Contributed by Bill
Publisher of: The
Fleet Street Letter
MONDAY, 15 OCTOBER 2001
The Wild, Dark
*** Debt, defaults, bankruptcies...
*** Profits and sales collapsing - well, looks like
things are back to normal...
*** "Your president seems to be doing a good job..."
Terrorists...the division of labor...and more...
|Debt could be paid down. Or it could be inflated |
Deflation, though, makes it tough to pay down.
Often, debtors default and creditors are forced to write
off the debts.
Providian, the nation's 5th largest credit card
issuer, announced last week that more and more people
are defaulting. The company said its earnings were off
as a result.
Polaroid couldn't pay its debts either. The
company went Chapter 11 on Friday. "U.S. corporations
are quickly burning through cash," says a USA Today
article, pushing some towards bankruptcy and making it
more expensive for others to borrow money.
"Nervous lenders have already cut back sharply on
lending to upstart companies and those with heavy debt
loads. But cash worries are spreading to well-known
companies as earnings fall so fast there is less left to
"Companies are going to sink in their own debt,"
says Mitch Zacks. Consumers, too.
Eric...what's happening in N.Y.C?
- "Overvaluation? What overvaluation?" Mr. Market seems
to be asking. "Terrorism? What terrorism?" The Dow
gained 2.5% percent last week - bringing its gains from
the post-attack lows on September 21st to an impressive
- Psychologists might call this denial. Abby Joseph
Cohen, on the other hand, might call it merely "a new
- Is the bear market over already? Might there not be a
little unfinished business? "Following Thursday's mini-
rally, the P/E of the S&P 500 reached its highest level
EVER - at 35.99," Addison reported in the DR Weekend
- For perspective, the average long-term P/E ratio of
the S&P 500 is about 15. And a few notable bear markets
in the past did not call it quits and yield to a new
bull market until the S&P 500 Index was selling for less
than 10 times earnings.
- Bear markets are supposed to correct the excesses of
the prior boom - restore value to the marketplace and
therefore, create opportunity for investors.
- But falling prices do not necessarily create value.
Like a week-old salmon filet, some things lose value so
quickly and completely that not even lower prices can
make them a bargain.
- U.S. stocks, while not exactly week-old fish, are
losing value even faster than they are falling in price.
In other words, earnings are collapsing more rapidly
than share prices. The result is that PE ratios remain
stubbornly close to all-time highs.
- Happily, the S&P 500, unlike week-old fish, will offer
value once again. Earnings will resume growing and
growth prospects will improve. But we're not there yet.
Genuine bear markets end in gloom and despair. "In this
bear market, however," Albert D. Friedburg, of
Friedburg's Commodity and Currency Comments points out,
"strategists of the major investment houses have
progressively upped the percentage allocated to stocks,
now running, on the average, at well over 70%."
- Individuals also are keeping the faith. "So ingrained
has the equity cult become that mutual funds have only
recently begun to experience net outflows on a sustained
basis," Friedburg says. "It is only a matter of time
before we witness a massive exodus. It is not the
severity of the decline that will cause the outflows.
Rather, it is the persistence, endurance and obvious
hopelessness of the bear market that will flush out even
the most committed."
- "The stock market recently made a comeback, leading
some market technicians to call a bottom," says Fred
Hickey, editor of the High Tech Strategist. "[Because]
stock market valuations are still too high by a factor
of approximately two times. I am on public record with
predictions of the Dow Jones Industrial Average below
5,000 and the Nasdaq Composite below 1,000 before this
bear market ends. I see no reason to change these
- To back up his predictions, Hickey rattles off a few
eye-opening statistics. The total valuation of U.S.
stocks (approximately $11 trillion currently) is nearly
120% of the value of this nation's GDP, with the
historical average being just 54%. Prior to the late-
1990s' mania prices, the all-time high in this indicator
(81%) occurred in August 1929, just prior to the
crash...every historical yardstick used over the decades
to value stocks provides the same answer.
Price/earnings, price/sales and price/book ratios all
show that stocks are at least two times overvalued."
- Despite the market's extreme overvaluation, Hickey
acknowledges, "The U.S. government is desperately trying
to reinvigorate the economy with the steepest interest
rate cuts in history, tens of billions of dollars of tax
rebates and tax cuts, and promises of huge fiscal
spending on infrastructure and other projects...with all
this cash sloshing around, some of it can find its way
into the stock market."
- But just the same, he would be a seller of any
rallies. "As the stock market comes down, more buying
opportunities will become available," he says. We're
guessing Hickey doesn't expect this buying opportunity
to present itself anytime soon.
- Without genuine value creation, it is difficult for
the bulls to plant their flag and to claim the stock
market as their own.
Back in Paris...
*** The Dow has recovered what it lost following the
Sept. 11 attacks. "Conditions are almost back to
normal," observed a commentator on CNBC.
*** Yes, normal for this stage of a bear market...
*** Profits have fallen faster than stock prices -
leading to the highest p/e levels ever, currently nearly
36 for the S&P 500.
*** Eddie Bauer says sales fell 21% last month. Overall
figures show a 10% drop-off in the retail sector.
All over the world, economies deflate. "French inflation
rate slips below 2%," says the Financial Times. "Worse
to come for UK economy," says the BBC.
*** "I was very impressed with your president," said a
Frenchman at a dinner party Friday night. "I stayed up
until 3 am to watch his speech. That just goes to show
how nervous I was. I mean...he comes across as a
cowboy...I didn't know what he might do...
*** "But he seemed very reasonable, calm...yet
*** "The problem is that he doesn't know what he's
gotten himself into. No one does..."
*** Europeans are more accustomed to terrorism than
Americans. For years, Paris lived with bomb blasts
delivered by North African terrorists. The British have
lived with violence from IRA bombers. And Spain has
suffered the attacks of Basque separatists. Once
unleashed, the dogs of guerilla war can be very hard to
get back in their kennels.
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THE WILD, DARK NIGHT
by Bill Bonner
"The real trouble with this world of ours is not that it
is an unreasonable world, nor even that it is reasonable
one. The commonest kind of trouble is that it is nearly
reasonable, but not quite. Life is not an illogicality;
yet it is a trap for logicians. It looks just a little
more mathematical and regular than it is; its exactitude
is obvious, but its inexactitude is hidden; its wildness
lies in wait."
The days grow shorter. The world, you will recall, is
not a straight up and down thing. Instead, it is tilted
on its axis, causing a seasonal oscillation as the earth
makes it way around the sun. At this latitude, it is
already darkening when Maria comes to the office at 7
p.m. Only a few weeks ago, it was still broad daylight.
All of life lists a little...as if it had too much to
drink or one leg shorter than the other. Nothing is pure
and simple. Nothing is quite as straight as we might
like it to be. Everything turns out to be a little more
complicated and cock-eyed than we might have first
thought. And at times...things seem to go mad.
"I read that this economic slump could last as long as
10 years," said Mario, an executive with the Danone
company, at dinner on Saturday night. "It seems like
madness...but I guess anything is possible."
Few people want to stack firewood in the summertime. And
at the end of an 18-year bull market, most people have
come to believe that stock prices "always go up in the
long run" and that the world economy will shamble along
as though it were always headed for another 20-year
period of growth.
But with each spurt of growth and bullishness a curious
thing happens. New and better ways are found to do
things. People specialize...the division of labor is
extended. The days of progress grow longer, stretched
on one end by new technology...with its electric lights,
alarm clocks, and particle accelerators...and on the
other end by people who tug themselves up into new
economic niches...elaborating the division of labor to
produce more and better things for less and less money.
Progress does not come without cost. As the economy
expands, each part of it becomes more dependent on the
others. The computer software salesman cannot live
without the efforts of the bakers, the automakers, the
miners, the central bankers...and so on. He counts on
thousands of others to keep his lights on and his table
Thus does the whole system become at once more
sophisticated...and more vulnerable. Before the
development of commercial aircraft, a man armed with a
knife was little danger to society. All men had knives.
One was no more dangerous than any other, and much less
of a threat than, say, the average city alderman or
patent medicine monger.
Nor even was a man with a gun much of a menace. Yes, he
might pick off a Lincoln or a Ferdinand. But what would
it matter? There are always plenty more to take their
places. In last week's news, by contrast, was the story
of a drunk with a rifle who shot a hole in a pipeline in
Alaska and crippled a fifth of the nation's oil
Imagine what a man with a pair of wire cutters might do
to the power lines. Or what a man with a kamikaze
complex and a bad, communicable disease might do. He
would not have to smuggle a pocket knife onto an
airplane. He would just have to board himself!
"The grim paradox is that terrorism, a particularly
primitive act," wrote George Will recently, "has a
symbiotic relationship with the sophistication of its
targets. And opportunities for macro-terrorism directed
against urban populations and their water, food-handling
and information systems multiply as societies become
The terrorists' attack - primitive and economical as it
was - will cost the world economy billions of dollars.
An IMF economist estimated that as many as 40,000
children under the age of 5 will die...from starvation
or lack of medicines...as a consequence of the economic
But this could be just the beginning of a long, wild
night. Sophisticated, prosperous economies require high
levels of mutual trust. You can work in a skyscraper
only so long as you can be pretty sure someone is not
going to blow it up. And you can walk around, relying on
credit cards for your spending power, only so long as
you are fairly sure that no one will sabotage the ATMs
and electronic clearing systems. And every time you get
on an airplane, go into a restaurant, drive down the
road, or sit down to dinner, you trust in the good faith
and common courtesy of people all over the world - the
engineers who designed the elevators and jet engines,
the farmers who grew the wheat and the baker who cooked
the buns, the guy at the next desk or next table...the
vintner who made the wine...and so on. Any one of them
could do you damage...( and yet, almost miraculously,
they almost never do.)
In a different season - that is, in a period at the
bottom of the economic cycle - a war might trigger a
boom. But at the top, it is likely to have the opposite
effect. People become less trusting. They are a bit less
eager to buy...less eager to trade...less eager to open
factories in Pakistan or take a vacation in Israel.
And what baby boomer, whose portfolio is now down about
40% from the peak, is not on the edge of panic? The
"savings" he counted on for retirement suddenly looks
vulnerable. He still believes that the market will
bounce back before he needs the money. But what if it
doesn't? Will he not soon have a wild look on his
face...as he desperately tries to replace the phoney
savings of a bull market with the real money? Each 1%
increase in the savings rate takes $75 billion out of
the economy. Returning to the savings rate of the early
'80s would cost the economy more than half a trillion
dollars a year. Other things remaining the same, this
would mean a GDP loss of about 5% - the biggest since
the Great Depression.
In a more straight up and down world, other things might
remain the same. But in our world, it's a rare act of
Congress, act of war, or act of economy that doesn't
produce some misbegotten offspring. Who knows what will
happen when the din and bustle of progress quiets, and -
in the long, wild night ahead - war, fear, and frugality
finally come together?
Your faithful correspondent,
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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.