to come
out of it."
Perhaps he guessed wrong. More below. Over to
you, Eric:
*****
Eric Fry writing from New York:
- "We are not only going to rebuild," said New York
mayor Rudolph Giuliani, "we're going to come out of this
crisis stronger than ever before - emotionally stronger,
politically stronger and in particular, economically
stronger."
- The Mayor may well be right, but the price of this
future strength is steep indeed.
- Many people that I know had relatives, friends, or
friends of friends who worked in the World Trade Center
and remain unaccounted for.
- The brother of a friend of mine placed a call Tuesday
morning from one of the uppermost floors of the World
Trade Center to say that he was trapped. No one has
heard from him since.
- Another friend of mine said that his son-in-law of
only two months called shortly after the initial
explosions to report that there was smoke everywhere and
that he was lying on the floor to avoid it. No one has
heard from him since.
- Each account of a life prematurely snuffed out is gut-
wrenchingly tragic.
- Suddenly, $80,000 Porsches and $1,000 Vuitton purses
seem embarrassingly frivolous. Even buying Starbucks
cappuccinos seems an almost perverse extravagance.
- A decade of uninterrupted prosperity may have made us
a little too fat and happy. Conspicuous consumption may
well take a breather while we focus on more pressing
national priorities, like making sure our citizens never
again find themselves having to chose between jumping
from a 100-story building or burning to death.
- Addison Wiggin e-mailed me Tuesday to say, "This
[attack] couldn't have come at a worse time for the
economy, for the market or for America as the remaining
global power."
- Addison may be correct, at least for the near term.
But this tragedy may have occurred at exactly the right
time...if there is such a thing.
- "Crisis mobilizes the commitment of human energy,"
writes Smartmoney.com's Donald Luskin. "If America's
leadership and the American people respond
constructively - as they always have the past - than
from this crisis could emerge significant opportunities
that could propel the economy and the markets into an
important new growth phase."
- Luskin continues: "Forgive me if this seems mercenary
and light of Tuesday's loss of lives, but history shows
that cataclysmic events like this had always been
reflected in powerful stock market moves."
- The powerful move Luskin expects is up. He cites as
historical precedent the stock market rallies that
followed close on the heels of the Cuban missile crisis
in 1962, the Kennedy assassination in 1963, and the Gulf
War in 1991.
- Near term, anything could happen in the world's
financial markets. Indeed, everything could happen. In
other words, volatility will increase throughout world
markets.
- On Wednesday, for example, many Asian stock markets
dropped precipitously. Hong Kong's Hang Seng index fell
more than 8%, while Japan's Nikkei Index fell more than
6% to an 18-year low.
- But over in Europe, most markets rebounded from early
morning losses to post modest gains. The German DAX
Index rose nearly 1% and the U.K.'s FTSE 100 Index
climbed 2.3%.
- Conversely, gold yielded much of the large gains it
achieved on Tuesday. Somewhat surprisingly, most gold
stocks closed below the price levels they held prior to
Tuesday's disaster.
- The lesson in all this is that volatile markets are a
lousy place to try to make a dollar. Most investors
would do well to stand aside for a couple of days.
Yesterday, I telephoned Bill in Paris to exchange
thoughts about what might happen next in the U.S.
markets. After about twenty minutes, we concluded beyond
a shadow of a doubt that when the U.S. market reopens it
will either go up or down.
- But we also concluded that the near-term trading
action probably matters very little. Rather, investors
ought to focus on the financial market trends that
already were unfolding prior to Tuesday's attack. U.S.
stocks, for example, have been floundering for more than
a year. They will likely continue to flounder. The U.S.
dollar has been falling since July. It will likely
continue to fall.
- Conversely, bullish trends remain in place for oil,
natural gas, the euro, gold, and selective foreign
stocks like Gazprom.
- America will rebound, but not in one day. In the
meantime, most of the best investment opportunities may
not trade on the Nasdaq. DR Blue Investment Advisory has
identified many such opportunities in the last few
weeks. Stay tuned!
*****
Back to Bill...
*** Christoph Amberger called me yesterday. He heads up
Agora's Taipan Group. He told me he's organizing a drive
to help those who are putting their lives on the line to
save the victims of the Manhattan disaster. "Apart from
our team members' individual contributions," says
Christoph, "the Taipan Group is kicking in US$5,000 to
get the ball rolling." If you want to contribute, click
here:
Taipan Red Cross Drive
http://www.taipanonline.com/red_cross.html
*** There is a chance of panic selling on Wall Street
when markets finally reopen. There is also a chance of
panicky non-selling.
*** "If investors choose panic selling [when markets
reopen]...[it] plays into the hands of terrorists and is
exactly what they hope we'll do..." writes Hokanson
Capital Management, resisting a return to rational,
analytic thought.
*** Besides, "savvy investors will recognize the
opportunity created by such a panic, and great future
wealth will be created - at the expense of today's
sellers. There is no greater message of strength,
solidarity and resolve that we can send both terrorists
and the world than to reflect those values in stable or
higher financial markets when they reopen."
*** What kind of investor would make his most important
financial decisions this way...in an effort to send a
message to unknown people in unknown places? It is
madness, of course, but madness is what makes markets -
at least for a while.
*** There is madness beyond the financial markets, too.
The plate glass window of Baltimore's only Afghan
restaurant has been smashed. And there is surely more
madness to come.
*** In markets people get what the deserve...not
necessarily what the expect...
In politics people may get neither.
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GETTING AND SPENDING
by Bill Bonner
"The World is too much with us; late and soon,
Getting and spending, we lay waste our powers;
Little we see in Nature that is ours;
We have given our hearts away, a sordid boon!"
William Wordsworth
"The attack IS a great blow to an already vulnerable
economy," writes my friend Martin Weiss. "As I have been
telling you for many months, the world economy was
ALREADY teetering on the brink even BEFORE yesterday's
attack."
On Tuesday, it got a shove.
Everything changed. But everything remained as it
already was. Martin explains:
"Even as the hijacked airlines flew mercilessly toward
their targets, a flood of red ink had wiped out over six
years of TOTAL accumulated profits of ALL companies
listed on the Nasdaq exchange (see last issue of Safe
Money).
"Even as the upper floors of the World Trade Center
burst into flames, America's largest money center banks
had the greatest exposure ever to derivatives - high
risk bets that are notoriously vulnerable to unexpected
events (according to the latest reports by U.S. General
Accounting Office).
"Even as the 110-story twin towers imploded into a great
cloud of dust and debris, the world's stock markets had
already been tumbling for 18 months or more. The Nasdaq
had lost about two-thirds of its peak value, with over
$5 trillion in wealth destroyed. The German Neuer Markt,
the equivalent of our Nasdaq, had lost roughly NINE
TENTHS of its value. The German DAX, the counterpart of
our Dow Jones Industrials, was down about 45%, the
Nikkei down close to 75%."
But now, for the first time, the fragility and
vulnerability of the U.S. has been exposed to the entire
world.
People will say all sorts of mad things...that stocks
will go up because it is their patriotic duty...or that
they'll go up because wars always make stocks go up...or
that the economy was ready to turnaround anyway. And who
knows...maybe they will be right.
But is it not likely. For the economic picture remains
nearly the same as it was before, with one important
exception: consumers have suddenly grown cautious.
Americans may proclaim their faith in the system. They
will stand with moist eyes, waving the flag and reciting
their newfound sense of national unity. They will affirm
their belief in American capitalism and their commitment
to buy-and-hold investing.
But they will not buy new cars. Nor take luxury
vacations. Amid the images of the dead and dying...of
bodies falling 100 stories...and mass destruction at the
very heart of American capitalism...
...getting and spending, at the margin, suddenly seems
less important.
Consumers will wonder if all their frantic efforts to
build wealth during the boom years was worth it. They
may recall an article in last week's U.S. News & World
Report. The article said that people are ten times more
likely to be depressed today than people born two
generations ago. "Though the quality of life is much
improved since WWII," the authors elaborated, "the
number of people who consider themselves happy remains
flat."
What makes people happy? "Strong marriages, family ties,
and friendships..." say the authors.
Rather than spend an extra 15 minutes working at the
office...people may decide to spend the time with their
families. Rather than upgrade their home computers...
they may make do with the one they have until they are
feeling more confident.
Consumers are becoming hesitant. Not because they
believe the economy is sinking...but just because
spending money has suddenly gone out of fashion.
Something big has happened that is beyond reason...
striking at the deep, dark "rag and bone shop" of the
human heart.
Alan Greenspan blamed the economic downturn on what he
called a "breach of confidence." For him and many
economists, the challenge in America was merely to
maintain consumer spending. As long as consumers
continued to spend, they reasoned, the economy would
continue to grow.
The real problem was not a lack of consumer confidence,
but a surfeit of it. Consumers developed, as Dr.
Richebacher put it, "an unrealistic and unsustainable
excess of expectations in future prosperity...built up
in the past boom years."
The more the economy boomed, the more confident they
became, and the more money they borrowed and spent. But
even as they felt more and more confident, debt loads
piled up like skyscrapers, leaving them more and more
vulnerable to shocks. Now that they've felt the earth
shake...can there be any doubt that they will turn more
cautious?
"This is NOT the end of the world," writes Martin Weiss.
But it feels like the end of an era.
Bill Bonner
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| About
The Daily Reckoning: |
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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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