|
Co-brand
Partnerships
| |
|
|
|
|
| |
|
Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
|
PARIS, FRANCE
WEDNESDAY, 17 OCTOBER 2001 |
|
|
Today:
The Way We Were
|
*** Funds down...earnings down...but investors still
looking "across the valley"...
*** Treasury bonds up...junk bonds down...
*** Is it time to buy gold? Yes, we say, realizing the
price might go down as well as up...Factories not
putting out...commodities down...and more...
|
For the last quarter, the average diversified
mutual fund fell 16.22 percent, according to Morningstar
Inc. It was the biggest three-month decline since the
fall of 1987. The two biggest funds, Vanguard & Fidelity
Magellan, are down more than 20%. (Conversely, a fund
managed by the DR Blue Team's David Tice - The Prudent
Bear Fund - is up 41.9%...)
Earnings are falling at least as fast. S&P 500
earnings are expected to decline 22.4% in the 3rd
quarter, the worst in a decade. And the earnings over
the last 12 months are the worst in history.
But Peter Lynch, who used to run the Magellan
Fund, is in advertising now...urging investors to stick
with stocks for the "long haul."
"Wall Street pundits," observes the Dallas Morning
News, "believe investors are already beginning to look
across the current valley in earnings to better times in
the first quarter of 2002."
How do they know times will be better in 2002?
Factory output fell 1% last month...to a level
where only 75% of capacity is being used. Commodity
prices are falling. Debtors are going broke. And
consumers don't want to buy.
Harry Schultz puts it this way: "The psychological
effect of the 'Nasdaq Shock' was to make a lot of people
say to themselves: Maybe I don't need the new model car
I want to buy. Maybe I should delay buying that boat, or
bigger/better located house. Maybe take a less expensive
vacation, one closer to home." (See: Economic Whiplash)
Why would earnings rise? A French couple we met
over the weekend described their trip to Utah:
"We took a hiking and river rafting trip. It was superb,
the best trip we've ever taken. We went for days without
crossing a road or seeing another person...along with a
group of Americans. The food was terrible but they were
all so nice...But it is strange out there. We would see
a mountain in the distance and we'd say to ourselves...I
guess we'll be there this evening. But three days later,
it would still be just as far away...Things can be a lot
farther away than you think."
Eric, what do you think - how far away is the
other side of the valley?
*****
Monsieur Eric Fry de Manhattan:
- If folks keep behaving as if stocks are actually in a
bull market...who knows...we might just get a bull
market. Somehow, stocks keep plugging away to the
upside, no matter how dire the news headlines may be.
- The Dow rose 36 points yesterday to 9,384, while the
Nasdaq Index tacked on 1.5%, to 1,722.
- Investors, like teenagers on a first date, find Mr.
Market so attractive that he can do no wrong. Rising
earnings would be a nice attribute, but declining
earnings are "kool" too. Where will this infatuation
lead? I'm afraid to look.
- "The bond market has a message for stock investors:
Curb your enthusiasm," writes the Wall Street Journal's
Gregory Zuckerman. Although stocks have recouped their
losses since Sept. 11, Zuckerman points out that "Prices
of corporate bonds, including junk bonds, are still down
sharply from their pre-attack levels."
- Typically, whenever recessions approach, corporate
bond prices fall more than Treasurys. That's because
investors start to care more about the return OF their
money than the return ON their money. Currently,
Zuckerman notes, "The spread, or difference in yield
between junk bonds and Treasurys, is nine percentage
points, its widest level since 1990."
- So who's right? The upbeat stock investors or the
pessimistic bond investors?
- Fred Hickey, editor of the High Tech Strategist, would
give the nod to the bond crowd. "Ultimately, the economy
won't recover until the excesses of the '90s are worked
off," Hickey predicts. "Consumers have to reduce their
consumption in order to whittle down their huge debt
balances. Savings rates must rise. The nation's mammoth
trade deficit, which absorbs most of the world's free
cash flow, can't be sustained much longer and must be
reduced. The manufacturing overcapacities resulting from
years of capital spending binging have to be absorbed.
Stock market valuations have to come down to more
reasonable levels. There are no easy solutions to these
problems."
- Bulls and bears alike agree that current economic and
geopolitical conditions in the United States are as
unsettled as they have been at any time in the last 20
years - and maybe at any time since the Vietnam War.
But the investment response to these troubling
conditions varies greatly from person to person. Some
buy "depressed" tech stocks, while others prefer to wait
out the crisis in short-term Treasuries.
- Curiously, very few investors seem to be seeking
refuge in the gold market. Yet, "the succinct bull
argument for gold today," Jim Grant, editor of Grant's
Interest Rate Observer observes, "is that, for the first
time in a quarter-century, all the world's major
economies are in recession together. Trying to lift them
out of it, governments and central banks will err on the
side of doing too much."
- Al Friedberg of Friedburg's Commodity and Currency
Comments agrees: "Monetary expansion around the world
has accelerated in direct proportion to the severity of
the economic bust. Growth rates of the broad-based
monetary aggregates in the U.S. have ratcheted upwards
for over five years, remaining well above 10-year moving
averages. The inflationary implications...are as obvious
as they are ominous. Can we capitalize on this
'inevitability?'" His response: Absolutely. Buy gold.
- Friedburg also points out that the special
circumstances that brought gold to its current low
estate are disappearing. For one thing, the lion's share
of dis-hoarding by central banks has occurred already.
"Henceforth, official supplies are predictable and
digestible." For another, net forward selling by the
mining companies will not be increasing, as their hedge
books are already very large. In fact, "Goldfields
reported that mines added to demand by lifting hedges on
41 tonnes during this year's first half."
- "The Fed today [may] face the Japanese predicament of
striking a match but lighting no fire," Grant allows.
But he anticipates that Greenspan's aggressive monetary
response to this state of affairs will spark an
inflationary reaction. "Value investors must swallow
hard to buy [gold]." Grant concludes. "Following the
roll-up of the European currencies, only four basic
monetary alternatives present themselves: euros, yen,
Swiss francs, gold. Of these, only gold is beautiful to
look at and not replicable on a high-speed printing
press."
-Shares of Freeport McMoRan, a gold play recommended by
the DR Blue Team, are still trading at a 19% discount to
their redeemable value. (DR Blue Readers Only see:)
*****
Back in Paris...
*** Elizabeth and I went to see Moliere's "School for
Wives" last night, in which a man in his 50s buys a
young girl from a destitute mother and keeps her away
from the world so that she'll grow up to be a perfect
wife - loyal, obedient, and faithful.
*** I felt sorry for the poor man. His project was
doomed from the start, as any half-wit could see. Walls
were never built so high as could keep a woman from
acting like a woman. But he persisted in his efforts to
completely control and dominate his young Agnes until
she finally had him groveling at her feet, beating upon
himself like a madman and begging for mercy. Not much
has changed, since the 17th century at least, neither in
love nor in markets.
*** After the play, we went for dinner at Le Grand Caf�
on the Boulevard des Capucines. "I felt sorry for the
poor man," said Elizabeth. "But as Moliere put it, if he
didn't want the trouble of having a real wife, he
shouldn't get married."
* * * * * * * * * * Advertisement * * * * * * * * * * *
The Boomer "Dreamworld" of Peace and Prosperity...Just
Turned Into A Nightmare!
* While the United States spent billions on high-tech
defense, fanatics armed with box cutters planned the
most audacious attack on the United States in history...
* While investors thought they were going to get rich -
they lost $5 trillion in wealth in an 18-month period.
* While consumers heeded the Fed's call to "buy...
buy...buy" - financial security was going bye-bye under
a collapsing tower of DEBT.
Now the "live for today" generation faces war and
recession - with no savings! To protect yourself from
the FINANCIAL THREATS you now face, click here:
http://www.agora-inc.com/reports/STRT/AReckoning
* * * * * * * * * * * * * * * * * * * * * * * * * * * *
The Daily Reckoning Presents: THE MOGAMBO GURU explains
why based on an overwhelming accumulation of historical
precedent, one can reasonably expect that we will have
several decades, or more, of increasing misery from a
depression.
THE WAY WE WERE
by Richard Daughty
The American economy will probably not recover for at
least a decade. There is no reason to expect that it
will. The immutable laws of economics have not gone
away, nor have they changed overmuch in the history of
the world.
Since before the time of the Pharaohs, all nations have
contended with the same financial forces in existence
today. They had (in one form or another) money, debt,
and taxes.
They all had government spending. And every single one
of these nations, in all of history, was eventually
ruined by its government. Their money was debased to the
point of worthlessness by the government spending too
much to do too much, and then the country collapsed.
Why should we expect to be any different?
To combat the evil of the debasement of the money, the
Founding Fathers wrote into the Constitution that money
will only be of silver and gold.
As thinkers of the Enlightenment era, Jefferson & Co.
surely studied history and saw, with alarm, what
happened to every nation that resorted to fiat money:
the value of the money went to zero and the people were
pauperized.
They believed that there had to be constraints on
government spending, and the only constraint available
was to limit the currency to something relatively rare
and valuable. Ergo, the gold standard, which limited
spending to the amount of gold and silver you had.
But the Supreme Court, in its infinite wisdom, rather in
a series of idiotic decisions that is part of its
lasting shame, acquiesced to the fraud of allowing
absolute disregard for this important, crucial piece of
the Constitution. No longer would the dollar be, "as
good as gold." Et voil�, fiat money.
Since the sixties the government has been on a deficit-
spending spree. That is, they "borrow" money and spend
it. This is, of course, the Keynesian approach to
battling a recession. It works. How could it not?
There is, unfortunately, a price to be paid. And the
price is the accumulation of debt. Piles of it. Whole
mountains of debt. Keynes himself said that the debt
accumulated during a stimulus program has to be paid
back out of the subsequent recovery. Congress, to its
sorry shame, forgot this part of the equation.
We now have $6 trillion of "official" government debt.
The interest on the debt already eats up a third of
government revenues. And it never goes away - except by
paying it or repudiating it. Normally, debt can only
accumulate to some limit. One limit, obviously, is when
total debt service eats up 100% of revenues. In reality,
it is a much lower amount. And when that point is
reached, the game is over. Normally.
Enter the central banks. After three decades of fiscal
stimulus by Congress, the geniuses at the Fed decided
the economy also needed direct, constant monetary
stimulus - to help the government pay the interest on
the ravenous debt.
The Fed, you'll recall, is a government-mandated, semi-
secret club of the banks, all meeting together behind
closed doors. Their "job" is to safeguard the banking
system. They set monetary policy for the government in
the name of "the common good." Meaning: "making sure the
banks are profitable."
Since the Fed does not actually have any money to pay
for anything, they invent magical money. It literally
appears on a whim, out of thin air, onto account
balances at the bank. The Fed says, "I have - presto! -
money! Take this money and sell me some of that
government debt you are holding. Look, now you have
money to lend!"
This is such an obvious fraud that it is also obviously
only an emergency power of the Fed. It was not supposed
to be used as "party favors" during the boom. But under
the woeful stewardship of Alan Greenspan through the
90s, that is exactly what it became.
Week after week, month after month, year after year, the
Fed poured pure adrenaline into the banking system. It
wasn't just for investors that Alan Greenspan pronounced
the mania as "irrational exuberance." He was also
describing the actions of the Fed. The operative word
is, of course, "irrational."
It is not rational to expect that fiat money will
forever hold it's value. It never has. It is
not rational to expect that a stock market will forever
go up. None ever has. It is not rational that a country
can forever spend more than it makes. None ever has. It
is not rational that debt can grow forever larger. It
never has. It is not rational to believe that a
government can keep getting bigger forever. None ever
has.
The enormous amounts of money magically brought into
existence during the decade of the 90s also made
superstars of every hotshot with a penchant for numbers
and access to Other People's Money. In each case, it was
a matter of cleverly coming up with another idea to
"free up" untapped sources of money, and putting it "to
work."
Receivables were constantly sold forward, ordinary debt
was broken into weird little pieces and sold at
premiums, unrealized profits were borrowed against,
equity in anything was borrowed against, futures bought,
options sold, etc. The velocity of money zoomed, as the
vortex twirled round and round, twisting tighter and
tighter, sucking in more and more money with each
revolution.
The Japanese, for their part, lent mountains of money at
zero percent interest, which was immediately snapped up
around the globe and plowed into something, anything,
making that "something" go up in value. You could almost
hear them exclaim, Frankenstein-like, "It lives! We are
geniuses!" You can still hear the echoes of the masses
replying, "You ARE geniuses! You are gods! Here's my
money!"
Add the newly formed IRA's, 401(k)'s, and a plethora of
retirement plans, and trillions of dollars got sucked
into the stock and bond markets. Interest rates dropped
when the money went into the bond market. Investments
boomed liked nobody's business when it went into the
stock market. IPO's! Mergers! Acquisitions!
Construction! Houses! Malls! Real estate! Antiques!
Congress, always eager to butt into everything, passed
NAFTA, GATT and God-knows what all free trade stuff.
Companies moved production of goods offshore, taking
advantage of the wide differential in wages and
regulatory burdens to fatten bottom lines. The goods
were then imported into the USA for manic Americans to
buy, via credit.
And credit was everywhere in abundance, because money
was everywhere in abundance. And the Americans bought
everything that was offered! By the ton! Consumer credit
soared to $1.6 trillion! Commodity prices tumbled, as
hard-scrabble foreign nationals now had cheap entry to
the US for their low-tech commodities production, and
thus kept primary inflation at bay.
No wonder services boomed! What else is there to buy,
now that we are chock-a-block full of TV's and cars and
houses and vacation property and investments and
snowmobiles and vacations and swimming pools and videos
and clothes? We actually thought we could have an
economy based on services. Laid off from the plant? Who
cares? Get a job in services! The factory production of
actual tangible products is absent in the U.S.A.? No
problem! Get a job in services!
So, here we are. Debt up to our eyeballs for toys that
are mostly broken and old. Debt up to the government's
eyeballs. Debt up to the state's eyeballs. A fiat
currency. A gargantuan government. A huge trade deficit
and a huge current account deficit (meaning goods
shipped in and dollars shipped out of the country) to
provide the consumer goods, while we merely peddle these
imports and services to one another. A nation of retail
clerks and hairdressers today, a nation of pyramid-
builders and quarry workers yesteryear.
So what is so different now? Nothing. Another page in
history, telling the same old story over and over again.
Mogambo sez: if the story is always the same, why should
we expect the ending to be any different?
Cheers,
Richard Daughty,
for The Daily Reckoning
Richard Daughty, general partner and C.O.O. of Smith
Consultant Group, serving the financial and medical
communities, is the writer/publisher of the Mogambo Guru
economic newsletter, an avocational exercise the better
to heap disrespect on those who desperately deserve it.
* * * * * * * * * * Advertisement * * * * * * * * * * *
THE DOW: DANGER FOR INVESTORS!
Today's most popular stocks will be tomorrow's most
dangerous investor traps.
Wall Street's "gurus" are pushing defensive stocks.
These are the same guys who last year were pushing dot-
coms. Don't pay attention to Wall Street. The Dow is a
dangerous trap.
Here's a strategy that will deliver you profits. Invest
without worry. We'll show you companies that will
skyrocket while the Dow wipes out most investors. The
entire analysis and investment strategy is yours FREE.
Read it now...and judge for yourself.
http://www.agora-inc.com/reports/FSUS/ValueTime
* * * * * * * * * * * * * * * * * * * * * * * * * * * *
|
|
|
| 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.
|
|
|
|
