Contributed by Bill
Publisher of: The
Fleet Street Letter
THURSDAY, 20 SEPTEMBER 2001
The Way We
Wish We Were
*** Stocks sold again...is THIS the "bottom"?
*** "All stocks should be sold"...
*** GE takes a hit..."infinite justice"...and more...
|Investors sold off stocks again yesterday. At |
first, it looked as though the panic selling we've been
expecting may have finally begun. But there was no
panic. Just orderly selling as the big institutions,
foreign and domestic, got out.
After falling more than 400 points on heavy
volume, the market turned around. This led many to think
that, after 8 rate cuts and $5.135 trillion in losses,
as measured by the Wilshire 5000, Wall Street had found
It's a major bear market, says Dow Theorist
Richard Russell. "All new money should go into short-
term Treasury obligations. All stocks should be sold and
placed in short term Treasuries."
Japan's stocks sold off this morning, too. But
Japanese stocks have been selling off for the last 12
years. If a bottom is to be found anywhere...perhaps it
will be on the other side of the world...
Eric, what else happened yesterday?
Eric Fry in New York:
- Ouch! Things seem to be going from bad to worse these
days. The stock market swooned again. This time the Dow
fell 144 points to 8,759 and the Nasdaq dropped 1.8% to
1,528. It could have been worse. In fact, it was. At one
point the Dow had fallen down to the levels reached
during the Asian Crisis of 1998.
- It's hard to say exactly what sparked the stock
market's recovery in the final hour of trading. Maybe it
was the announcement that Defense Secretary Donald
Rumsfeld ordered more than 100 U.S. warplanes to the
Middle East. Or maybe it was the mere mention of Robert
Rubin returning to Washington for a meeting with
Greenspan. (We want Bob! We want Bob!) Lawrence Lindsey
was also invited. Whatever the case, we might need
similar announcements tomorrow to keep the rally going.
- Outside the stock exchange, lower Manhattan was no
more inviting a place than it was on Monday. The area
continues to feel like a war zone.
- The health club on the ground floor of 30 Wall St.
that once teemed with the chiseled bodies of young
financial professionals working up a sweat now serves as
a rest stop for emergency workers. It's also a temporary
home to numerous bomb-sniffing dogs. Cases of Alpo are
piled high next to the weight machines. Narcissism is
certainly more fun than the tedious task of insuring our
- Yet, amidst the emotional hardship, New York City has
never seemed more civil. Because everyone shares a
common pain, everyone seems to be a common friend. As a
native Californian, weaned on stories of mean-spirited
New Yorkers, I can attest that this urban legend has
always been patently false. It is even more false now.
- It had to happen. Companies are now lining up to blame
their poor third-quarter performances on the WTC attack.
General Electric was one of the first in line when it
announced earlier this week that its Employers
Reinsurance Corp. subsidiary, one of the main reinsurers
of the World Trade Center towers, would lose $400
million to $600 million after-tax. "It is the first time
in more than seven years that GE has had to warn on
profits," the Financial Times reported.
- However legitimate GE's warning might be, we can
expect hundreds more somewhat less legitimate earnings
shortfall warnings. This attack provides very convenient
cover for already slowing sales and/or managerial
- Jim Grant, with whom I share an office, assures me
that our building at 30 Wall Street is the absolutely
safest structure in downtown Manhattan. It seems that
once upon a time the building was the Assay Office of
the U.S. government.
- In Grant's book, "The Trouble With Prosperity," he
notes that an 80-foot smokestack used to extend from the
roof. "Through this stack had poured the noxious vapors
of melting gold. New Yorkers would take bouillon-bearing
dust, foreign coins, or scrap jewelry to the assay
office ($100 minimum order required) and receive in
return gold bars or United States money at the statutory
rate of $20.67 to the gold ounce."
- To safeguard all the gold on the premises, the three
stories above ground rested upon a five-story
underground vault. Writes Grant, "Its floors were
reinforced up to a load-bearing strength of 1,000 pounds
per square foot. The underground vaults were protected
by reinforced concrete sheathed with 2 �-inch sheet
steel." I feel better now.
- Speaking of vaults of gold, AP reports, "some 11.8
metric tons of gold worth an estimated $110 million and
30.2 million ounces of silver valued at $121 million are
buried in the rubble below one of the collapsed
buildings in the World Trade Center..." But, "even if
for some reason the gold can't be recovered, there's
plenty of supply in the world. One company estimated the
trade center hoard to be 0.3 percent of the global
- Even if stocks continue to disappoint their most
ardent admirers, New York's commercial real estate
market may be picking up a bit. "25 million square feet
of office space in lower Manhattan is either completely
destroyed or otherwise out of commission," says my
friend Randy Fuchs, vice-president of Reis.com.
- 400,000 office workers have been displaced. This all
adds up to lots of opportunity for commercial real
estate professionals in and around New York City. "The
attack on the Twin Towers has spurred a new real estate
and construction boom," the New York Post reports. "From
tragedy some good things come to an industry that was
beginning to look down a dark hole," Lenore Janis,
president of Professional Women in Construction, tells
Back to Paris...
*** "In the wake of last week's attacks," writes
Marshall Auerback, "outright nationalization of Japan's
troubled financial institutions becomes a very realistic
option. In wartime, markets do not operate freely. There
is a tendency toward increased regulation and
centralized, government-directed activity - even among
governments which, under normal circumstances, champion
free markets." See: "It's A Wartime
*** Little by little, day by day...the madness of the
financial bubble on Wall Street seeps down the East
Coast to Washington.
*** Asset values deflate while the conceits of politics
get puffed up. Gone is the "lock box" that protected the
non-existent Social Security trust funds. Gone is the
worry about fiscal restraint or preserving the budget
surplus. Gone is the concern about the "moral hazard" of
bailing out industries...swept away by the hot air of
*** The billions are adding up...but how can you fight a
campaign for "Infinite Justice" without an unlimited
*** "Infinite Justice" is nothing if not optimistic. But
is nature more likely to allow infinite justice than she
was to give up unlimited capital gains?
*** Oh, if only we could live in an irony-free world!
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THE WAY WE WISH WE WERE
by Bill Bonner
George Soros calls it "reflexivity".
It's the market's nasty habit of punishing simpleminded
hope, group thinking and outsized ambitions. Those who
expect unlimited profits end up without a pot to put
their portfolio in.
And the best time to sell stocks and take a vacation, it
turns out, is the precise moment when most people expect
it to rise.
The rest of life is much the same. The left, rational
side of our brain is constantly confounded by the other
half. We get love not by going after it directly, but by
giving it away. We are born...we learn...become wiser...
and then, when we finally feel we have things figured
out, we die. Good and evil lie side by side in this
world, so close, sometimes, it can be hard to tell one
from the other. For everything that is created,
something is destroyed. And for every little nanogram of
courage, truth or justice, some poor soul lies
smoldering on an ash heap in hell.
The paradox that the left side of the brain cannot
imagine comes to the right side as an intuition: that
pride goeth before a fall...what goes up must come
down...and that, over time, all vanities are corrected.
But that is not the world I write about today. Instead,
bowing to popular demand and commercial pressures, today
I give you the world as we would like it to be - a world
dumb enough to be a campaign slogan and simple enough to
cause a bar fight:
Daily Reckoning readers will recall that everything was
going along just fine until September 11. Investors had
not paid too much for stocks. Consumers had not spent
more than they could afford. Businesses had not over-
invested in unprofitable projects. Americans had not
become too confident in their economy and their
future...nor had Europeans extended them too much
The revolution led by information technology had seen
its bubble popped. The silliness was passed. Earnest men
and women were getting back to business, putting those
new technologies to work in ways that would permanently
boost productivity and increase asset values from here
Alan Greenspan had cut rates 7 times already - bringing
the key rate to half what it had been at the beginning
of the year. The bottom was in sight...Abby Cohen said
so. So did almost all the CNBC guests. And Rukeyser's
Then, last week, a group of evil men with horns managed
to slip through our normally rigorous security
precautions (remember...vigilant security guards even
caught Henry trying to board a plane with his super-
soaker!)...and knocked the U.S. economy down again, just
as it was struggling to its feet. Because of that, the
third quarter is probably going to show a loss.
Whatever happens, it is the fault of the terrorists. Who
could have foreseen such an attack? Who could have
imagined the damage they could do?
But the attack on the WTC and the Pentagon gave
Americans a new sense of purpose and of faith in our
free economy. Even as I write, a new American armada is
gathering - one that will unleash a fury of "infinite
justice" on our enemies. Their cities will be laid
waste, never to be rebuilt. Their crops will be
destroyed and their fields will be salted. Their
soldiers will be smitten and their fortifications
annihilated. Their leaders will be brought to trial and
Then, with new energy and determination, the American
economy will come roaring back. After a brief decline,
stocks will rise - and go on rising, nearly forever.
That is what happened the last time America was
attacked. Six months after the attack on Pearl Harbor,
stocks hit an all-time low. But then, spurred on by the
new war economy, stock market capitalization rose
steadily, from only 16% of GDP in 1942 to a peak of
78.1% of GDP 30 years later.
That, dear reader, is the world as most Americans
believe it to be.
Wouldn't it be nice if they were right?
Not only would we have the prospect of a new boom to
look forward to, but also Osama bin Laden to blame if
they are not.
"When people are riled..." writes Frederick Sheehan,
"discourse explaining to them their own culpability may
be the wrong tactic to employ."
"The average Congressman may not understand the Black-
Scholes option pricing model," he continues, "but can
sense an opportunity to lead a popular crusade."
Americans are riled. They are sure that whatever ill-
wind blows their way must come off the sands of some
far-off Arabie, stirred by a man with a beard on his
face and a diaper on his head.
They are sure, too, that once America is mobilized
against this evil...peace and prosperity will follow,
just as it did following the Japanese attack in 1941.
But in 1941, stock prices in America had been falling
for the last 12 years - as in Japan today. In 2001
America, stock prices have been falling for only 2
In 1941, America's factories geared up for a world war,
involving vast amounts of material - jeeps, planes,
food, trucks, oil, bombs, guns...you name it. The War on
Terrorism involves the use of very limited resources.
After all, there are only a few dozen terrorists.
Instead of gearing up, aircraft and automotive
industries are gearing down. Boeing alone is laying off
In 1941, Americans lacked confidence. They had not yet
emerged from the Great Depression. They saved money.
They were reluctant consumers. The idea of a "patriot
rally," was absurd back then. Investors could only
imagine that stocks would fall further. In 2001,
Americans are confident to a fault...so confident that
they imagine that almost anything - even a new war -
would cause a stock market rally.
The left side of the brain cannot imagine it. But the
right side suspects that a real rally will begin only
when the idea of it has become as absurd to Americans
today as it was in 1941.
P.S. Uh oh. I've done it again, I've slipped into my bad
habit...warning of doom and gloom. But wait...tomorrow I
will give you some uplifting commentary. I'll tell you
about another American president, 200 years ago, and his
battle with Arab terrorists. But he set his sights lower
than Mr. Bush. He aimed for just a little bit of
justice...and hit is mark. More tomorrow...
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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.