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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
WEDNESDAY, 26 SEPTEMBER 2001 

 

Today:  Concrete and Oil

*** Greenspan pushes his string...

*** War not always bullish...confidence plummets...

*** "Bomb them all - let God sort them out!" And, of 
course...more!

From Julian Snyder courtesy of Richard Russell:

"After 1929, the strangely forgotten (or covered 
up) fact is that the Fed cut interest rates rapidly from 
6 to 2 percent by early 1930. Pundits of the day called 
the non-response to the cuts 'pushing on a string.'"

Greenspan has been pushing on a string too. Rates 
have been cut from 6.5% to 3%, with results comparable 
to those of '29. 

Consumer spending - the last pillar of support for 
the American Dream Economy - is now collapsing. "Home 
sales slow after attack," says the Associated Press. 
"Retail Sales Plunge After Attack," observes Reuters. 
Consumer confidence has taken its biggest hit in 5 
years. 

"The bottom line throughout 300 years of 
capitalism," Snyder goes on to explain, "is that 
economic expansion, no matter how handled, is, at the 
end of the day, like a balloon. When production has 
filled warehouses with unsold goods, when credit is at 
its limit, when the consumer is mired in debt, when big 
media advertising can no longer con or beat the consumer 
into spending more money, and the most ambitious 
marketing plans (at home and abroad) have gone awry, the 
balloon bursts or is rapidly deflated. 

Usually, the greater the expansion, the more 
severe the contraction. "President Franklin Roosevelt's 
WPA and deficit financing policies proved in the end to 
be futile. In 1940 the economy was still in depression. 
Only Pearl Harbor saved the economic day with the need 
for massive war production." 

But is war always bullish? A DR reader challenged 
us to find out. "The two wars most relevant to current 
conditions [are] the U.S. Civil War and the War of 1812, 
when the British burned the White House to the ground. 
In no other war EVER has the U.S. suffered any damage to 
the continental U.S. Do us a favor...go to the Library 
of Congress and find out what Baltimore real estate or 
some other asset of relevance did from 1811 to 1813."

So, I sent Becky (our ace researcher) to the 
Internet as the next best thing. "Baltimore real estate 
in 1812?" I detected a "mission impossible" doubt in 
Becky's voice. "I guess next you'll want me to find 
Osama Bin Laden."

Becky was unable to concoct an index of Baltimore 
real estate during the War of 1812 - from the material 
available on the Internet. But she found that Civil War 
stock prices did indeed rise - 170% from 1861 to 1864. 

During WWI, however, stocks rose only 40%. Alas, 
prices rose 80% during the same period...which was 
followed by the recession of '20-'21. At the bear market 
bottom, of 1921, stocks were down 37% from their wartime 
high and 13% below their pre-war values.

But let's see what happened yesterday on Wall 
Street. Eric? (Watch Eric - this week only - on CNNfn, 
9:30 to 11:30 a.m. est.)

*****

Eric Fry on the scene in Manhattan:

- Consumer confidence took a header in September, but it 
was hardly a surprise. There is nothing confidence 
inspiring about watching two of America's tallest 
skyscrapers collapse and kill thousands of our citizens.

- The consumer confidence index plunged to 97.6 in 
September from 114 a month earlier, according to the 
Conference Board survey (conducted partly before and 
partly after the Sept. 11 terrorist attacks). It was the 
largest monthly drop since October 1990. The future 
expectations index also fell sharply to 79.2 from 93.7 
the prior month. 

- Although this latest drop in consumer confidence was 
dramatic, it merely continues a months long trend.
Most of the root causes of shriveling confidence 
preceded the attack. Things like rising joblessness and 
falling stock prices have been weighing on a heavily 
indebted Mr. and Mrs. Consumer for some time. (More 
below in this week's guest essay...)

- Wall Street shrugged off the expected bad news, as 
investors focused on the task of buying marked-down - 
but still richly valued - stocks. The Dow advanced 56 
points to 8,660, while the Nasdaq squeaked ahead 2 
points to 1,502. Of course, some stocks are richly 
valued for a reason. 

- Wal-Mart, for example, sells for a plump 30 times 
earnings. But that's because the giant retailer 
continues to mint money in an environment where many 
retailers are struggling to avoid losses. Of course, 
Wal-Mart may owe part of its resilience to the fact that 
it operates in suburban America - far from New York 
City. The farther one moves away from "ground zero," the 
easier it is to buy a new toaster and a complete set of 
commemorative Elvis Presley dinner plates.

- Looking out over the next few months, the retail 
landscape will not exactly be feast or famine - more 
like tuna fish sandwich or famine. Will anybody be 
feasting?

- After wrapping up my appearance on CNNfn yesterday, 
the TV station offered to call up a car service to drive 
me to my office. I accepted. As we rode along through 
the bustling streets out of Manhattan, I asked the 
driver if his business had picked up since the attack. 
My thinking was that all those Manhattanites who might 
now be less inclined to ride the subway would be more 
inclined to call up a car service to take them to and 
fro. "Business is awful," he answered. "It's off about 
70% since the attack."

- The problem, as my driver explained it, is threefold: 
fewer people are going to airports, nobody is going to 
lower Manhattan and all businesses are scared.

- It's hard to make lemonade out of those lemons. The 
best that one can say is that air travel will likely 
pick up over the coming months. In the meantime, it will 
be rough going for the airlines, the hotel companies, 
the theme park operators, etc.

- The way it's looking right now, if you go to Aspen 
this winter, you might have the place to yourself. But 
if we assume that most Americans will be traveling less, 
will they not be doing something else more?

- Maybe they will go out for dinner and a movie a little 
more often. Or maybe they will play Monopoly with the 
family more often. Or maybe they will start reading the 
Daily Reckoning from start to finish each and every day. 
(Maybe we'll start writing twice a day!)

- In other words, subtle lifestyle changes might benefit 
specific industries and/or specific companies. One hedge 
fund manager told me that reduced spending on vacation 
travel will mean rising discretionary spending on 
children's clothes and toys. He likes Toys "R" Us. Call 
it the "guilt" trade if you will. The fund manager's 
hypothesis is that if Dad cancels the vacation to Disney 
World, he'll have to make up for it somehow. Maybe he 
will buy an extra toy here and there.

- Even if consumers rein in their spending a bit, there 
is some good news out there for this ol' economy of 
ours. Oil prices are falling, government spending is 
accelerating, government bailouts are rising, tax cuts 
are in place and Greenspan (remember him?) is expanding 
the money supply rapidly. All told, our economy may just 
rebound in spite of itself.

- Of course, any rebound will likely be short-lived 
until corporate cash flows and balance sheets start to 
improve. Greenspan's magic interest rate alone can't 
pull those rabbits out of any hat.

*****

Back in Paris:

*** "Finally, we give Afghanistan 72 hours to turn over 
bin Laden," wrote a helpful citizen. "If they don't, we 
give them 72 hours notice so that their civilian 
population can evacuate the city and then bomb the city 
out. Next, the second city is bombed out. Etc. And so on 
until bin Laden will not even have a tower to use his 
cell phone..."

*** "We're wasting time," said another, to a reporter 
from Le Figaro. "We're strong enough to do the job 
alone. It was New York and the Pentagon that were hit - 
not the Eiffel Tower. Sad to say, but I think we need 
blood and fast."

*** "Of course, it would be better to avoid civilian 
casualties," added an accountant, "but if there's no 
other way, we shouldn't hesitate. The Twins weren't a 
military target. Innocent people were killed, so I don't 
see why we should worry."

*** "Bomb them all," said another New Yorker, "let God 
sort them out."

*** The speaker, giving voice to America's new spirit of 
thoughtfulness and honesty, was - perhaps without 
realizing it - paraphrasing the remark of one of 
Christendom's greatest protectors - Simon de Montfort. 
More about him tomorrow...

* * * * * * * * Advertisement * * * * * * * * * *

The horrible events of September 11th have given an 
entirely new meaning to the word "security." Personal 
security, financial security - the true meaning of a 
secure life itself - have now been called into serious 
question. 

This sudden uncertainty about what the future may hold, 
makes it not only prudent, but highly critical, that you 
take appropriate action now to protect your freedom and 
your hard earned cash, assets and investments. Click 
here to learn how:

http://www.agora-inc.com/reports/SOVS/TSVDR1
* * * * * * * * * * * * * * * * * * * * * * * * *


The Daily Reckoning Presents: A Guest Essay from "the 
nation's leading advocate for financial safety."


THE LAST BIG BUBBLE
By Martin D. Weiss, Ph.D.

On September 11, nineteen fanatic terrorists broke 
America's heart. But even as we continue to grieve for 
our fallen countrymen and women, the second devastating 
impact of that contemptible deed is being felt - on the 
world economy. 

The unsettling new environment guarantees that we are 
about to experience more than an economic 
slowdown...more than a mere recession. We are about to 
witness the deepest stock market crash and depression 
since the 1930s. 

Please don't misunderstand: Things will not fall 
straight down. The most powerful institutions and 
central banks in the world will do everything in their 
power to prop up their economies and stimulate temporary 
stock market rallies.

But their efforts are a drop in the bucket compared to 
the trillions that had already been lost in stocks 
around the world. Even before the Twin Towers fell on 
September 11... 

* THE ASIAN BUBBLE was a distant memory. The Nikkei had 
lost an incredible 75% of its peak value. 

* THE TECH STOCK BUBBLE was in shambles. The Nasdaq was 
down 66%, $5 trillion in wealth destroyed. 

* THE WORLDWIDE REAL ESTATE BUBBLE was ending too. In 
Japan, prime real estate was selling for a meager ONE 
SIXTH of its peak value. 

All this BEFORE the terrorist attacks on September 11. 
But one giant bubble was still standing: The core of the 
great American economy, held up by just one thin thread 
-- the confidence of the American consumer. 

By early September, the American consumer was living in 
an increasingly smaller and more lonely world, shielded 
from reality by credit cards, home equity loans, a 
couple of SUVs, and the nearest shopping malls. 

And, strangely, until late August, consumers were still 
spending freely despite the bad economic news. Home 
sales were holding firmly. Retail sales were still OK. 
Consumers were the last hope for the American economy. 

But all that ended when the Twin Towers collapsed. The 
thin thread of consumer confidence was cut - 
irreversibly and irretrievably severed. 

Everywhere in America today, consumer confidence is 
gone. Seven out of 10 Americans are fearful, depressed, 
or terrified. They feel powerless to restore their sense 
of physical security. So they are scrambling to restore 
their feeling of FINANCIAL security, to somehow build a 
cushion to fall back on during the coming hard times. 

Problem: Right now, most Americans HAVE NO CASH. They've 
been living from hand to mouth for years. In the past, 
whenever they needed cash, they just grabbed the nearest 
credit card...or took out still another loan on their 
home. 

No more. Now, many feel a growing pressure, even a 
compulsion, to sell something - anything. Stocks. 
Property. Goods. 

This past weekend, we talked to automobile dealers here 
in Palm Beach County, Florida. Even though GM and Ford 
are offering ZERO percent financing for new cars, the 
dealers are getting no takers. None. Zilch. 

Yes, they ARE getting a lot of phone calls. But the 
calls are from customers who want to SELL their cars - 
not to buy. Many families in this area have two cars for 
transportation. Plus, they also have one or two EXTRA 
cars for leisure, fun, or just conspicuous consumption. 
And Palm Beach County is not unique. It's the same in 
key areas all over the USA.

The CEOs up in Detroit and the economists up in New York 
figured that, once someone buys a car, that's it. It's 
off the market. They forgot that the United States has 
the largest used car market in the world. They never 
imagined that, instead of consumers making net 
purchases, you could see them unleashing net SALES.

And don't forget the mass selling still coming in the 
stock market. Last week, many investors called their 
brokers to sell. But they didn't want to seem 
"unpatriotic." So they mumbled sheepishly that they were 
doing it "only because they had to" - only because they 
"needed the CASH." 

Or the brokers called THEM, asking for more margin 
money. Like the Bass brothers who got a margin call to 
sell 135 million shares ($2 billion) of Disney. Brace 
yourself. This is just the beginning of the forced 
liquidations in the stock market - to raise desperately 
needed cash. 

Back here in Palm Beach Gardens, where I live, an 
associate called a handy man this week to give him a 
small job. The man was practically in tears with 
gratitude. All his other jobs had been canceled. He was 
completely out of cash. He had no idea where his next 
dollar was going to come from. 

In New York, four Broadway shows have closed down. Not 
just for a few days. Forever! They were out of cash.

The leading airlines in America were equally cashless. 
They were estimating losses of $2.5 billion for the year 
before the September 11 tragedy. Now, they say their 
losses in 2001 will be many times larger. They asked Mr. 
Bush and Congress for close to $25 billion; they're 
getting "only" $15 billion. But giving them money is 
like throwing salt into the sea. Even after 115,000 
layoffs and even after flight bookings begin to pick up, 
they'll still be running way below capacity. If that 
continues, the $15 billion will be gone like a puff of 
smoke. 

I've dug back into the history of America's 10 largest 
great corporations - AT&T, Ford, GM, GE, etc. - and 
found that, before the Crash of 1929, they used to keep 
as much as $2 in cash on hand for every dollar of 
current liabilities (bills and debts coming due within 
12 months). Now, I see many of those same companies are 
down to a dime - one measly alloy dime - on the dollar. 
Nearly all American individuals and institutions are 
equally cashless. 

This has been true for a few years. The difference now 
is that they're desperate to GET to cash, but don't know 
how. That's the sea change we are now witnessing. 
You can already hear the sound of millions of American 
consumers slamming their wallets shut. 

Americans will unite behind the President and rally for 
the country. But will they buy a new gas-guzzling SUV 
every year? Take luxury fly-away vacations every summer? 
Gleefully charge their credit cards and go deeper and 
deeper into debt? 

No, those days are gone. Mark my words: It's going to be 
many, many long years before we see another wave of 
consumer spending like the one that had energized this 
economy before the events of September 11. 

Best wishes,

Martin Weiss, Ph.D.
for The Daily Reckoning

P.S. Your financial security has never been in greater 
danger. Thus, we've provided a specific plan of action 
for you to follow. You'll find it on the Daily Reckoning 
website - click here: Your Financial Security At Risk

Martin D. Weiss, Ph.D., the nation's leading advocate 
for financial safety, has helped millions of Americans 
with his ratings of stocks, mutual funds, insurance 
companies, banks, brokerage firms and HMOs. And he has 
testified before Congress repeatedly, advocating full 
disclosure of risk to investors. 

That's why Forbes has called Martin Weiss "Mr. 
Independence," the Wall Street Journal says he runs a 
"feisty firm," and Esquire noted that his is "the only 
company...that provides financial grades free of any 
possible conflict of interest." 

Today, subscribers to Martin Weiss's newsletter, the 
Safe Money Report, get this kind of widely acclaimed 
information PLUS specific advice on how to convert it 
into investment profits.

See: The Safe Money Report
http://www.safemoneyreport.com/

* * * * * * * * Advertisement * * * * * * * * * *

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level in 18 years, down a staggering 76% from its peak.

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select Japan indexes and stocks could explode into
$148,000. 

And this is just the beginning. Click on the
link below to find out more:

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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 27, 2001

Published By Tulips and Bears LLC