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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
THURSDAY, 4 OCTOBER 2001 

 

Today:  Still Turning Japanese

*** "Good value" at 25 times current earnings?

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The Dow was up again yesterday. Is it a 
continuation of the "dead cat" bounce from September's 
2147 point drop? Or a major new rally?

Of course, we don't know...nor do we especially 
care.

Stocks bounce around in a largely unpredictable 
fashion. Smart investors don't worry about it. Instead, 
they merely buy the good companies they want to own... 
when they are cheap, hoping that they will be less cheap 
in the future.

Barron's thinks stocks are cheap now. The current 
issue lists 25 "good value" picks. Wait - what's this - 
GE at 25 times its current earnings? Microsoft at a P/E 
of 28? Cisco at 112? Viacom at 412? Oracle, Fannie Mae, 
Verizon? 

And the dividend yields? 1.8% from GE...nothing 
from Microsoft, Cisco, or Oracle. Verizon at least gives 
you a dividend almost equal to the inflation rate. And 
Viacom? Heh, heh...

These may be great companies, but these are not 
great prices. Why not wait? GE has lost 25% of its value 
in the last 12 months. Viacom is down 29%. And Oracle 
has lost 58%. What's the hurry?

Eric, what's shakin'?

*****

Eric Fry, right in the thick of things:

- "Remember when Alan Greenspan was the most powerful 
man in Washington?," Moody's John Lonski wrote earlier 
this week. "For the first time in a long while, the 
President of the United States seems to matter more to 
both the U.S. and the world economy than does the 
chairman of the Federal Reserve."

- How right you are, John! Two days ago, Greenspan 
worked his magic on Wall Street. He cut interest rates 
and voila, stocks rallied. But yesterday, it was the man 
himself, George W., who kicked the stock market into 
high gear. All he had to do was show up on Wall Street 
and stocks bolted higher. And while it may be impolite 
to compare such things, George's rally was much bigger 
than Alan's.

- The Dow raced ahead 173 points to 9,124, climbing 
above 9000 for the first time since the terrorist 
attacks. The Nasdaq soared 88 points - nearly 6% - to 
1,581.

- President Bush and an entourage of several hundred 
security personnel paid a visit yesterday to the Federal 
building on the corner of Wall and Broad - immediately 
adjacent to my office at 30 Wall St.

- While he was inside yakking away with "business 
leaders" about our resilient economy, all the worker 
bees here inside the building were "locked-down." No one 
was allowed in or out of the building between 10 AM and 
1 PM. It was like being grounded by your parents, or as 
my childhood friend's mom used to call it, "room 
confinement."

- Outside our windows on the surrounding rooftops, a 
bevy of police sharpshooters stood watch - each one 
packing some kind of serious firepower. 

- Meanwhile, across the street inside the stock 
exchange, retailing stocks led the charge amid 
pronouncements from the talking heads on CNBC that "the 
consumer is back." How the consumer could be back so 
soon after going AWOL is a mystery to me. My friend, 
Michael Martin: "Maybe Americans can lose their jobs and 
still buy twice as much stuff. What do I know?"

- Investors must think they know something because 
retail stocks were flying off the shelves. The S&P 
Specialty Retail Index jumped 9%. A few individual names 
put in an even more sparkling performance. Surfware 
retailer Quiksilver rode the wave up 15% and Williams 
Sonoma, vendor of $100 wine openers and other household 
necessities, popped 22%. (The fact that Wine.com filed 
for bankruptcy earlier this week should in no way be 
taken as a leading indicator of wine-opener demand). The 
consumer may not actually be back, but the consumer of 
consumer goods stocks returned with a vengeance 
yesterday.

- If the consumer has returned at all, it is because he 
never completely left. Despite the fact that September's 
consumer confidence reading plunged a jarring 31.5% 
year-over-year, it did not fall evenly from coast-to-
coast. Confidence dropped precipitously in the regions 
close to "ground zero." But distance seemed to soften 
the negative impact of the attacks. In the Northwest, 
September consumer confidence actually increased by 3.6% 
from August.

- That said, a vigorous consumer spending rebound seems 
unlikely. "September's tally of those actually 
collecting state unemployment benefits could be up by 
49.5% yearly," John Lonski observes. "A year-to-year 
advance of that magnitude has not been seen since the 
recession years of 1980-1982."

- Furthermore, Lonski continues, "One of the U.S. 
economy's remaining pillars of strength may have 
succumbed to the terrorist strikes. Prior to September 
11th, home sales were apparently proceeding at a brisk 
pace. Unfortunately...a residential real estate trade 
association claimed that home sales have only partly 
recovered from their near standstill immediately 
following September 11th's terrorist attacks."

- To judge from recent stock market action, life in the 
U.S. is almost back to normal. But there is still that 
small matter of finding and disposing of Osama bin 
Laden, along with several "terrorists to be named 
later." And there is that other small matter of American 
businesses doing a lot more firing than hiring. 

- Certainly, life in the U.S. is less abnormal then it 
was three weeks ago, but "normal" seems a ways off.

*****

Back in Paris...

*** You've been extremely generous, Christoph Amberger 
tells me. 

*** As you know, we've been following the Taipan Group's 
"Open For Business" relief drive for victims of the WTC 
attacks. Including the $5,000 Christoph kicked in, 
readers of the DR have helped to raise over $36,000! 
100% of the proceeds will be handed over to the Red 
Cross to help out the disaster relief efforts in New 
York. (If you haven't donated yet, you can still do so 
at the following link: Taipan's Red Cross Relief Drive - 
Last Chance!)
http://www.taipanonline.com/red_cross.html 

*** If you plan to donate you should do so today. The 
funds will be awarded next Thursday, October 11, at 2 PM 
at our company headquarters. "Tell you what," writes 
Christoph. "Since it's your donation I'll be handing 
over...if you happen to be in the area, just come join 
us. The event will take place at 14 W. Monument Street 
in downtown Baltimore. (If you decide to come, just 
shoot us an email, so we can mentally prepare: Taipan 
Red Cross - hng@agora-inc.com)"

*** Meanwhile...What's the best investment to own, right 
now?

*** The price of gold rose 70 cents yesterday. Gold 
stocks fell 4%. "I'm still pushing gold as the ONLY 
asset to own right now," writes the Mogambo Guru, "The 
Fed has announced that they are fully aware that their 
easy-money posture will create inflation in the future! 

They admitted it right to your freaking face! Every 
textbook ever written on economics says that vastly 
increasing the money supply is a cause of inflation! 
Gold is the ultimate hedge against inflation! Every 
economist in the world agrees with that, as far as
I know. It is selling at little more than the #%@& cost 
of production RIGHT NOW! The WORST it can do is just sit 
there for no gain!

"Gold is, RIGHT NOW, the bargain of the century..." 
(More on gold, tomorrow...)

*** "Think Japan's Economy is Bad Now?," writes William 
Pesek in a Bloomberg article. "Just Wait."

*** The poor, dumb Japanese. All of the magic of the New 
Economy and other illusions of the late '90s were lost 
on the Japanese. Their economy limped along and their 
stock market fell, from a high of nearly 40,000 down to 
under 10,000. An entire decade, and what do investors 
have to show for it? A 75% loss!

*** And not for lack of trying. All the elixirs and 
patent medicines upon which Americans put so much hope 
were administered by the horse bucket...Rates cuts? 
Japan went all the way...down to zero. Fiscal stimulus? 
Oh la la...they ran enough juice through the body 
economic to straighten out a lunatic. 

*** But for what? The situation just gets worse. Why? 
You'd think the inquiring minds at the Federal Reserve 
or the Treasury Department might want to know. But no. 
So, it's up to us, dear reader, to figure it out. More 
below...

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STILL TURNING JAPANESE
by Bill Bonner


I think I'm turning Japanese
I think I'm turning Japanese
I really think so.
The Vapors


Learning from the mistakes of others is cheap tuition.

An e-mail message yesterday told the story of an amateur 
pyrotechnician. Sure that diesel fuel would not 
ignite...and wanting to show off to coworkers...he 
passed a cigarette lighter over a stream of fuel 
spilling out of a tank, without effect. Then, just to 
prove his point, he repeated the trick, perhaps coming 
in closer contact with the fuel.

He is presently recovering from burns over most of his 
body.

Today's letter is written in the spirit of the 
inquisitive onlooker...amazed that anyone could be so 
dumb...fascinated by the spectacle of it all...and happy 
to let someone else conduct the experiments.

The economic engineers in Washington, too, might be just 
a little bit curious. Opening the jets of both monetary 
and fiscal stimulus, they may at least wonder about what 
it takes to set them on fire...and spark a real 
recovery.

There has been only one major experiment with such 
vigorous rate cuts in a fully modern economy. It was 
conducted under imperfect conditions. Still it may be 
worth studying. 

In the 1980s, the Japanese economy was a marvel, the 
most successful, most dynamic, most self-confident 
economy the world had ever seen. American businessmen 
cringed and quaked before the threat of Japanese 
competitors and the Japanese economy grew at 4% per year 
throughout the decade. 

But epic levels of confidence, like epic P/Es, 
eventually give way. Japanese economic power soon proved 
an illusion. Stocks crashed in January of 1990...and the 
economy went into a slump.

Of course, by 1990 books by Milton Friedman and John 
Maynard Keynes could be found in any good Japanese 
library...and it was not long before Japanese 
policymakers were doing exactly as the two great 
economists counseled. Interest rates were cut...and 
cut...and cut. Rates fell below 1% five years ago. Since 
then, they've dropped all the way to zero. Did the 
Japanese economy bounce back? 

No, it didn't. GDP has grown only about 1% annually 
since 1991. And unemployment rose from 2.1% in 1991 to 
around 5% today. This number is probably low. In Japan 
it is disgraceful to be unemployed...so it is often 
unreported. Bankruptcies and suicides have surged.

You may recall a note in Daily Reckoning more than a 
year ago. So many Japanese businessmen were committing 
suicide by jumping in front of trains that the rail 
stations began to put large mirrors on the edge of the 
tracks so those planning suicide could "reflect" before 
doing themselves in.

Zero interest rates are not new to the world. They were 
a feature of the Depression in the U.S. too...when rates 
dropped as low as 0.02%. Then, as in modern Japan, they 
seemed to have no effect. 

U.S. economists may want to reflect on that. And on what 
effect fiscal policy can have on such an economy. 
Yesterday, a $78 billion "stimulus package" was 
announced in Washington. 

But, here too, there is empirical evidence on which to 
draw. Japan has already subjected itself to the 
stimulating effects of spending the taxpayers' money 
before the taxpayers earn it. In the 1980s, Japanese 
consumers went wild...getting, borrowing, and spending 
with the confidence of a teenager. In the following 
decade, their confidence declined as their savings and 
frugality increased. Government stepped in to fill the 
gap, spending money people did not have on projects they 
did not need.

"Think of it as the W.P.A. on steroids," suggests 
economist Paul Krugman, writing in Sunday's New York 
Times magazine. "Over the past decade Japan has used 
enormous public works projects as a way to create jobs 
and pump money into the economy. The statistics are 
awesome. In 1996, Japan's public works spending, as a 
share of G.D.P., was more than four times that of the 
U.S. Japan poured as much concrete as we did, though it 
has a little less than half our population and 4% of our 
land area. One Japanese worker in 10 was employed in the 
construction industry, far more than in other advanced 
countries."

In 1992, Japan ran a budget surplus. In that year, too, 
it had public debt of about 60% of GDP - in line with 
other modern economies. Today, after 10 years of 
vigorous boondoggling, the public debt in Japan is the 
highest in the developed world, at 130% of GDP. 

And still no economic turnaround. In fact, a dozen years 
after the slump began...things look worse than ever.

"We're in a very bad way at the moment and things are 
getting worse," says James Malcolm, senior economist at 
J.P. Morgan Securities (Asia) Ltd. Kazuhiko Ogata. 
"Japan is no longer in recession," adds a colleague, 
"it's a depression." 

For all their stimulating effects, neither fiscal nor 
monetary policy has aroused the Japanese economy. Why?

As promised, here is the answer.

"Alan Greenspan's aggressive rate cuts are proving to be 
a complete failure," writes Dr. Kurt Richebacher. "They 
ought to have reinvigorated the U.S. economy long 
ago...when was the last time the Federal Reserve cut 
interest rates 8 times in a row and the stock market 
still kept falling? 

"It is indeed different this time..." Dr. Richebacher 
continues. "The single most important, most unusual, and 
also most ominous feature in the U.S. economic 
development during the past few years has been the steep 
drop in profits, which started at the pinnacle of the 
boom. It's definitely the downturn's one key cause. 
Everything else - the protracted plunge of stock prices, 
the savage cuts in business capital spending and the 
shrinkage of consumer income growth - is but a 
consequence of the profit carnage."

Profit levels, generally, have made no progress since 
1997. Nasdaq companies, according to the Wall Street 
Journal, "haven't made a collective dime since the fall 
of 1985."

Without profits, as Keynes once pointed out, "the whole 
process [of capitalism] comes to a halt." No profits, no 
new investments. No new employees. Instead, companies 
cut costs - including laying off employees - in order to 
become profitable again. That is the real source of the 
slump - not consumers, not terrorists, not high interest 
rates. 

Does lowering interest rates help? Not when companies do 
not want to borrow. They borrow to build new plants and 
buy new equipment. But the problem they face is that 
they can't make any money on the capacity they've 
already got. Instead of investing in new capacity... 
they're liquidating the bad investments they made when 
they were more confident. 

Floyd Norris, in the N.Y. TIMES, elaborates:

"Broadly speaking, companies raise capital for two 
reasons, because they need the money to pay bills or 
because they want to make investments that appear 
attractive. Markets are not eager to provide cash to 
those who need it the most, and the volume of investment 
spending has fallen sharply from peak levels because 
some industries, notably telecommunications and 
technology, have excess production capacity. That glut 
is not likely to ease soon..."

If lower rates and massive public spending do little 
good, might they, in fact, do harm? Possibly. The glut 
of capacity will not ease as quickly if businesses are 
encouraged - by low interest rates - to continue adding 
capacity, even in a downturn. And public works - which 
produce no profits - may also have a negative effect, 
absorbing resources that might have been invested 
profitably elsewhere else.

Why else has the Japanese economic malaise lasted so 
long, if not for all their efforts to cure it? Even in 
this post-ironic age...Mr. Market still sniggers. 

More to come...as usual...

Bill Bonner

 
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: October 05, 2001

Published By Tulips and Bears LLC