At the beginning of the decade, the tech stocks of the
day... radio... automobiles...electric utilities...
airplanes... were driving the market up wildly. It truly
was a New Era... If you had invested $10,000 in General
Motors in 1919, it would have been worth $1.5 million in
the summer of '29. But by 1933 unemployment had reached
nearly 24%...
What happened? Is it happening again? Yes. Says a respected
Austrian economist - and you'd better be prepared. Falling
technology shares are only the beginning. Here's what you
need to do - right now - to prepare yourself for the
collapse of the credit bubble:
(http://www.agora-inc.com/reports/RCLF/TheBubbleSplat)
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
*** The Nasdaq opened below 3,000 yesterday. Then, it fell,
at one time dropping nearly 5%. But it bounced in the
afternoon and ended down 62 points, that is, about 2%, at
2,966.
*** The Dow dropped too - 85 points.
*** The day's losses were blamed on two things: an
announcement from Hewlett Packard that profits fell nearly
20% short of expectations...and the continuing uncertainty
of the U.S. presidential elections.
*** HP stock lost 13% yesterday. It is down 50% over the
last 3 months.
*** There were 1202 stocks advancing on the NYSE yesterday;
1653 declined. 42 issues hit new highs; 104 hit new lows.
*** The U.S. presidential election is still headline news
all over the world, though a few papers have suggested they
would move it to the comics page if the story remains
unresolved. In the meantime, the Election provides Mr. Bear
with a camouflage the world over. "This sort of market can
reverse very quickly if things clear up in the US,"
Francois Xavier Chauchat, an economist with the Paris firm
Chevreaux de Virieu, is quoted as saying in the IHT.
Meaning, Mr. Bear can take stocks down without panicking
investors - who are sure that everything will come right as
soon as the final results are announced. The post-election
rally, on hold since last Wednesday, is now scheduled for
next Monday - following the last day for tallying overseas
ballots on the 17th.
*** Though the markets rarely stick to such neat programs,
Mr. Bear is a cagey fellow. What better way to keep
investors pumping money into stocks than to allow them to
think that only an event as rare as this closely-contested
presidential election might knock them down?
*** Oil rose 45 cents yesterday. Expected cold weather
before Thanksgiving and very tight U.S. heating old stocks
seem to be about to drive the price of oil over $35/bl.
Even in this Information Age, news that the weather turns
colder in winter seems to have come as a surprise. And no
one seems to have checked the nation's oil tanks until
winter was practically upon us. (see: Hostage To A Rogue's
Gallery)
*** "The world oil market is very different from what it
was 30 years ago," writes Lord Rees-Mogg. "Still prices
have risen, both on normal market grounds and because of
OPEC restraints. Even apart from events in Israel, the
prospect for this winter is worrying. The global oil system
is 'strained and running hard just to keep even'. Look for
oil to rise in the next six months." (see: Fight May Be In
Someone Else's Backyard... )
*** But the most peculiar bit of news from the financial
markets yesterday was that the euro did not rise. Despite
falling U.S. equity prices, disappointing earnings, record
debt, negligible savings rates, the largest current account
deficit in history, and a presidential election that is a
joke in the eyes of much of the world...the euro fails to
rise against the dollar.
*** "The fact that the euro is not rising in the midst of
all this," said Kit Juckes of the Royal Bank of Scotland,
"speaks volumes for it."
*** It may speak volumes, but what does it say? That the
euro is going to disappear? That the dollar is invincible?
I don't know. But I guess we'll find out eventually.
*** While stock prices are falling, so are many commodity
prices. Lumber and copper both fell yesterday...with copper
down from 94 cents/lb. in September to 81 cents/lb. today.
The Dow Jones Basic Materials Index was 143 in April; it's
below 120 today. Meanwhile, bonds are rising.
*** What would make commodities go down and bonds go up?
Approaching recession. More on that below...
*** In "bubble economies," writes Doug Noland in the Credit
Bubble Bulletin, "the great inflation is not in consumer
goods prices, but instead in stocks, bonds, homes, office
buildings, sports franchises, media properties, vintage
automobiles, yachts, collectables, and a myriad of other
assets. Tangible wealth for the average individual is not
created." But, "asset inflation begets only more
inflation," Noland continues, "...and provides for even
greater borrowing and spending - creating a self-feeding
bubble. (see: A Rather Simple Maxim)
*** Also, the decline in stock prices has not been confined
to the U.S. markets. Stocks are going down almost
everywhere. South Korea's over-the-counter market, for
example, is down nearly 70% for the year. Taiwan is nearly
50% below last February's peak. Hong Kong's answer to the
Nasdaq, the Growth Enterprise Market (GEM), has also fallen
nearly 70% since it opened on March 20th.
*** Europe, Asia, America - the story is little different.
A worldwide slowdown is underway. "The Dow Jones World
Stock Index," writes Richard Russell, "has formed a huge
top... This suggests to me that a world economic slowdown
is on the horizon...The next US president is not going to
have a picnic." How much will things slow down? To be
determined...
*** Even the most successful new technology companies offer
little shelter form a major bear market. "It took Radio
Corporation of America (RCA) 40 years," Ray DeVoe reminded
readers recently, "to match its price in 1928."
*** Harry Dent made a name for himself in the investment
world with a series of books of almost unbounded optimism.
"Dow 35,000" made the case that Baby Boomers would pile
into the stock market and drive prices to previously
unimaginable levels. Of course, that has already
happened...though few Baby Boomers could match Dent's
imagination.
*** Interviewed in Barron's recently, Dent says the Nasdaq
could fall to 2300. But not to worry. Because "that would
end up creating a tremendous buying opportunity and give
the market momentum of the last two years a tremendous
boost."
*** What that last phrase means is anyone's guess, but
Richard Russell describes analysts such as Dent as
"imposters." "Since the public doesn't know the difference
between sincere, authentic market analysis and utter
nonsense, this kind of 'analyst' writes nonsense books or
lands on some TV or radio program, and presto, we have the
professional fakir, the great 'stock market soothsayer'."
*** Fortune Magazine says 77 dot.coms have died since
January. "At this rate," says Fortune, "the Death Watch
will clear 100 by the end of the year."
*** The rapper, Run, from Run DMC, turns 36 today. Addison
says Run is a "seminal" performer in the hip-hop world.
*** Paris has turned cold and wintry. The skies are gray
and the streets are wet with mist. It happens every year.
But like a bear market, 3 months ago it was almost
unimaginable.
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Six years ago, an old friend of mine, Grover Norquist
worked with Newt Gingrich and other Republicans to fashion
a new strategy for the GOP. The idea was to commit the
party to make real changes in the way America was governed.
They called it "the Contract with America," a specific list
of actions that Republicans pledged to take to reduce the
size and scope of the federal government. Like sinners at a
tent revival, Republican politicians stood up and took the
pledge. Largely on the strength and specificity of the
contract, the GOP won control of Congress in that election
year.
Since then, reports Ed Crane of the Cato Institute, "the
Republican-controlled Congress has approved discretionary
spending that exceeded Bill Clinton's request by more than
$30 billion. The party that in 1994 would abolish the
Department of Education now brags in response to Clinton's
2000 State of the Union address that it is outspending the
White House when it comes to education."
The contract called for the abolition of 95 major federal
programs. But Cato found that "the combined budgets of the
programs that the Contract with America promised to
eliminate have increased by 13%."
If politics were not a farce - that is, if politicians were
forced to keep promises the way everyone else must - voters
could hold Republican office holders responsible for breach
of contract. The politicians would be thrown out of office
for non-performance and dereliction of duty. The contract
itself would be terminated - with prejudice.
Instead, nearly half of those voting last week seem to have
cast their ballots for Republican candidates - knowing full
well that they can't be trusted to keep a promise. Thus
they voted for people who just cheated them 6 years ago and
to whom they would be reluctant to lend $20.
In a real fight, these Republican politicians are the sort
of men and women whom you might have serving soup...or
maybe starching the general's tunic. You could never count
on them to protect your flanks.
The Romans...or even Marshal Zhukov, in charge of Soviet
defenses at Stalingrad...had a way of dealing with such
men: They were lined up...and every tenth man was put to
death.
Admittedly, that seems a bit extreme. But politics is a
brutal and nasty business. That is what separates it from
the rest of life - the readiness to use force when it is
called for.
Republicans are protected from the fate they so richly
deserve by their opponents. By tacit collusion, in all the
gabbing and calumniating prior to the vote, the Contract
was scarcely mentioned. For Democrats have their own frauds
and broken promises to forget...and are probably at least
as untrustworthy as Republicans. About the only thing that
can be said for them is that they are not Republicans, they
tend to drink more and their daughters are more liberal
with their kisses.
(I make that later observation based on a very small sample
a very long time ago...)
And yet, one of these parties will soon celebrate the
election of its main man as president. Champagne, aged
longer than expected, will finally be uncorked on the one
side...and tears will flow on the other. The quadrennial
farce will be over.
Ah, but who will be the winner? There's the hitch. Because
the paradox of this election is likely to be that the real
winner will be the loser. It is the economy, stupid. Voters
expect politicians to disappoint them. But not the economy.
They will put up with lies and larceny...until there is a
cyclical downturn.
"George W. Hoover vs. Al Carter," is how Gary North
describes the presidential contest. "The party of whichever
man wins the Presidency," he continues, " will suffer
Congressional and Senate losses in 2002, and will probably
lose the Presidency in 2004."
Why?
"The inverted yield curve has reappeared," explains Dr.
North. "It's a good forecasting tool of recession. The
[new] president will get blamed."
William Rees-Mogg recently described the business cycle,
quoting Dr. Hyde-Clarke from 1847: "We have just gone
through a time of busy industry, and are come upon sorrow
and ill-fortune; but the same things have befallen upon us
often within the knowledge of those now living... A period
of bustle, or of gambling, cut short in a trice and turned
into a period of suffering and loss, is a phenomenon so
often recorded, that what is most to be noticed is that it
should excite any wonder."
Cycles of prosperity and poverty have been around since
civilization began. In the Old Testament, Joseph
interpreted pharoah's dream as economic cycle of 'seven fat
years followed by seven lean years.'
But the lean years still excite wonder and surprise. At the
height of the bustle, people refuse to believe that there
will be a downturn. And when it finally does occur, they
don't know what to make of it.
Thus, instead of tracing the recession of 2001 and the bear
market to its source - the excessive credit, spending, and
bullishness during the Clinton years - voters will blame
whoever is president at the time, as they blamed Hoover for
the Great Depression and Carter for the recession of the
early 70s.
Recessions and bear markets are cyclical. They are
unpredictable in terms both of magnitude and timing. And
yet, continues Lord Rees-Mogg, "in the last century, we
have seen an approximate 10-year business cycle...[with
recessions in] 1921, 1931, 1951, 1960, 1973, 1982,
1992...The evidence for this sequence extends back to the
early 18th century."
Some downturns are mild. Some are severe. "Every once in a
while," writes Lord Rees-Mogg, "perhaps every fourth, fifth
or sixth time, the burden of speculation has to be purged
in a bigger way."
Dr. Kurt Richebacher believes this downturn has already
begun...and that it will be a big one. "In past letters,"
he writes, "we have repeatedly warned that people will be
shocked at how quickly the U.S. economy's strength will
simply disappear once the bull market ends. If it had not
been for a burst both in government spending and inventory
building, U.S. real GDP growth in the 2nd quarter would have
been just 2.8% at an annual rate, and if not for another
burst in inventory accumulation, it would have been barely
1% in the 3rd quarter. Automobile promotions and other
temporary factors boosted consumer spending from its sharp
downturn in the 2nd quarter. Growth in business capital
spending has drastically slowed to 2.9% and 16% in the 1st
quarter and 11% in the 2nd quarter. Residential building
shows an abrupt decline. All signs point to deepening
weakness in the economy..."
"The man who gets elected president," concludes Gary North,
"will get a nice, fat recession for his trouble...The
treausury's surplus will do a disappearing act reminiscent
of Walter Mondale's. If Bush gets elected, he will face the
normal mid-term fall-off of a newly elected president's
party in Congress, coupled with well-orchestrated "we told
you so" responses from Gephardt and other Old Econony
Democrats. I can hear it now: 'Elect a Bush and get a
recession!'"
Advice to George W. Bush: If the final vote leaves you in
charge, demand a recount.
Your political reporter...watching the Palm Beach Story
with amusement...
Bill Bonner
P.S. Tomorrow - Value Investing vs. Trend Following...and
some more Darned Cheap Stocks.
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Last modified: April 01, 2001
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