*** Slow day on Wall Street...as thoughts turn to
politics...FLASH: the rich dumb guy won...
*** Take Pets.com out and shoot it. Dead senators...Dead
presidents... does anyone really care?
*** More global hot air...Cisco's numbers...and more! What?
Yes, more!
*** Yesterday, the nation's attention turned away from Wall
Street and towards Washington. Rich and poor, humble and
proud - all good citizens shambled like sheep to their
nearest polling places to decide by whom they would be
sheared. Would it be the rich and pampered son of a major
political figure and product of the Eastern Elite
Establishment who is completely committed to the status
quo...or the rich and pampered son of a major political
figure and product of the Eastern Elite Establishment who
is completely committed to the status quo?
*** Unable to find any difference that anybody seemed to
care about, the media concentrated on caricatures of the
candidates. One was supposed to be smart...the other was
supposed to be convivial.
*** It's 6AM EST, the race for president seems to hinge on
the votes of a few hundred people in Florida. Who will be
the victor? With no guidance from the mass media, The
Daily Reckoning will make its own projection: The rich
dumb guy will win.
*** But the most interesting and encouraging election news
comes from the great state of Missouri where over a million
people voted for a corpse. Though many members of the
Senate have appeared to be in various stages of rigor
mortis while in office, no Senator has ever taken his post
in that condition. Americans are willing to overlook almost
any handicap it seems - stupidity, cupidity, or terminal
rigidity.
*** Polls showed that what voters really wanted from the
election was continued gridlock in Washington. In that
regard, what could be better than a Senator whose every
joint was locked... permanently. Surely voters are also fed
up with fast-talking political spin-meisters. Again, the
junior Senator from the show-me state will be a model -
being incapable of speech at any speed and whose only
opportunity for spin will be in the grave.
*** Turning now, from dead senators to dead presidents...
that is, from politics to markets... Wall Street had
anticipated the Bush victory and had already run up prices
for Microsoft (thinking a Bush justice department would lay
off), and Philip Morris (Bush is supposed to be pro-
tobacco). Both companies edged higher yesterday.
*** But there was little action or excitement on Wall
Street, pending the election results.
*** Not that it seemed to make much difference. "No matter
who wins," the Reuters newswire informed us, "the stock
market should go up, experts said."
*** One of the experts: "It will be a rally either way."
*** Maybe it will. But if the market is destined to go up
today, and everyone knows it, why didn't it go up
yesterday?
*** Instead, the Dow fell 25 points and the Nasdaq was
unchanged in yesterday's trading.
*** Cisco 'beat its numbers' in the last quarter. But the
closer analysts looked at the numbers, the less they seemed
to like them. The problem with Cisco's numbers is the same
problem with the entire economy's numbers. Operating
statements look okay - but balance sheets seem to get
weaker and weaker. Receivables rose twice as fast as sales.
And inventories increased at nearly the same pace - dollar
for dollar - as sales.
*** Cisco said it would reduce inventories next year. This
was not good news to the people who make the products that
crowd Cisco's shelves. Broadcom fell 19% yesterday. Other
chipmakers were similarly affected. (see: Earnings Went
Thataway
http://www.dailyreckoning.com/body_headline.cfm?id=719)
*** Oracle fell more than $1. The company is plagued by
weak sales growth, and rumors of management distress.
*** GM fell too - 6%. GM is not a major supplier to Cisco,
but it is a major supplier of light trucks, the market for
which seems to have softened. Honda announced a 12% decline
in its profits.
*** Oil rose 54 cents to $33.40.
*** And the dollar index fell slightly. But then, when the
election news from Florida was announced - the euro fell,
though it is still above 86 cents. Who knows what effect
the next flash update will have.
*** "In the first three years of the Blair administration,
the British pound behaved more like a dollar-based currency
than a satellite of the deutschemark/euro," writes the
Fleet Street Letter's Brian Durrant. "It had appreciated by
25% against the euro - while simultaneously tracking the
dollar in an approximate range of $1.55 to $1.67... But
this relationship has broken down since May 2000 with
sterling tumbling to $1.40 and actually weakening against
the euro. A de-rating of the British pound is now taking
place..." (see: Who Will Put The Spring Back In The Euro?
http://www.dailyreckoning.com/body_headline.cfm?id=728)
*** Gold fell 60 cents to $265.40.
*** "Pets.com leaves pile on Amazon's carpet," said the
tag-line of an email message I received yesterday. The
accompanying note informed me that Pets.com had turned into
a dog. After spending $25 million to purchase the company,
it now looks as though it will have to be put to sleep. The
pet store on-line is "winding down operations." Analyst
Holly Guthrie of Janney Montgomery Scott says AMZN stock is
a "sell" and worries that its commerce partners are "slowly
disappearing."
*** "My dog, having been raised in Asia," writes Marc
Faber, noting investors' Pavlovian tendency to buy stocks
when interest rates go down, "has a slightly different
reaction to declining interest rates. He knows that a
decline in interest rates after an economic boom financed
by excessive credit growth signals a period of mounting bad
loans - a la Japan after 1989 and the rest of Asia after
1997." (See: Sectors to Own v. Those To Avoid (Like The
Plague)
http://www.dailyreckoning.com/body_headline.cfm?id=730)
*** "This time last year," Barron's reports, 196 computer
and electronic new issues returned on average 86% on their
first day." In the following weeks, they rose an additional
88.6% - on average.
*** But this year, according to Comm-Scan, an investment
banking service, the average computer and electronic IPO
has gone up 74% on the first day...only to fall an average
of 54% afterwards.
*** "Global Warming is a Fact," declared a headline on the
editorial page of the International Herald Tribune. The
source of this fact is a report from U.N.'s
Intergovernmental Panel on Climate Change.
"There's just one problem," writes atmospheric physicist S.
Fred Singer, research fellow at The Independent Institute.
"In spite of what the IPCC summary implies, temperature
hasn't warmed appreciably in the last 60 years, since
showing a major rise between about 1880 and 1940."
"Overwhelming evidence, from well-controlled weather
stations, satellites, balloon-borne radiosondes, and from
proxy data and ice observations, speaks against those
surface data that show a recent warming trend. Several of
us, as official reviewers for the IPCC report, have raised
these points but our arguments have evidently been ignored
by the controlling group that wrote the summary," Singer
continues.
HARNESS THE STRATEGY THAT BUILT AMERICA'S LARGEST FORTUNES!
A small group of investors recently turned $100,000
investment into $6,700,000. Another investor group turned a
$100,000 investment into more than $193 million. You can
try to scrimp and save your way to riches by working 60-80
hours and going without. Or follow the path of the super-
rich. One significant investment into the right company
brought to you by this circle of high net worth private
investors - could catapult your net worth 50 to 100 times
what it is today.
For those readers who are less hip than your editor, if
that is possible, 'dead presidents' is street talk for
money.
And for those readers who are unfamiliar with inner city
public schools, in certain areas children may pass from the
1st grade through the 12th without ever having much grasp of
reading, writing or arithmetic. In an innumerate society,
dead presidents substitute for the decimal system, as in,
"Gimme a Lincoln and I'll give you a rock."
Anyone who has lived in the inner city of a metropolis such
as Baltimore or Newark knows that for all the talk of
poverty, the scarcity of dead presidents is not the
problem.
Just the contrary, the days after the welfare checks come
out are the worst. Drunks get drunk. Addicts get high.
Children, untended, play on the sidewalk until 2am. Fights
break out. Deals go bad. People get shot.
The burden of today's letter is that what is true for the
ghetto dwellers may be true for everyone else: More money
does not make people richer. It makes them poorer.
What brought this to mind was yesterday's insight from
Peter Bernstein's book, The Power of Gold.
"One might think that Spain in the middle of the sixteenth
century should have been the richest nation in Europe by a
wide margin," writes Bernstein. "It was not. The impact of
this immense and sudden addition to monetary wealth was
felt throughout the rest of Europe and even out to the Far
East, but in Spain no lasting payoff remained form the
spectacular exploits of the conquerors and the fountains of
blood that flowed from white men and Indians."
"Once the gold began arriving in quantity," he continues,
"the Spanish were far more proficient at spending than at
producing."
The new-found gold had the same effect on the Spanish as a
welfare check:
"The massive imports of gold and silver stimulated the
spending skills at the same time that they stifled
Spaniards' incentive to produce. Spain acted like a poor
man who makes a great windfall at the gambling tables but
comes to believe that the money is his destiny rather than
a non-recurring event."
Gold bugs, if there are any still living, will be
disappointed to learn that any unearned increase in the
supply of money - whether it is hard or soft...paper or
precious metal - will have the same effect. Bernstein
continues with a quote from the Spanish popular assembly,
the Cortes:
"Though our kingdoms should be the richest in the
world...they are the poorest, for they are only a bridge
for the [gold and silver] to go the kingdoms of our
enemies."
Money passed through. But no new wealth was created. Fields
and workshops were abandoned. In Spain, "agriculture laid
down the plough, clothed herself in silk, and softened her
work-calloused hands."
In 16th century Spain, as in inner city ghettos, idleness
was not accompanied by tranquility. Charles V and his son,
Philip, used his money to go to war with Francis 1st of
France...to try to subdue the Dutch and Belgians...and even
to send the Spanish Armada to England in hopes of toppling
Queen Elizabeth 1st.
All of this cost money. And typical of people who get
something for nothing - there is never quite enough.
"Instead of transforming the gold and silver into new
productive wealth," writes Bernstein, "the Spaniards paid
the precious metals out to other countries, and spent so
much that debts to foreigners soared."
This may trigger the same synapse connection in your brain,
dear reader, as it did in mine. A flood of new money will
have the same general effect - whether it is hard money in
a 16th century backwater economy...welfare payments in a
miserable inner city ghetto...or a vast new supply of
purchasing power in the most advanced economy on earth.
For the last few years, America has been rehearsing Spain's
16th century role. Let me count the ways...
Instead of gold and silver from the New World, U.S.
spending power expanded with the money and credit from the
conquistadors of the New Economy.
This additional spending power did not really lead to an
increase in America's productive capacity. Actual
investment, productivity, and wages in non-information
parts of the economy have been stagnant for at least the
last two years. Instead, the 'money' is spent on foreign-
made products...and then reinvested in American assets.
While America has been supposedly enjoying a great economic
boom, more and more of America's assets have gone to
foreign owners. Merger and acquisition efforts by foreign
telecoms alone, for example, accounted for some $70 billion
last year.
Foreigners have taken up the new money with the same
enthusiasm as the world took Spain's new-found gold and
silver. Approximately $7 trillion now circulates outside of
the U.S. itself. American corporations have borrowed this
money back...along with yen and euros too. Federally-
sponsored agencies - such as Fannie Mae and Freddie Mac -
borrowed $255 billion in 1999 and are on track to borrow
even more this year.
Thanks partly to this source of funds, home mortgages in
the U.S. have increased by $1.5 trillion since 1995.
I will spare you more figures. As I explained yesterday,
when Americans borrow overseas, it increases demand for
dollars on world markets, boosting the value of the dollar
- thus further increasing the purchasing power of dead
presidents. The circle appears virtuous. But it is as vice-
ridden as a Chicago polling station. Debt levels increase.
Savings disappear. The whole country gets poorer.
A sharp observer of Spain's economy, Pedro de Valencia,
wrote in 1608, "So much silver and money...always has been
fatal poison to republics and cities. They believe money
will keep them and it is not true: plowed fields, pastures,
and fisheries are what give sustenance."
The flow of new money dried up in the second half of the
16th century. In July of 1576, King Philip of Spain did what
sovereign nations as well as individuals do from time to
time: he went bankrupt. His army of mercenaries mutinied.
"It was said," writes Bernstein, "that at one point the
captain general [of Philip's army] did not have enough
money for lunch."
Your correspondent...on his way to lunch...
Bill Bonner
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Last modified: April 01, 2001
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