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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
THURSDAY, 11 OCTOBER 2001 |
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Today:
Beyond the
Khyber Pass
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*** Yields fall...savers lose money...
*** But war was bullish yesterday...
*** Billions for the war effort...Tristan and Iseult...
keeping a low profile...and more!
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For every silver lining there is a cloud.
Yields on 3-month T-bills fell to 2.18% yesterday
- a level not seen since people were wearing "Ike &
Dick, Sure to Click" buttons in August of 1960.
But a Daily Reckoning reader spotted the dark
shape of a cumulonimbus approaching: "Dad...[and] his
generation are dealing with this personal issue today.
While he and many his age receive pensions, there are
many who depend on their interest income for a large
part of their living expenses. He finds it curious that
so little is being said about this 50% cut in people's
income when so many have been affected."
Alan Greenspan-san cuts rates in an effort to
inflate the currency. But lower rates reduce the
spending power of savers.
"Even the talk of reducing tax rates...pales in
comparison to the amount of interest income already
ripped out of the wallets of the people with real
money..." comments the Mogambo Guru, with typical
reserve. "This sacrificial cohort have witnessed their
income from that stash of cash slashed by more than
half. Net of taxes, they are actually losing real,
inflation-adjusted money, and it staggers the
imagination to believe that they have any intention of
spending the little dribs and drabs they are making,
since they are already going into the hole...the
consumer is tapped out at the same time he is worried
about his job and getting killed in a war with
terrorists. He obviously ain't a-gonna be buying
anything but groceries and two bucks worth of gas."
Maybe so. The most recent figures show credit card
balances have risen to $8,100, from $3,000 in 1990.
Delinquencies are at 29-year highs. One out of 10 FHA
loans is late. And one month after the terrorists'
attack, mall traffic is still off 9%.
But both the cannon and the herd on Wall Street
are still thundering, right Eric?
*****
Eric Fry, not far from the Hudson:
- It looks like war is bullish after all. Or maybe
anthrax is bullish. Whatever the reason, stocks soared
yesterday.
- Come to think of it, maybe the job losses announced
yesterday at Goldman Sachs and CS First Boston are also
bullish. Or maybe the 7,000 job cuts at Motorola and the
disclosure that it will lose money for the 4th straight
quarter were cause for celebration.
- Why stop there? AIG's announcement that its insurance
losses from the World Trade Center attack will total
$800 million - not the $500 million it first estimated -
must have been a positive for stocks as well.
- Or maybe it was the combination of ALL these bullish
events that spurred the Dow 188 points higher to 9,241,
and the Nasdaq to charge ahead 3.6% to 1,626.
- It's starting to look good for the patriots who
purchased stocks on September 17th. The S&P 500 index now
stands more than 1% above where it opened on that first
day of trading after the attacks. Of course, things are
looking even better for the slightly more cautious and
patient patriots who purchased stocks a few days later
at much lower levels.
- I doubt that Bill has been a big buyer of stocks
lately, but he does declare himself "bullish on
deflation"...and perhaps with good reason. Many things
are deflating these days: U.S. stocks (until recently),
commodities, Manhattan apartment rents, and even al-
Qaeda training camps.
- Providing additional deflationary evidence are falling
bond yields, shrinking payrolls, and slowing economic
activity. But just because what is, is, does not mean
that it will remain so.
- At present, our economy looks more like Japan's in the
1990s than like our own in the 1970s. But if bell-bottom
pants and platform shoes can make a comeback (they
have), couldn't inflation return as well? Finance, like
fashion, is cyclical.
- Bill is quite right that current trends in the U.S.
economy are deflationary. I am persuaded, too, by his
symmetrical, even poetic, prediction: "When Greenspan-
san began cutting rates, the Fed funds rate was 6.5% and
the savings rate was near zero. Before the present trend
is exhausted, the savings rate will be 6.5% and the Fed
funds rate will be near zero."
- Even though deflation holds sway at the moment, all
the Fed's horses and all the Fed's men are trying to
"reflate" our economy again - and they just might
succeed.
- As we draw near the land of swelling passbook accounts
and the invisible interests rates that Bill predicts, we
should expect to find a fresh crop of inflationary
phenomenon sprouting all around us.
- Already, President Bush's approval rating is inflating
rapidly. Beyond that, Greenspan and Bush are both trying
hard to spur our economy along and the plan goes
something like this: Greenspan prints the money, Bush
spends it.
- Unofficially, our government will be spending tens of
billions of dollars rebuilding New York and "smoking
terrorists out of their holes." Officially, the gang in
Washington is backing a $60 billion spending package
designed to cure the economy of whatever ails it.
- Meanwhile, Greenspan is pulling on the monetary oars
with both hands. In the last 12 months the federal funds
rate has plunged from 6.5% to 2.5% and the money supply
is soaring. M2 is climbing at a 10.5% annual rate - the
steepest such increase in 18 years.
- "If you look at the Federal Reserve's reaction time
since the bubble popped in March of last year," observes
James Stack, editor of Investech, "it is conspicuously
shorter than the central bank of Japan's was in the
early 1990s. In fact, Greenspan has brought down
interest rates in half the time..."
- Considerable monetary and fiscal stimulus of the sort
we are now witnessing threatens to smoke inflation out
of its hole. Toss a falling dollar and a rising oil
price into the mix, and voila, say "hello" to 10% CD
rates.
- Resurgent inflation would make financial geniuses out
of all the folks who are refinancing and fools out of
the lenders. But I guess that could never happen. When
did a banker ever make a bad loan?
- Deflation is a trade, but inflation is the trend.
*****
Back on the banks of the Seine...
*** We went to see "Tristan and Iseult" on Tuesday
night, part of Elizabeth's program of cultural
improvement. "Tristan and Iseult" is one of the oldest
love stories in the western world. But this production
was set to French pop music and included a troupe of
acrobats from somewhere out on the Eastern steppes. The
whole thing was rather amusing in an unintentional
way...and the inevitable death scene at the end, in
which both hero and heroine finally lay dead...came none
too soon.
*** The spectacle was staged at the Espace Pierre
Cardin, located across the road from the American
embassy. Americans were warned - in the Tuesday's issue
of the International Herald Tribune - to maintain a "low
profile..." Rather than take down the Stars and Stripes
and hoist the banner of, say, Tonga, the U.S. embassy
beefed up security. A double row of barricades
surrounded the building...and three busloads of police
were on hand...mostly napping or dining in their
buses...though one seemed to be watching a security
camera.
*** Of course, anyone who wanted to could have easily
driven a truck full of explosives through the light
metal barricades...but, at least on Tuesday night,
people seemed to have better things to do.
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Conveniently, the WTC attacks are being blamed for a
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Suddenly, it seems, corporate profits are dropping;
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* * * * * * * * * * * * * * * * * * * * * * * * * * *
BEYOND THE KHYBER PASS
by Bill Bonner
After yesterday's rally, the Dow has made up about half
of what it had lost since January, 2000.
The same people who never saw this bear market coming
now see it going. The lows were hit, they believe, in
the aftermath of the September 11 attacks. And now that
the dogs of war have slipped their leashes, there seems
to be nothing standing in the way of a full recovery and
even a new bull market. Tax rebates, rate cuts, fiscal
stimulus on a grand scale - all the blood that can be
squeezed out of taxpaying turnips - can now be used in
the fight against terrorism and bear markets.
And what enemy could stand against such power?
The U.S. is, we don't need to remind readers, the
world's only superpower. It can bomb poor little
countries such as Afghanistan 24/7...in no corner of
their godforsaken country are its citizens safe from
U.S. military might. From carriers at sea and bases
scattered around the world, the U.S. can focus its high-
tech, ultra-sophisticated military hardware...worth
billions of dollars...on enemy positions almost
anywhere...and bring destruction down on the diapered
heads of goatherds at any time of night or day.
Can there be any doubt about which side will win?
Americans will not be the first Westerners to make war
against the Afghanis. Alexander the Great, fresh from
his victory against the Persians at Gaugamela, in 331
B.C., turned towards Afghanistan. He brought with him
the military superpower of 4th century B.C. - the
Macedonian army. Within a few months he had conquered
most of the Afghan tribes, but never could completely
subdue them. There were constant revolts that plagued
his garrisons. Gradually, the Greeks withdrew. The last
Greek outpost - at Ay Khanom - was overrun by a nomadic
raid in 130 BC.
More recently, the world's runner-up superpower - the
Soviet Union - tried to control the country. Afghan
terrorists (then known as "freedom fighters" in the
West) threatened the communists' allies in Kabul.
The Soviets dominated the skies of Afghanistan. But,
once on the ground, they found themselves fighting a war
on Afghan terms. The Soviets had a number of advantages.
Their lines of supply were notably shorter than those of
the U.S., half a world away...and they were probably
willing to be more ruthless than U.S. forces.
Nevertheless, they took losses, and finally decided to
exit...just as America had exited Vietnam a few years
earlier...disgracefully.
Will Americans do any better? We don't know, dear
reader, but if success in the present war were a
tradable commodity, we would be short.
And what of the economic front? Do not economies always
leap up at the sound of cannons? The U.S. has of course
the world's only super-economy too. In the last decade
of the 20th century, it raced ahead of its challenger,
Japan, with a spectacular burst of innovation and what
looked like wealth-creation. It now has the most
flexible, dynamic economy in the world, it is widely
believed...and a Fed chairman who is lauded in popular
books and lionized in the popular imagination.
The Fed still has 250 basis points it can cut from the
fed funds rate - before reaching zero - and the
government has hundreds of billions it can spend on
fiscal stimulus projects. Even the farmers are expecting
a big increase in their ill-gotten gains, thanks to the
new, patriotic spirit of spending other people's money
on everything and anything that might give the economy a
lift.
Of course, the world's number 2 economic superpower
tried these things too.
I will not revisit the Japanese story, dear reader. You
have suffered through it often enough.
But, perhaps the knowledge gives you an edge. To most
Americans, Japan's economic troubles are as remote and
mysterious as what lies beyond the Khyber Pass. Could
there be useful lessons hidden in that forlorn
landscape? Could there be traps...ambushes...useful
tales designed for our edification and enlightenment?
But it is not information that gives Daily Reckoning
readers an advantage, if they have one. It is intuition.
Most Americans are wrong about how the world works. It
is not a digital world...it is an analog one. What
happened to Alexander is analogous, in some ways, to
what happens to us. What the Japanese economy suffered
has lessons for us too. Even the story of Tristan and
Iseult might help us better understand what goes on in
the hearts of our sons and daughters...and maybe even in
our own.
Technology may build up like digits...little by
little...accumulating over time. But man's use of
technology - for profits...for war...or improvements in
his standard of living - follows the deep cycles of the
human heart...rising on tides of confidence, then
falling as the tide ebbs towards fear and uncertainty.
It is a world where the left side of the brain invents
excuses and rationales for what the right side of the
brain wants to believe. "The mind is merely the heart's
dupe," said La Rochfoucauld. It is a world ruled largely
by the heart...full of sin and sorrow, sturm und drang,
madness and the kindness of strangers.
It is not a "buy and hold" world. It is a world
dominated by fear and greed, progress and backsliding,
epic levels of self-assurance followed by almost
unimaginable despair. These cycles can last much longer
and carry us much farther than anyone imagines. It is as
if each generation had to discover for itself how bad,
and how good, things can get.
America has just left a period of nearly 20 years of
economic expansion...culminating in the highest stock
prices ever seen on Wall Street, as well as such an
apogee of confidence that people cut their savings rates
to near-zero while paying more than 200 times earnings
for stocks. Nature in her magisterial simplicity
suggests the next phase: a huge wave is followed by a
huge trough. Or, climbing a high mountain of the Hindu
Kush, a hiker discovers a steep decline on the other
side. There is a neat symmetry to all things natural -
and markets are natural. No one designs them. No one
controls them. Nor can they ever be fully understood,
or predicted.
All we have is an intuition...that high peaks are
bordered by deep valleys...that things normally regress
to the mean and that investors generally get what they
deserve, not what they expect.
Economists confirm, by observation, what we feel must be
coming:
"The length and severity of recessions," wrote Professor
Gottfried Haberler in 1936, "depend partly on the
magnitude of the 'real' maladjustments which developed
during the preceding boom and partly on aggravating
monetary and credit factors..."
What went wrong for the Japanese? Perhaps nothing. A
long period of above-normal growth needed to be followed
by a long period of below-normal growth...just to bring
the long-term trend back to the mean.
What went wrong for the Soviets? Perhaps nothing. Since
the days of Alexander, Afghanistan has been a graveyard
for foreign invaders; the Soviets' airpower could not
reverse the long-term trend.
Will America's superior firepower, technology, money,
brains, luck, Greenspan, or determination break the
long-term trends?
Again, we don't know, dear reader, but if our success in
fighting recession and bear markets were a tradable
commodity, we'd be short.
Your correspondent...this side of the Khyber Pass...and
keeping a low profile...
Bill Bonner
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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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