Contributed by Bill
Publisher of: The
Fleet Street Letter
TUESDAY, 23 OCTOBER 2001
*** Gold down. Euro down. Commodities down. Deflation
*** Consumers give credit cards a rest...
*** Ad budgets slashed...employees slashed...
entertainment budgets slashed...slash, slash, slash...
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Gold dropped $4.50 yesterday - to $263. The euro
fell to 89 cents. Commodities fell to a new low. "For
the first time in years, Americans start to give their
credit cards a rest...," declares a Houston Chronicle
And..."Virtually all of the world's major
economies have broken decisively to the downside in the
past few months," reports Stephen Roach from Tokyo.
Prices are falling in Taiwan, with the CPI down
.5% year to year...and wholesale prices down even more.
Japan, meanwhile, is in its 4th recession in a decade.
Worldwide deflation...get used to it.
"The glass-half-empty folks might see our country
today as a land of frightening terrorist plots, falling
corporate earnings and bad TV sitcoms," writes Eric Fry
from New York, "but clearly, Mr. Market sees something
else altogether - something hopeful, something upbeat,
something so positively marvelous that it is worth
almost 40 times annual earnings." Though they suffer the
torments of Job...investors still believe...
Here's the rest of Eric's report:
Mr. Eric Fry in New York:
- The stock market is going up because it is going up.
Who are we to quarrel with it? Like pierced tongues and
facial tattoos, some things just seem to happen...for no
- The Dow gained nearly 2% yesterday, rising 173 points
to 9,377, while the Nasdaq advanced more than 2%, to
- It would be nice if Mr. Market would let us in on what
he sees because, to the naked eye, the economy and the
stock market don't look so good.
- Case-in-point: SBC Communications announced yesterday
it would cut several thousand jobs, trim next year's
capital budget by 20% in and delay the build-out of its
broadband network. The telecom giant is hardly alone in
declaring that it plans to save money next year, not
spend it. (To refresh: spending is good and saving is
- Company after company has been reporting terrible
earnings lately...the market is rallying anyway, which
prompts smartmoney.com's Igor Greenwald to suggest doing
away with "reporting season" this quarter. "The hundreds
of public companies reporting earnings over the coming
week should save their breath, red ink and crocodile
tears," he writes. "A single press release will do: 'The
170-odd S&P 500 companies reporting this week announced
a 20%+ drop in third-quarter profits, after subtracting
very special charges in a procedure no one should try at
home. Those results beat, by a penny a share here and
there, forecasts those companies supplied three weeks
ago...Business, meanwhile, is still slow.' No fuss, no
muss, no annoying conference calls." Igor's got a point.
Business, indeed, is still slow.
- Many companies are slashing their advertising budgets,
along with every other budget they can find. The media
executives from across the country who convened at the
annual American Magazine Conference in Manhattan
yesterday all griped about the grim outlook for ad
spending. Frederick Hill, executive vice president of
marketing and communication for J.P. Morgan Chase told
Crain's magazine, "Our advertising dollars will be
curtailed until the second quarter of 2002."
- As ad budgets fall, so do entertainment budgets, and
that's bad news for the restaurant trade. Many Manhattan
restaurants continue to do a steady business in the
aftermath of skyscraper bombings and anthrax attacks,
although most are not serving "organic mixed greens,"
"seared tuna steaks" and "tiramisus" the way they used
to. According to Crain's, "some 15,000 jobs have been
lost and hundreds of eateries in the highly fragmented
industry face the possibility of going out of business
by the beginning of next year..."
- But the Big Apple's loss is the burbs' gain. I dined
Saturday night at a restaurant in Westchester County,
about an hour north of Manhattan. The place was packed
to its rustic 300-year-old rafters. "Ever since Sept.
11th," the manager explained, "we've been very busy.
Customers say they don't want to go into Manhattan. So -
I hate to say it - but terrorism has been good for us."
- Terrorism might also be good for the oil market. John
Myers, editor of the Resource Trader Alert, is not
afraid to say it: "Osama bin Laden and the Taliban are
getting the lion's share of attention, but the most
important player in the Middle East is Saudi Arabia.
Beneath the Saudi desert sands lie one-third of the
world's oil reserves, much of which can be developed for
less than $2 a barrel. The pro-American sheikdom is
OPEC's swing producer, able to dictate prices and make
up disruptions to the world's oil supply.
- "But Saudi Arabia may also be an oil empire on the
brink," Myers warns. "The events since September 11 have
increased the tension between the U.S.-friendly Saudi
government and the radicalized Saudi populace to the
point where the stability of the Saudi government is
more threatened today than it has been since the last
revolution in the 1930s...If Saudi Arabia were to fall
into chaos, crude prices would probably spike to more
than $80 a barrel - perhaps even higher." (see: The Wolf At The Back Door)
- At the very least, keep a full gas tank at all times.
And back in Paris...
*** It's a rainy autumn day. The leaves on the linden
trees outside my office have turned yellow. But it is
still as warm and delightful as a fresh croissant and a
cup of tea...as long as you don't read the paper.
*** The news is dreadful. Germany just registered its 2nd
sharpest collapse in business sentiment since WWII.
Italy just uncovered a vast network of terrorist cells
all over Europe. Argentina is about to default on $132
billion in foreign debt. And the editorial pages are
full of the worst drivel I can remember...about which
*** I'm going to see "Irma La Douce" at the theatre
tonight. I'll give you a report.
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WAR & INFLATION
by Bill Bonner
"I don't care about money really; it just settles my
"Inasmuch as this is the first full-blown recession in
the modern day era of globalization," writes Stephen
Roach, "the contractions around the world now seem to be
feeding on one another." What could put an end to this
vicious circle, he asks.
"Even with a mild recession in America," adds the
Economist, "...this could still turn out to be the most
severe world recession since the 1930s."
What might head off a '30s-style recession? You know the
answer, dear reader: war.
Why is war supposed to be good for an economy?
We ask the question, not because we don't know the
answer, but because we think it is too seldom posed.
The common answer is simple. 'War is good for a sluggish
economy, because it is inflationary.'
In wartime, governments drop their feeble inhibitions
and take up the task of destroying their currencies as
though their lives depended on it.
War "is always wasteful, no matter how just the cause,"
noted James Grant recently. "It is cost without income,
destruction financed (more often than not) by credit
creation. It is the essence of inflation."
It is what economists call a "deadweight loss,"
destruction without creativity, a lose-lose situation...
a cloud with no silver lining. A tank may be a useful
thing to have - at the appropriate moment - in the way a
fire extinguisher is useful. But neither adds much to
our quality of life - except by preventing an even
Inflation can be described as an abundance of money
chasing a scarcity of goods and services. Wars destroy
the goods and services we really want - houses, cars,
crops, restaurants - thus, they are biased towards
inflation. What's more, in wartime, governments spend as
if there were no tomorrow...deficits explode...and
central banks do their best to expand the money supply.
But wars also destroy confidence, credit, and trade.
Fighting unsettles the nerves of millions of people. It
causes consumers to clutch their money just a little bit
tighter and hold onto it just a little bit longer. And
it causes businessmen to close down unprofitable
operations sooner, rather than later...and to forestall
new capital investments. It cuts sales, squeezes
profits, and quiets the shipyards and truck terminals,
as the volume of trade falls.
In the present conflict, the U.S. finds itself fighting
on two fronts - against terrorism...and against
deflation. On the first front we have the word of the
president that the battle is going well. But on the
second, the battle against deflation, the news is not
The Economist notes a disturbing feature of the world
economy. "Margins are at their lowest level at any time
in the past half-century." Companies cannot raise
prices. "Estimates of the global output gap (the extent
to which output is below its potential) suggest that it
has increased to its widest since the 1930s. High excess
capacity around the world looks likely to push inflation
down faster than in past world recessions."
In America, for example, factory output in America fell
for the 12th month in a row in September. Capacity
utilization is down to its lowest level in 18 years and
When people were flush with confidence, cash and credit,
they built new factories. Now they are flush with
factories and what factories produce. Not only is there
too much of just about everything except Cipro, the
world's factories can turn out a lot more. Credit is
still available but lenders are getting worried. People
are getting low on cash...and confidence is still strong
among na�ve investors...but shaken among people who know
what they are doing.
"Let's put a final nail in the inflationary coffin,"
suggests my old friend John Mauldin. "Prices are in
retreat. The Philadephia Fed reports, "For the fourth
consecutive month more firms reported paying lower
prices for their purchased inputs (24 percent) than
higher prices (2 percent). The current prices paid index
fell from -13.2 in September to -22.1, its lowest
reading in the history of the survey. With regard to
prices of their final manufactured goods, more firms
reported decreases (22 percent) than increases (7
percent). The prices received index fell slightly from -
12.2 last month to -14.9."
"This is price deflation," John continues. "There is no
other way to interpret it. 'The lowest reading in the
history of the survey.' Only a few industries have any
ability to maintain or raise prices.
"The US has not experienced numbers like the above for
over 60 years. That is because we have not been in a
deflationary environment for over 60 years.
"There is a global glut of capacity. I predicted this
two years ago, and now it is sadly coming to pass. In an
optimistic wind the world built more factories to build
more things than we can actually buy, much less afford.
Now we reap the whirlwind of companies and nations
competing on price to keep those factories busy."
By a margin of almost 4 to 1, Americans say they intend
to reduce debt levels and increase savings. They are
still refinancing their homes - but new home financings
have dropped sharply since Osama bin Laden became the
most hated man in Christendom since Saladin. People do
not trade up in wartime.
"This is major league deflationary," concludes John, who
has his office in the Texas Rangers' stadium. John
raises another ominous feature of the slump: "the
velocity of money...has dropped to the lowest point for
18 years. (I can find no data from before that time.)"
In a boom, people enjoy the confidence of CNBC and
rising portfolio statements. But in a slump, they find
themselves on their own...and take a little comfort from
the crisp bills in their wallets and the jingle of coins
in their pockets. Money circulates less quickly...and
Your writer in residence...
For more from John Mauldin visit the Millenium Wave
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.