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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
TUESDAY, 9 OCTOBER 2001 |
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Today:
Star Struck
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*** The rockets' red glare fails to light up Wall
Street...
*** Investors "hanging in there"...but squirming a
little...
*** Gunfire in Alaska...brisk business in
N.Y....mortgages flying off the shelves...buy bonds/sell
GE...and more...
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The cannons boomed Sunday...and again last night.
And the stock market stood its ground...more or less. No
panic. No euphoria either.
Investors are still "hanging in there" - even as
the economy goes sour and the Wilshire 5000, the
broadest measure of the stock market, has fallen 40%
from its high.
"We are depressed about the news and about what
happened," says Paul Watkins, member of an investment
club quoted in the Philadelphia Enquirer, "but we are
confident the market will rise again, like it always
does. Once you get yourself to accept that this is real,
you have to look at what will happen in the future."
I don't know what that last sentence means. But I
feel a little sorry for these poor naifs. Mr. Watkins
said that his portfolio has grown 11%-12% a year since
he joined the club in '84. He can't walk away from that
kind of growth, he says. "And however it goes, whether
there's full-blown war or recession," he went on as if
he had a clue, "(the economy) is going to come back,
because people are going to need the same goods and
services."
Yes, they will need goods and services...but not
necessarily stocks at 30 times earnings. Mr. Watkin's
group's latest purchase included shares of GE - which
fell another 2% yesterday.
Eric, what else happened on Wall Street?
*****
Fry in New York:
- Considering all the obstacles that the stock market
faces these days, it looks like it's performing pretty
darn well. Looks can be deceiving, of course. A dead cat
only bounces so high, and then it falls right back down.
- The Dow fell 52 points yesterday to 9,068. The Nasdaq
gained a sliver to 1,606, but these stocks seem to be
lacking their recent �lan - they're "trading heavy."
- Maybe it's the gunfire in Alaska - not in Afghanistan
- that's weighing on the market. "Get this, a 37-year
old drunk with a high-powered rifle caused the second-
largest oil spill ever in the Alaskan pipeline on
Friday," observes the DR Blue's Dan Denning. "The
single-gunshot wound to the pipeline effectively shut
down one-fifth of all domestic U.S. oil production."
- The pipeline is reportedly built to withstand
gunshots. "It has an outer coating of galvanized metal,
four inches of insulation, and a half-inch of steel,"
says Denning. "But that wasn't enough to stop a bullet
from a .38-caliber rifle. Let me ask you this, if a
drunk with a rifle can halt 1/5th of U.S. oil production
with a single bullet, what do you think a couple of
sober terrorists could do with a rocket launcher?" Hard
to say, but it probably wouldn't be bullish...except for
defense stocks.
- Continuing recent trends, defense stocks like General
Dynamics, Lockheed Martin, and Raytheon - maker of the
Tomahawk cruise missile - all jumped to new 52-week
highs yesterday. Meanwhile, hotel and lodging stocks
slipped ever lower into the slough of despair.
- "I'm sure we are in a recession, probably a relatively
deep and extended one," Warren Buffett proclaimed last
week, "but [recessions] are part of business life and we
are prepared." That's all well and good for Berkshire
Hathaway and Warren Buffett, but what about the rest of
us? If I had a few billions of dollars stashed away for
a rainy day, I'd feel "prepared" too.
- But as The Daily Reckoning highlighted yesterday,
"savings are meager, debt is abundant." Most of us are a
little light in the rainy day funds department.
- "The first half of 'stagflation' is upon us - a
stagnating economy," writes Outstanding Investment's
John Myers. "What remains to be seen is whether
inflation comes to bear. Certainly some of the
precursors are present: the Fed playing fast and easy
with the money supply and the threat of rising oil
prices (which cannot be dismissed given the geography of
the current conflict)...rising oil, rising energy...
inflation."
- "Stagflation," in Myers' opinion, "would deliver mega-
money making opportunities to resource investors. Raw
resources are every bit as underpriced today as they
were in the 1970s. If just a fraction of the money from
the bond market were shifted to hard assets, prices
would skyrocket!" (see: The Wolf At The Back
Door)
- Mortgage refinancings to the rescue?! Now that 30-year
mortgage rates have fallen to within 1/4 point of a
three-decade low, homeowners are flooding into mortgage
banks to refinance their home loans. The Mortgage
Bankers Association of America reports that in the week
ending Sept. 28th, refinancing activity soared to the
second largest volume week in the twelve years that the
Association has tracked it.
- "The latest burst of activity is effectively a boom on
top of a bloom," USA Today reports. "On the strength of
the first nine months, the mortgage industry has already
anticipated a record year: $1.65 trillion in
originations."
- It is tempting to shake our heads at all these heavily
indebted consumers who are sucking the equity out of
their houses. But maybe they are little smarter than we
are giving them "credit" for. If you borrow money
against your home at 7% and use part of the proceeds to
pay off credit card debt costing 19%, the pretax return
is 12%, guaranteed. Where else can you get a certain
12%?
- Oh...how nice. America's new saving ethic. Time was,
millions of Americans would borrow funds from their
credit cards at 19% to invest in a stock market that
seemed all but certain to produce 35% returns each and
every year. Those were the days.
- How about you, Bill? You going to refinance the
chateau to pay off your Visa cards?
*****
Bonner back in Paris:
*** Hmmmm...thanks for the suggestion. Maybe I should
refinance it twice...just to be safe. I can borrow at
the lowest rates in 40 years. Shouldn't I load up on
debt while I have the chance?
*** But wouldn't it be just like that crafty Mr.
Bear...and that unforgiving Mademoiselle Nature...to
drop interest rates even further, after I had
refinanced...and maybe send the economy into an even
deeper decline?
*** S'pose our own Alan Greenspan-san follows the trends
set by his Japanese counterparts...and cuts rates to
zero? And s'pose consumer prices fall just as they have
in Japan - making debt even more of a burden? And s'pose
business goes bad so I can't afford to keep up with the
payments?
*** No, Eric, this looks like a good time to own debt
rather than service it. With a little luck, the U.S.
economy will follow the Japanese model...interest rates
will go to zero. Debtors will go bankrupt and bonds will
soar. Buy bonds. Sell GE.
*** Besides, a man doesn't want the banks to foreclose
on his chateau in the middle of a depression...
*** Meanwhile, a housekeeping detail - Addison tells me
cyber punks from Russia(!) seem to be causing mischief
with our e-mail. Daily Reckoning transmissions have been
disrupted. We thought about sending in missiles, but
decided to negotiate...stay tuned.
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STAR STRUCK
by Bill Bonner
Mr. Greenspan must look at himself in the mirror each
day. Does the world's most powerful central banker look
tired, he must ask himself? Saving the earth can be hard
work, he must observe...with a sparkle in his eye...
But perhaps the Fed chief notices a change. Does he see
himself "turning Japanese" a little more each day...as
rate cut after rate cut fails to boost the economy...and
consumers, investors, and businessmen turn cautious?
In December of 1996, stocks in America reached an
unheard of level...nearly 6500 on the Dow. It was a case
of "irrational exuberance", said Mr. Greenspan on
December 5th. The next day, stocks recoiled.
Stock market valuations had reached such a high level,
that they had out ran imaginations. But soon after,
imaginations caught up...inventing a whole cluster of
explanations and justifications. A galaxy of "New Era"
rationales launched into space. Within days, the
astronomers of Wall Street began to discover the distant
stars..."the productivity miracle"..."the Peace
Dividend"..."the information technology revolution"...
"the new economy"..."long-term buy & hold"...and so on.
And within days, the stock market rocketed skyward...and
didn't stop until January of 2000, when the Dow hit
11,722 - more than 5,000 points higher
Was Mr. Greenspan alarmed by this even-more-irrational
exuberance? Quite the contrary. Thanks to the twinkle of
so many New Era stars, the Fed chief was able to see
stocks in a new light. In the 4 years from 1996 to the
market's peak in January 2000, he had turned his face to
the heavens and become a believer.
Since January 2000, the Dow has fallen as low as 8,235.
The Wilshire 5000, as noted above, has lost 40% of its
value - a sum estimated at $5 trillion. And the Nasdaq
has suffered even worse damage.
But the "New Era" stars still shine in the autumn sky -
brightly enough to lead perhaps an entire nation to
destruction.
"According to the latest survey of fund managers by
Merrill Lynch," writes Marc Faber in his latest letter,
"84% of managers expected higher equity prices within
the next year, compared to just 10% who saw lower
prices." Abby Cohen, the permanent bull, has become even
more bullish. And Wall Street strategists now advise
holding 70% of your assets in common stock.
Star struck investors, such as Mr. Watkins, mentioned
above, have stood their ground...even in the midst of
war, recession, and a bear market. Stocks have gone
down, but there has not been a single day of panic. Mr.
Watkins, and millions of others, still believe that a
steady hand on the tiller and a close eye on the star of
"long-term buy & hold" investing - even through a bear
market - will lead to investment success. (He seems
unaware that a good navigator needs to recognize the
point of departure as well as the destination. Buying
stocks at the top is almost guaranteed to be a losing
proposition...unless you are as a long-lived as
Methuselah. Adjusted for inflation, investors who bought
at the '29 peak waited more than a quarter of a century
to get back to where they began.)
And yet, there, half a world away, the world's second
largest economy has enacted "a morality play designed
for our edification." Does anyone bother to watch?
Apparently not. While the U.S. was getting better and
better - far better than anyone expected - Japan was
going in the opposite direction...with an economy that
has proved more intractable than anyone could imagine.
"In one way...," explains Paul Krugman in his NY Times
article, "our situation is actually worse than Japan's.
For the past decade, Japan has been an island of
depression in a sea of prosperity, its economy
stagnating even as other major economies, ours in
particular, boomed. That was, you might say, quite an
achievement. Our current problems, on the other hand,
are shared by much of the world - not the least by Japan
itself."
As long as Americans were willing to buy more than they
could afford, the Japanese economy managed to keep
growing...though barely. Now, things look worse than
ever for the Japanese. The economy shrank at an annual
rate of more than 3% in the 2nd quarter of this year.
Prices are falling. Banks and huge corporations - kept
afloat for years by easy money and the "convoy system" -
are in danger of sinking. Unemployment is already 5%...
and rising. "If Japan slips into the abyss," writes Paul
Krugman in his NY Times piece, "that will have a direct
adverse effect on our economy dwarfing anything the
terrorists did."
But, now, the entire world seems to be slipping into a
deflationary abyss. Who will buy Japanese products? Who
will buy anyone's products?
And who will suffer most? Low-cost producers such as
China and India...or high-cost producers such as the
U.S. and Japan?
Globalization is a great thing during a business
expansion. It extends the division of labor...allowing
for more specialization and lower cost goods and
services. A company in Cleveland, for example, opens a
manufacturing plant in Bangladesh to supplement its U.S.
production facilities. Everyone benefits - consumers get
lower prices, Bangladesh gets capital investment and
employment, and the U.S. company gets higher profits.
But when profits are squeezed, the Cleveland company may
have to close one of its plants. Which one will it shut
down...the one in Bangladesh that exploits workers at $2
an hour? Or the one in Cleveland that is exploited by
workers at $20 an hour?
Another difference between Japan and the U.S. is that
Japanese householders never abandoned their saving
habits. Even at the very height of the Japanese mania,
when the Nikkei Dow was near 40,000 and confidence had
reached epic levels, savings rates never fell below 12%.
In America, savings rates at the peak of confidence
dropped below zero...and presently hover around the 1%
level.
So at least the Japanese could face their downturn with
more grace and equanimity than Americans. They had
savings upon which to fall.
Still, who knows what will happen? Nature, with her
sense of poetic symmetry, could insist that we Americans
follow the Japanese script. Mr. Market, more mischievous
and destructive, may even add a more desperate scene or
two.
And Mr. Greenspan, if he still has his wits about him,
is sure to observe a moment of confused silence as the
Dow reaches his point of "irrational exuberance" - and
regret that he did not retire when his popularity was at
its peak. He is an old saxophone man, after all. He must
know that you should stop while the crowd still wants
more.
Perhaps he will pick up his old speech from years
ago...shake it to get the dust off...and recycle it.
"The market is reacting," he will say, "to irrational
desperation."
Then, the skies will cloud over...and the market will
fall another 50%...
Your correspondent...watching the stars...
Bill Bonner
P.S. When the Dow crosses the 6,500 mark on the way
down...peoples' imaginations will go back to work. Soon,
they will discover a new cluster of stars...reasons why
stocks are doomed to fall even further...and why the
world economy will never climb out of the abyss. It will
be a "new economy," they will say...in which the dollar
is doomed, economies are ruined...and stocks will never
recover.
Then, a new boom can begin...
P.P.S. "Let me put this bluntly. If you look at it from
the inside - or if you look at the official data - you
will conclude that the brokerage community is not
designed to help you profit," writes 11-year veteran VP
of T. Rowe Price, James Cooke. "It's designed to
encourage you to buy. Even as the bear market ravages
through the average investor's portfolio, when you need
to know which stocks are headed for trouble - Wall
Street is mute."
(See: The Silent
Conspiracy)
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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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