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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
MONDAY, 8 OCTOBER 2001 

 

Today:  Greenspan-San

*** Pray for clear skies...Americans not prepared for a 
rainy day

*** Stocks up last week...and now the sound of gunfire 
in Afghanistan...will it bring a new rally?

*** Abby Cohen even more bullish...number one terrorist 
target in NY...baseballs...lonely dipsomaniacs...and 
more!

Pray for clear skies. 

The big news at the end of last week was that 
199,000 fewer people had to report for work this Monday 
morning. 

People who lose their jobs typically fall back on 
savings. But few people today have much of a cushion 
waiting for them. "Even during the past decade of 
prosperity," notes a Wall Street Journal article, "many 
people failed - or simply weren't able - to put away 
enough money for rainy days."

At midyear, the savings rate was only 1.1%. 
Uh...let's see...how long would you have to save at that 
rate in order to have a year's worth of income ready for 
a rainy day? Hmmm...hard to say...depends on what you do 
with the savings...but about 75 years might be about 
right.

Of course, we are reminded that the savings 
figures do not include capital gains. But the Wilshire 
5000 - the broadest measure of the stock market - is 
down 40% over the last year and a half...or about $5 
trillion. 

While savings are meager, debt is abundant. Debt 
service has risen to 14.35% of disposable income...from 
13.51% in 1990.

Householders are woefully ill-prepared for 
inclement weather. Eric, how do the skies look over your 
way...?

*****

Eric Fry in New York:

- U.S.-led military forces lit up Kabul, Kandahar, 
Jalalabad, Mazar-e-Sharif - and a bunch of other cities 
no one had heard of 30 days ago - with missiles, bombs 
and other ordnance. Forgive me if I don't let out an 
audible "Hooray!" Military action - like getting a 
filling - is a painful solution, even if it is 
necessary.

- I find the news depressing, not exhilarating. And it 
wouldn't surprise me one bit if Mr. Market sees it the 
same way.

- For several weeks, the experts have portrayed Mr. 
Market as a bellicose sort of guy who delights in armed 
conflict. "Remember," they say, "how the market rallied 
after Pearl Harbor and after the Cuban Missile Crisis."
Perhaps Mr. Market does like war. But he's never been 
fond of expensive stocks, companies whose earnings are 
collapsing, and economies that are sliding into 
recession. And that's what we've got.

- Rallies are probably better sold then bought right 
now.

- Greenspan is slashing interest rates, Bush is spending 
billions of dollars we don't have, and the ever-bullish 
Abby Joseph Cohen is more bullishly bullish than ever. 
What more could the stock market want?

- At the Daily Reckoning we don't have the answers, but 
we do have a couple of questions:

First off, why would I want to buy stocks selling for 30 
times declining earnings, much less stocks like Yahoo 
that sell for more than 90 times earnings?

Secondly, why do investors find themselves itching to 
buy an expensive stock just because it is less expensive 
than it had been a few months earlier? Would anyone 
today "back up the truck" to buy Beanie Babies for $50 
apiece just because at one time people bought and sold 
them for more than $100 apiece?

- The stock market may have fallen a lot, but it still 
ain't cheap.

- Furthermore, the financial markets are nervously 
navigating the shoals of declining profits on the one 
side and the reef of tapped-out consumers on the other.
First Call estimates that third-quarter profits will 
plummet 22% year-over-year. What's a value-seeking 
contrarian to do?

- Cash isn't a bad idea.

- "Abby Joseph Cohen, Chief Investment Strategist at 
Goldman Sachs, was out with a new target for the S&P 500 
this morning," reports USA Today. "She sees the index 
finishing out 2002 somewhere between 1,300 and 1,425. 
>From today's levels that forecast represents a gain in 
the range of 23% to 35%."

- Of course, Ms. Cohen has touted an upbeat outlook for 
some time and it hasn't exactly worked out that way. She 
just might be wrong...again.

- And then there's Peter Malkin, a guy who likes 
buildings as much as Ms. Cohen likes stocks. Malkin, as 
the ultimate contrarian, commands our attention, if not 
exactly our admiration. Even contrarian investment 
behavior has its limits, and Mr. Malkin just may have 
exceeded them by offering to purchase the Empire State 
Building for $57.5 million.

- Now that Manhattan's famous landmark has regained its 
status as the city's tallest skyscraper, it has also 
regained an ignominious identity as the city's foremost 
terrorist target. And while I assume that the building 
is in fact safe from a terrorist attack, it is not safe 
from a barrage of crank bomb threats and other 
continuously disruptive events.

- It could be challenging to keep long-term tenants 
intact. What's more, based on the current rental stream, 
the lease income would return no better than CD rates - 
about 3.4% - on a $57.5 million purchase price. I'll 
take the CD, thanks.

- Meanwhile, "The United States, by far, remains the 
world's largest producer and seller of arms," reports 
the DR Blue intelligence team, "selling more than $18.6 
billion worth in 2000. The next in line, Russia, 
manufactures and sells considerably less than half that 
amount ($7.7 billion), but the amount and type of 
weaponry available from Russia is growing dramatically, 
as are the numbers and types of potential purchasers of 
Kalishnikovs, tanks, and mobile missile units." 

- "Global arms sales were worth $36.8 billion in 2000, 
up 8 percent from 1999," the report continues. 
"Intelligence experts" are concerned about the 
proliferation of cheaper Russian and Chinese arms on the 
market and how they seem to be the weapons of choice 
among terrorist groups. (If you would more information 
about becoming a DR Blue reader like to be click here)

- The market crashed last Friday...for Mark McGwire's 
70th home run ball, that is. 

- The Daily Reckoning faithful will recall reading last 
week that a Mr. Todd McFarlane paid $3 million in 1998 
for McGwire's record-setting baseball. Sadly for Mr. 
McFarlane, Barry Bonds hit home runs No. 71 and 72 on 
Friday, thereby eclipsing McGwire's record.

- If McGwire's baseball was ever worth $3 million, it is 
worth far less now. The special baseball is not so 
different from the shares of Cisco Systems, the one 
stock that everyone simply had to own in March of 2000, 
even if it meant paying far more for it than any 
rationale assessment could ever justify. 

- Cisco's stock price has fallen more than 80% since 
then. The value of McFarland's special baseball has 
likely fallen even more. Brings to mind a phrase popular 
among the ancients: "Margin of safety."

***** 

Back in Paris...

*** Skies are grey. It is rainy here already...

*** There is nothing quite as lonely as writer on a 
rainy day. You are stuck with your own thoughts...
like a castaway on a desert island. 

*** Perhaps that is why most writers turn out such 
gloomy, self-absorbed, absurd, mawkish, claptrap. They 
have only their own thoughts to work with...

*** And maybe that is why writers tend to drink so much. 
Some lonely professions tend to encourage drinking. I 
once worked as a housepainter and noticed that the older 
painters were almost always dipsomaniacs. Or insanely 
pleasant. There is just too much time for thinking as 
you swing your brush or roll your roller, I guess.

*** What triggered these thoughts was the discovery of a 
cache of empty bottles near a tumble-down garden house 
out in the country.

*** "Oh...those must have been left by Leon," explained 
a neighbor. "Leon was a character. He was the gardener 
here in the '50s. He would spend most of his time in the 
garden shed. And then, when he came out...he would weave 
around...we all thought he was going to fall down.

"But those were different times. People were much more 
relaxed about things. Leon was a good gardener...and 
people didn't worry about his drinking. 

"Leon had been a prisoner of war in Germany," continued 
our neighbor, warming to his reminiscences. "He was 
forced to work on a farm run by a huge German woman... 
you should have heard his description of her. She was 
very mean. Every day, Leon would have to get up at 5 
a.m. and prepare a fire in the big kitchen stove. Then, 
when she came down...she'd light it.

"Well, finally, the war was over...and Leon was free. On 
that last day, he prepared the fire as usual...except 
that behind the paper and kindling...he laid a pot of 
oil or grease or something. Leon left just as she put a 
match to the fire...and said he laughed all the way to 
Paris."

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GREENSPAN-SAN
by Bill Bonner


When we parted company on Friday, we were wondering to 
what extent the world's largest economy might resemble 
the world's second largest. 

Both experienced an enormous stock market bubble. 
Between 1985 and 1989, stocks in Japan rose 200%. Ten 
years later, Wall Street performed the same trick...with 
the S&P 500 up about 200% over the 5 years, 1995-2000.

The parallel was there for all the world to see. 

Krugman spells it out in the New York Times Sunday 
magazine: "An already advanced nation pulls ahead of its 
first world peers, taking the lead in all the hot new 
technologies. Stock prices soar to levels that look 
insane using conventional criteria, but everyone agrees 
that in such a dynamic economy old rules no longer 
apply. And then the bubble bursts, leaving behind a 
mountain of bad debts and an economic engine that 
refused to turnover. Name two countries whose experience 
in the last 20 years fit that description."

Yet, no one seemed to notice the resemblance. Over the 
past 10 years it seemed as though Japan and the U.S. 
were not even on the same planet. While the U.S. economy 
benefited, or so it seemed, from every favorable omen 
and every serendipitous advantage, from the Info Tech 
revolution to the Peace Dividend, Japan's economy lay 
inert and friendless. 

Within 5 years, Japan had gone from being the idol of 
the entire world to being an object of open contempt. In 
1989, American businessmen were practically 
straightening their hair and dying it black in fawning 
imitation of their Japanese role models. A few years 
later, they were offering the Japanese advice...and 
seemed almost indignant when it produced no favorable 
response.

And yet, suddenly, Japan is back in the news and looks 
like a trendsetter again. 

Why should we care what happens in Japan?

Today, the financial press reports that Japan bought 
$24.8 billion worth of dollars and euros last month. The 
reason? The Bank of Japan wanted to "reverse a rise in 
the yen," reported Bloomberg. Japan is as eager as other 
nations to wage war on its own currency but has less 
ammunition to throw into the fight. It has already 
lowered rates to the point that there remains nothing 
more to lower. 

But Japan has been caught in what economists call a 
"liquidity trap." As the return on other assets declines 
- earnings from stocks, bonds, real estate - it becomes 
more attractive to hold cash. Also, when the world 
begins to feel less safe...people begin to prefer to 
hold cash rather than spend or invest it. 

Could America also be putting its foot in a "liquidity 
trap"? 

Americans' preference for liquidity reached an epic low 
recently - with savings rates falling below zero and 
recently rebounding to 1.1%. If rates merely increased 
by 2 percentage points it would take $150 billion out of 
the economy, overwhelming any attempts at fiscal or 
monetary loosening. 

Mightn't Americans - groaning under the biggest debt 
burdens ever...losing their jobs...facing what might be 
a long, expensive, uncertain "war on terrorism" - decide 
to imitate the Japanese habit of saving...just a little? 
Mightn't frugality come back in style? 

Various heads of the Bank of Japan have already done 
what Alan Greenspan of the Federal Reserve is in the 
process of doing - fighting a liquidity trap. Central 
bankers manage their currencies...by allowing their 
destruction at a mild, steady pace. Liquidity traps 
interfere, boosting the value of money relative to goods 
and services. Central bankers cut interest rates in 
response. But in a real meltdown, it does no good. 
Instead, they get a deflationary spiral downwards, 
Krugman explains, "in which falling prices and a 
slumping economy feed on each other, plunging the 
economy into an abyss."

Lower interest rates did nothing for the Alan Greespan 
of Japan. In fact, they probably only postponed the day 
of reckoning...turning a crash into what Krugman calls 
"a long, slow-motion depression."

When interest rates of zero failed, Japan did not 
hesitate to "crank up the presses" on the fiscal front. 
As Krugman reports, "In 1996, Japan's public works 
spending, as a share of GDP, was more than 4 times that 
of the U.S." And though the island nation has only 4% of 
the land area of the U.S., "Japan poured as much 
concrete as we did."

(If Japan really is setting a new mode...DR readers may 
want to recall my suggestion of a few days ago: Buy 
cement.)

"I wish I could say with confidence," Krugman continues, 
"that Japan's dismal experience is of no relevance to 
the U.S. And certainly our nations are very different in 
many ways. But there is a distinct resemblance between 
what happened to Japan a decade ago and what was 
happening to the United States economy just a few weeks 
ago. Indeed, Japan's story reads all too much like a 
morality play designed for our edification."

Wouldn't it be just like Nature to put on a morality 
play for American investors and policymakers? Didn't She 
warn Caesar of the ides of March...and put shoe-shine 
boys on the streets of NY to offer stock tips? And 
wasn't it She who put first-hand accounts of Napoleon's 
disastrous campaign against Russia in the hands of 
Hitlers' generals as they crossed the Berezina? Didn't 
She put Bezos' mug on Time magazine when AMZN was nearly 
$100 a share...and ring the bell at the very top of 
America's bubble with deliciously absurd statements from 
people who should have known better?

But these little glimpses into the future must be 
ignored. Or else, history would be as drab and 
meaningless as a joint session of Congress. 

And so must the parallel between the U.S. economy and 
the Japanese experience of the last 10 years remain our 
little secret. Otherwise, investors would pull their 
money out of stocks in a panic...and consumers would 
begin to save their money...well, like the Japanese. 

Until tomorrow, explaining why the situation in America 
may be worse than Japan...

Bill Bonner

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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.

 

 
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Last modified: October 08, 2001

Published By Tulips and Bears LLC