Contributed by Bill
Publisher of: The
Fleet Street Letter
WEDNESDAY, 3 OCTOBER 2001
the Big V's
*** The dogs and cats of war...discount rate lowest
*** More job losses...defense IPOs?
*** Nasdaq erases all profits for last 5 years...and
|"There are still 600 basis points between here and |
That cheerful comment was made in happier times by
Ed Yardeni, back in January, explaining how, even if the
first rate cut did not revive the economy, there were
plenty more where that one came from.
But, now the dogs of war have been unleashed. So
have some stray cats. Rate cuts seem to have lost their
All over the world, governments are mobilizing to
fight the threats of bear markets, recession and
terrorism. Rates are being slashed. Credits are being
provided. New subsidies, bailouts, and spending projects
are under way. Lock boxes are being pried open. Peace
dividends are being cut.
And the era of big government is back.
Yesterday, the Fed took another step towards zero
- its 9th so far this year - cutting rates another 50
basis points, leaving only 250 bps to go.
The poor Japanese want to help by weakening their
currency too. Alas, they can't cut rates; they have no
more rates to cut. Key bank lending rates in Japan have
been near zero for years. So, the Japanese have had to
content themselves with intervening in currency markets
to lower the value of the yen.
And yet, despite the flood of cash and credit, the
bond market shows no signs of worrying about inflation.
Long bonds rose sharply yesterday; inflation-adjusted
bonds, relatively, sank.
Gold, too, went down a bit.
The dogs of war are bound to bite a few innocent
people...but - astonishingly - investors, so far, are
not anticipating any collateral damage from inflation.
Eric, how did the rate cut go over on Wall Street
Eric Fry in New York...
- Like the future Hall of Famer, Cal Ripken, Fed
Chairman Alan Greenspan has been striking out lately a
lot more often than he has been hitting the ball.
Despite nine interest rate cuts in little more than nine
months, the economy and the stock market are both far
worse off than when Greenspan began the process.
- But that doesn't mean that "The Chairman" can't still
jack the ball out of the park every once in awhile -
economically speaking. Yesterday, he reduced the Fed
Funds rate by one half percent to 2.5% and the stock
market rallied, just like old times.
- The Dow gained 114 points to 8,950. The Nasdaq fared
slightly less well, advancing only 0.8% to 1,492.
- The Nasdaq just seems to limp along - gaining less
than the Dow on up-days and falling more than the Dow on
down-days. One clear difference between the two indices
is that most Dow stocks make money. "Nasdaq," quips Sean
Corrigan of capitalinsight.co.uk, "stands for No Actual
Sales, Dividends, Assets or Quality."
- Sales and assets are certainly in short supply these
days, on Nasdaq and elsewhere. In a sign of the times,
The Daily Deal introduced a new weekly section called
'Bankruptcy Thursday.' "The Manhattan-based chronicle of
mergers and acquisitions leads the section with two
standing features," explains Paul Colford of the New
York Daily News. "'Letter from Delaware' rounds up the
latest bankruptcy filings and their casts. 'DIP
Dimensions' looks at firms operating with debtor-in-
- Now that bankruptcy filings are a weekly news feature,
the U.S. economy must be getting closer to hitting
bottom, even if it is not quite there yet.
- Joblessness tells the tale of our economy...and the
story line is a bleak one. Consumer confidence has hit a
five-year low, and the unemployment rate is on target to
hit a five-year high. Initial unemployment claims
reported last week rose by 58,000 to 450,000, the
largest weekly gain and highest level in nine years. The
monthly unemployment report comes out on Friday and it
won't be pretty.
- "In the first major cutback by a large Wall Street
firm since the terrorist attacks, Morgan Stanley plans
to let go as many as 200 investment bankers, or about
10% of its banking staff," the Wall Street Journal
reports. Remember, not a single IPO came to market in
the month of September. So, one might be tempted to ask,
what are the remaining 90% of the bankers going to be
doing all day?
- Morgan Stanley reported a few days ago that its net
income fell 43% in the quarter ending August 31. It's
just a guess, of course, but maybe there will be more
staff reductions in the future.
- Perhaps defense stock IPOs will be the new hot thing
that bails out the investment banking departments on
Wall Street. "Spending for defense-related activities is
on the rise, but has a long way to go to reach levels of
years past," writes Grantsinvestor.com, citing the work
of International Strategies & Investments (ISI). "The
defense sector has suffered through years of under
investment...U.S. military employment is at its lowest
level in postwar history, and down 50% from the peak
reached in 1968. Although nominal government spending on
defense equipment and structure has turned up over the
past four years, [it] represents only 0.8% of GDP, a
postwar low. Many things changed on September 11th, not
the least being America's renewed interest in defense.
Investors, take note."
- As defense spending increases, stocks like Boeing will
likely benefit. Boeing has endured a very turbulent ride
over the last three weeks, but it gained almost 6%
yesterday to $34.25.
- Three unrelated news items bode well for the aircraft
manufacturer. First, domestic air travel continues to
rebound. Second, both the Air Force and the Navy are
nudging Congress to speed up appropriations for new
surveillance and tanker aircraft from Boeing. Third,
yesterday China agreed to buy 30 aircraft from Boeing
for $1.65 billion. Bloomberg reports, "Chicago-based
Boeing has predicted that China will buy commercial
aircraft worth over $144 billion during the next 20
years, making it the second-largest market after the
U.S." (see: http://www.grantsinvestor.com/agora.html)
- Boeing may or may not be a good stock to buy. But it's
nice to know that even if the U.S. economic news is
mostly bad, it's not all bad.
Back in Paris:
*** "I've spent a lot of time traveling all over the
world...and I've seen situations similar to what's
happening in Nicaragua right now," Kathie Peddicord
passes on from her recent travels there. One
International Living reader points out that "Every time,
within a few years...in places with similar conditions,
the prices skyrocket. The same thing's going to happen
in Nicaragua...very soon."
*** But for now...prices are still cheap. For example, a
1.7 acre lot on the Pacific Ocean, 5 minutes outside of
San Juan, is currently US$15,000. A private island in
Lake Nicaragua - the largest body of fresh water south
of the Great Lakes -is available for as low as US$8,000
(the whole island). Or a lot at Rancho Santana, a
private reserve on 2.5 miles of spectacular Pacific
coastline, can be had for as little as US$25,900.(For
more, click here: http://www.ranchosantana.com )
*** "The new data reveals a profits disaster," notes Dr.
Kurt Richebacher in his latest letter. "Profits hit
their peak in the 4th quarter of 1997...from there they
have steadily declined." They are currently "below their
level in 1995," Richebacher observes.
*** Consider the Nasdaq alone and the profit picture is
even worse. The Wall Street Journal reports that if you
take all of the profits of all Nasdaq companies over the
last five years, and subtract the losses, the result is
a negative number. "Put another way," says the WSJ, "the
companies currently listed on the market that symbolized
the New Economy haven't made a collective dime since the
fall of 1995, when Intel introduced the 200-megaherz
*** "There Was No New Economy," Dr Richebacher reminds
us. (also see: False And True Prosperity
*** But markets make opinions...and years of rising
prices on Wall Street led investors to search for an
explanation. It felt like a "New Economy" to the right
side of the brain. The left side merely had to invent a
cluster of corollary propositions to support it.
*** Those myths and misapprehensions are now being
destroyed. But more importantly, to the right side of
the brain, it no longer feels like a New Economy. Greed
is giving way to fear...
*** "You never know," said a New York secretary to a
reporter from the French newspaper Liberation, "if there
is a war...or if a recession is coming...I feel better
saving my money..."
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The Daily Reckoning Presents: A Guest Essay in which
the author tries to define the big "V"...
AWAITING THE BIG V'S
by Gary North
Asked to define "victory" in the war against
terrorism last week, Defense Secretary Donald H.
Rumsfeld had difficulty coming up with a concise
answer. After 500 words of hovering, he landed
on his definition. "I say that victory is
persuading the American people and the rest of
the world that this is not a quick matter that is
going to be over in a month or a year or even
five years," he said.
Sept. 23, 2001
Some of us remember a photo of Churchill, sitting in
front of a camera - Karsh's, as I recall - displaying a
V sign. It was V for victory.
Now we are told to expect two victories: one against
terrorism, the other a fast recovery of the stock
market. But the only image I have of two V's is Richard
Nixon waving them and smiling in 1972. This is not
A few days before the attack, I was watching a show on
MSNBC (I think). The person being interviewed was an
academic type. He had completed a study of which month
was worst historically for the U.S. stock market.
"September," he said. The interviewer was all aflutter
to hear the good news. This meant that the fall in the
market might be temporary. The academic concurred. Then
came September 11.
The fall in the market in the week following the
attack was a bad one - the worst in 70 years, several
media sources reported. The week began on MSNBC with the
most intense stock market cheerleading I have ever seen
The New York Stock Exchange had not yet opened.
The cheerleader was Jim Cramer of The Street.Com. He was
adamant: this was a great buying opportunity. His
company had committed money to the market. This was the
bottom. Get on board now! Another person being
interviewed was judicious, saying that there were
reasons not to be so optimistic. Cramer pitched the
opposite line with great intensity and confidence.
Then the market opened. Instantly, it was down 50.
It kept going down, down, down. It was down by 250
within an hour. Cramer kept saying this was a great time
About the time it hit 500, he began to modify his
tone...somewhat. He said that it would be unwise to
commit all of your money today. Save some extra money
for the rest of the week, he said. The Dow closed below
An hour before the stock market opened, Greenspan's
FED had lowered the short-term federal funds rate by
half a percentage point. The market ignored it.
Economists call the turnover of money per unit of time
the velocity of money. When it slows, it is deflationary
in its impact. This is why Greenspan has more leeway to
lower rates again by creating new money. We are heading
into a massive slowdown of spending.
Consumer confidence was already down in the week before
the attack. When people are scared, they slow down their
spending even more. They stop buying discretionary
Lower rates won't solve the problem of reduced sales.
Lower rates allow businesses to borrow more money, but
businesses today are not interested in borrowing more
money. Capital spending has fallen like a stone for a
year. Even before the attack, entrepreneurs were
convinced that the public was not going to buy what
Despite all the cheerleading on TV and in the financial
press, businesses decided a year ago that the consumer
was tapped out. That's why businesses pulled the plug on
capital spending long before September 11.
New York City is the center of the world's equity
markets. The American financial industry is close-knit -
one might even say "incestuous." These people run in
packs and think in herds (or maybe vice versa). This is
why none of them saw what was obvious to me in February
and March of 2000: the Nasdaq was insanely overvalued
and ready to crash.
According to Fortune magazine, before the attack,
183,000 people worked in the financial services industry
in lower Manhattan. These people will be emotionally
scarred for months, maybe years. Their professional
lives will never be the same. They saw everything come
crashing down around them, literally. One of them put it
As traders, we are taught to stay at our desks
during fire alarms. You serve your clients. You
don't run. Well, in this case the people who ran
were the smart ones. The people who stayed are
dead. That's counter to everything you are
taught on Wall Street. But we're just moving
money around. It kind of makes you think.
It kind of does, indeed. Stock options? For your
widow. These people have been through what few Americans
have seen since Vietnam. They have seen death face-to-
face. They have been through something that tends to get
people's priorities straight.
Now they must return to cheerleading. But how? The stock
market is down, a long war is looming, and they or their
colleagues are sitting at strange desks in new
September 11 marks the end of an era.
The markets will still function. People will still go to
work in New York City and move all that money around.
But the ones who moved it around from the caverns of
lower Manhattan will never move it around with the same
confidence or arrogance.
There is no more talk about a second half recovery of
the economy or the stock market. That was the party line
six months ago. Now there is endless chatter about the
Big V. The V means a sharp downward move, followed by a
sharp upward move. Presto: "It won't hurt any more!
Uncle Alan will kiss it and make it all well."
What V? The Nasdaq, which is still under 1500, down from
5040 a year ago March. So, where is the sharp upward
move? It takes two moves to make a V. One move makes a
for The Daily Reckoning
At age 25, Dr. North was the youngest elected member of
the Economists' National Committee on Monetary Policy.
He served as a senior staff member of the Foundation for
Economic Education and as a research assistant to U.S.
Congressman Ron Paul.
For more see: Derailing the New Economy
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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.