Contributed by Bill
Publisher of: The
Fleet Street Letter
FRIDAY, 19 OCTOBER 2001
*** Gold down, bonds up... Misters Greenspan & Market
telling us the slump could last for months...
*** An immense geo-political, macro-economic tornado
headed your way...
*** What's this - value in Japan? - say it ain't so...
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Gold fell $4.20 yesterday. Bonds were up too. Both
markets are telling us that things are going to get
worse in the U.S. economy before they get better.
"Greenspan says slump could last for months," says
a Washington Post headline.
But he also said that "Prospects for ongoing rapid
technological advance and associated faster productivity
growth are scarcely diminished. Those prospects, born of
the ingenuity of our people and the strength of our
system, fortify a promising future for our free nation."
"Easy-money policies bring about, through a
combination of innovations and booming financial
markets, massive over-investment and a gross
misallocation of capital," wrote the DR Blue's Dr. Marc
Faber in a recent study of 19th century booms and busts.
"The downturn is ushered in when the over-
investments lead to excess capacity and a collapse in
prices, which in turn drive down profits, then stock
prices, which in turn weakens the economy even more."
The ingenuity and strength of our people
notwithstanding, of course. (Blue Readers see: Who Shall Decide When Doctors
Meanwhile, a study by McKinsey Global Institute
confirmed a suspicion we have been harboring here at the
Daily Reckoning: productivity has little to do with
business spending on information technology. All those
billions spent in the late '90s caused a boom...but they
did not provide a lasting benefit.
Over to you, Eric...
Eric Fry on the island of Manhattan:
- The stock market wobbled a bit yesterday, but
managed a decent performance...all things considered.
The Dow fell 70 points to 9,163, while the Nasdaq
Composite eked out a 6-point gain to 1,653.
- Terrorism never sleeps, we are discovering. Even when
the terrorists themselves take a day off, the residual
havoc and fear inflicted by their previous crimes
lingers on. Investors keep trying to turn their
attention to things like yesterday's solid earnings
reports from Tyco and Coke. But instead, they must
confront a daily news assault about fresh anthrax cases,
and try somehow to factor these "exogenous events" into
the risk equation that adds up to either "buy stocks" or
- I've done the math. The answer looks to me like "sell
stocks." Or more precisely, sell some stocks and be very
careful about the select few you chose to own. Terrorism
is not bullish. Nor is declining corporate
profitability, nor rising unemployment, nor collapsing
industrial production. You get the idea.
- We're heading straight into a geo-political and macro-
economic headwind - maybe even a tornado. In such times,
discretion is the better part of preserving accumulated
wealth. Or, as Jim Grant put it recently, "Risk aversion
entered a bull market 18 months ago..."
- "In the 1990s' boom," Grant explains, "the best
offense was no defense. Savings, inventories and cash
reserves were paired to the bone. Confident of happy
outcomes, Americans renounced the theory and practice of
a margin of safety."
- But Grant predicts, "Before the cycle is over,
families will save more, corporations will borrow
less...safety will be taken to excess in the downturn
just as audacity was in the bubble."
- If Grant is to be believed, the risk-averse, post-
bubble era has a lot longer to run before safety is
taken to excess, and caution gives way to a new risk-
- We might need to see somewhat lower valuations in the
stock market as well. For example, Fred Hickey observes
that even though the Nasdaq has plunged nearly 70% over
the past 18 months, it has hardly become a repository of
value. Hickey compiled a table of the 36 largest Nasdaq
tech stocks and compared their estimated 2001 P/E ratios
to their average annual P/E ratios in various years,
including 1987. The average P/E ratio of these stocks is
now more than 40, compared to a P/E ratio of 21 at the
market top in 1987.
- Residue of a bubble gone bust litters the economic
landscape. And the former propagators of the bubble are
now suffering the greatest financial distress: Wall
Street and Silicon Valley.
- Merrill Lynch announced Wednesday that it would likely
slash 10,000 jobs from its payroll. Yesterday, Bear
Stearns joined the layoff chorus, saying that it would
shrink its workforce by 7.5%. Lynn Carpenter had already
found success selling Morgan Stanley short prior to the
Sept. 11 attacks. Might be a good time to look at some
of these other big financials. (see: A Number 2 Pencil
A Plain White Envelope)
- Meanwhile, "Unemployment in the heart of technology
mecca Silicon Valley rose in September to 5.9%," Reuters
reports, "a big gain from 1.8% in the same month in 2000
as the area's high-tech industry continued to shed
workers...This is the region's highest unemployment rate
in seven years."
- Popular opinion has it that Greenspan's magic Fed
funds rate will triumph over massive job losses and
shrinking corporate profits. Seems a tall order for one
little interest rate. But lower rates are spurring
activity in some corners of our economy.
- "Auto sales have been booming," notes the New York
Observer's Christopher Byron, "not so much because
consumers are flush with cash as because automakers have
been rolling out utterly irresistible deals to spur
sales and get shoppers back in the dealer showrooms.
Zero-interest [rate] loans are now commonplace, meaning
that consumers are being offered what amounts to free
money to buy a car - a powerful incentive to act quickly
before the offer is withdrawn."
- At the same time, the mortgage-refinancing locomotive
keeps chugging along. "Fleet Bank has been deluged with
so many applications in the New England region that some
of its offices are backed up for weeks," says Byron.
- Is the road to economic salvation paved with debt-
Back to Bill on the Emerald Isle...
*** This week's Barron's includes an interview with
Jean-Marie Eveillard, who manages the Eagel SoGen Global
Fund. The fund has returned investors an average of
14.70% per year while Eveillard has managed it, since
1979. Not bad, especially when you consider that Jean-
Marie's investments have the protection of real value,
rather than the relative value of Barron's shopping
*** "The market was good for 20 years," says Eveillard,
"it has been bad for 18 months. If it has been good for
20 years, it can be bad for longer than 18 months. And
so if anything, September 11 has given us the idea that
we should insist more than ever on what Ben Graham
called the margin of safety."
*** Where does he find a margin of safety today? In
*** "A great number of Japanese securities have been in
a 12-year bear market...we own some Japanese stocks in
which the net cash, which is the cash and the portfolio
of securities after the appropriate haircut for
liquidating the portfolio and paying the capital gains
tax, is in excess of market cap. You are paying less
than nothing for the businesses.
"It is a situation that would be unthinkable in the U.S.
or in Europe, because you would have financial raiders
rushing in. It is only possible in Tokyo because of the
12-year bear market and because so far, although I think
it will be changing in the next two or three years, no
hostile takeover has succeeded in Japan."
*** Eveillard mentioned a couple of names - Okumura and
Shimano - without providing much additional detail.
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DUBLIN TO WATERFORD
by Bill Bonner
Europe is enjoying a wonderful Indian summer. The days
have been much warmer than usual...warmed by a sun that
seems as unwilling to yield to the approaching winter as
an American investor to the bear market.
I left my hotel in Dublin this morning...walking down
Thomas street towards Heuston Station. I passed the
Guinness plant, which takes up what seems like an entire
city block on both sides of the street. Guinness, next
to the Irish people themselves, has been one of the
country's most successful exports.
Nearby the Guinness plant was a store selling
tombstones. "Come in and browse," a sign on the door
People browse in antique stores, in furniture stores,
even in appliance stores...but what kind of a morbid
personality would spend his time browsing for a
gravestone? A perverse curiosity grabbed me as I
passed...a sentiment of the sort that overtakes me when
I pass the Senate Office Building in Washington...I
decided to browse.
Perhaps a visit to the headstone store in Dublin takes
the place of the memento mori that people used to carry
in the 19th century...a reminder to live well, and
carefully, for death could come at any time. But the
enterprise on Thomas Street was as much of a
disappointment to me as it must be to the locals.
Alone, I read the suggested inscriptions - "may he rest
in peace"..."gone but not forgotten" and so forth...cut
into polished slabs and crosses of stone. As light and
silly as the sentiments were, the stones were worse -
bright red and blue marble in oval, square and simple
cross shapes...and some free-form like a blob from a
lava lamp that was suddenly petrified.
How much better it would be to have more useful remarks
chiseled into traditional celtic crosses...for even
fools can be martyrs for something: "Don't forget the
bend on O'Donagh Road"...or "A pack a day was probably
too much for poor McConnell."
There are times when people are fearful...and times when
they need a reminder that there are things to fear.
Maybe investors ought to carry memento mori too - such
as a portfolio statement for the first 3 quarters of
this year, with notations. Every dollar lost, too, must
have something to teach. A little souvenir of the
mistakes one can make might be useful.
"Never again will I buy when prices are this high,"
would suffice for almost any market and almost any time.
"If prices ever get that high again...don't forget to
sell!" might be a useful thing to find in your tickler
file at the top of the next bull market.
"Pay no attention to shills, analysts and central
bankers," is the sort of sentiment that is not only
useful, but timeless.
In science, and you may want to quote the Daily
Reckoning on this, people make new mistakes all the
time. In war, investments, and the rest of life...they
make the same old ones.
When the memory of an egregious foolishness is
forgotten...count on it to be repeated.
However little useful advice and information you are
accustomed to finding in the Daily Reckoning - I have to
warn you, dear reader - you will probably find even less
today. In fact, you have already gotten it. What follows
are merely more notes from my trip to Ireland.
As I made my way down to the station, I passed through
good neighborhoods and bad ones. The bad ones seemed
familiar to me. People looked like my relatives. The bad
neighborhoods of Dublin are not very different from the
poor white sections of Baltimore or Philadelphia.
People look the same, wear the same bad clothes, eat in
the same bad restaurants, and shop for the same mawkish
furniture and pay for it over time. The streets are
dreary and depressing - along with almost everyone in
The train left Dublin on its way to Waterford with few
people on board. Clearing Dublin, we found ourselves
cutting through some of the most beautiful countryside
on earth. Very green fields, often with sheep grazing,
are bordered by stone fences, or hedges. Hills rise up
and fall away to little copses of trees...around which
groups of cattle lay sunning themselves.
But everywhere and always, nature achieves her balance;
the Irish countryside is blemished by Irish buildings -
houses, barns, factories, stores and office buildings...
like small pox on a beautiful girl.
I say this with no malice aforethought. My father's
family came from Ireland. This is his country. But I am
always a bit disappointed when I see what his people
have done with it.
There are a few attractive houses and public buildings.
But not many. And more often than not, the attractive
buildings - old churches, rectories, and mansions, often
with carved stone lintels and arched doorways - are
attended by weeds or wrecking crews, or are already
half-demolished and converted into pigsties.
The typical Irish house is depressing. It is made of
cement walls with plain windows and doors stuck in at
regular intervals, topped by a gray slate roof. For most
of the year, to make matters worse, it is cold and wet.
But since I am in a mood to improve, having already
reformed the country's tombstone business, I offer a
suggestion: Put on shutters, ivy, a thatched roof, a
more sophisticated doorway - perhaps with Georgian
columns - something, anything to add a little grace,
charm or beauty.
The train trundled along, stopping to pick up passengers
and let others off. After about an hour, a downpour
began. Water rolled down the windows so heavily that I
could barely see out.
A few minutes later, we stopped at the village of Athy.
So small was the station that the cars at the rear were
left well rear of the platform, with an orchard on one
side and a graveyard on the other. The rain had calmed
to a drizzle...and there in the cemetery was an ancient
celtic cross...practically alone and untended.
The limb of a nearby tree, swaying in the breeze,
touched it lightly...and water dripped off, like blood
from a martyr.
In the land of his ancestors...
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.