*** More evidence of deflation...PPI comes out today...
*** Telecoms set to lose more than dot-coms...why the
natural gas shortages...and more.
*** Not much of a rally. In fact, hardly a rally at all.
*** You may recall, when we left off yesterday, investors
were ready for the long-awaited post-election rally. Well,
the post-election finally arrived...and GWB, as fine a post
as any, won.
*** Gore was more wooden, but Bush had more friends in high
places, notably the U.S. Supreme Court. And so we have a
new Commander in Chief.
*** Stocks didn't seem to care. The Dow barely moved - up
just 26 points. And the Nasdaq resumed its losing ways -
giving up 109 points.
*** The nation's favorite big techs were mostly down - with
Intel off a buck. Microsoft fell more than $1. Oracle
dropped $2.25. IBM lost $2.50. Cisco went down $3.25. And
Juniper plummeted more than $6.
*** Since election day, the S&P 500 has fallen 5%. The Dow
is only off 1.5%. But the Nasdaq has slumped 17%, with the
Internet sector sinking 37%.
*** So what's new? Well, bonds rose. The dollar moved
little...and the price of oil fell 94 cents.
*** The Producer Price Index comes out today. It is not
expected to reveal much of an inflation risk.
*** That's because the risk is on the other side. People
are hoping that Mr. Greenspan will lower rates next year -
and that the economy will come to rest at a more moderate
rate of growth. This is the "soft landing" that - like the
Big Bottom - the financial press thinks it sees all the
time.
*** But the problem in the U.S. economy is not that credit
is too tight - it is that it has been far too loose. As a
result, too many people owe far too much money - and have
too little to show for it. Consumers frittered away money
they had never earned...and businesses invested trillions
in projects with a much lower rate of return than the cost
of capital.
*** You don't solve these problems with lower interest
rates. You solve them with bankruptcy, defaults, work-outs,
cutbacks and real savings.
*** "Of the 300 CLECs operating in the United States, only
two are profitable," said John Windhausen, President of the
Association of Local Telecommunications Services. An
estimated $150 billion has been lost in dot.coms. An
article at prudentbear.com by Marshall Auerback explains
that "in today's turbo-charged world of new economy
finance, this sum is but a pinprick of the scale of the
credit problems likely to result from faltering telecoms
and Internet infrastructure companies. Here, the quantities
of debt held by several leading household names (AT&T,
British Telecom, KPN, Cisco, Lucent, Germany's MobilCom,
and France Telecom to name but a few prominent examples),
and the concomitant deteriorating backdrop for their
respective businesses, imply future debt write-offs and
possible bankruptcies that will dwarf those of the
dot.coms."
*** Alan Greenspan recently discussed the problem as
follows: "In many respects, the situation may be analogous
to a phenomenon of which I am sure many of you are all too
painfully familiar - the tendency to overbuild in
commercial real estate when low vacancy rates prompt
commercial building starts well beyond the point that, on
completion, could be supported by the ongoing growth in
demand. Problems have even arisen among a number of well-
established companies whose forays into uncertain newer
technologies have come up short."
*** "But ultimately," Auerback continues, "the biggest
losers are the millions of investors who have bought into
this nonsensical rhetoric about the new economy, whose
euphoric expectations were stoked by people who ought to
have known better than anyone how to recognise and prevent
a financial mania."
*** The telecoms have hundreds of billions in debt already.
But even that will not be enough. They have bought
expensive licenses and made commitments for hundreds of
billions more in capital investment.
*** Where will they get the money? People who expect Fed
rate cuts to automatically make cash available to these
high-risk borrowers are going to be disappointed. Lenders
need to be compensated for the risks that they have,
suddenly, noticed. The result will be higher effective
rates for the people who actually need the money.
*** This is not a set of conditions likely to end up in a
soft landing. The Financial Times reports that the chief
economist for HSBC, Stephen King, "believes that even
aggressive rate cuts may not be sufficient to prevent a
hard landing. This is because of the irrational exuberance
that prevailed in the late 1990s - companies have over-
invested, consumers have over-borrowed, and banks have
over-lent. All three will decide to cut back whatever the
level of interest rates."
*** "The US is now showing severe symptoms of distress,"
writes King. "Banks are showing a degree of credit
constraint last seen during the early 1990s' hard landing.
The collapse in the Nasdaq carries enormous implications
for the cost of capital. The deterioration in household net
wealth this year is an event that, in the past, has been a
precursor to recessions."
*** Meanwhile, unionised bank workers in Seoul decided that
they would not take a credit crunch sitting down. They took
the chairman of Kookmin Bank hostage until he agreed to
discuss future merger plans with the union.
*** And energy is in the news on this cold, rainy morning
in Baltimore. Natural gas was about $2 per thousand cubic
feet last year. Now it trades for between $9 and $20. U.S.
Senator Frank Murkowski wanted to know why "the demand for
natural gas in the future has been grossly underestimated."
*** He's got a point. It's not exactly rocket science.
Still, even in this Information Age, it is ignorance that
moves markets - not information or knowledge. Apparently,
nobody bothered to check the fuel gauge until the snow
started to fly. Meanwhile, inventories of computers and
manufactured goods rose - beyond what the market could take
up.
*** People don't like the uncertainty that markets - and
life - produce. They much prefer the false security of
politics. Thus, a headline on today's newswire: "Energy
crunch adds to deregulation doubts."
*** A modest prediction: millions of people will go broke
in the coming downturn. More than a million bankruptcies
are expected in the coming year alone - without forecasting
a major bear market or recession. These people will not
blame themselves for making bad investments. They will
blame anyone and everyone they can. There will be
lawsuits...criminal charges...and the demand for greater
regulation.
How 15 Minutes Each Day Can Make You Richer, Happier and
more Successful...
Successful doctors, lawyers, realtors and entrepreneurs
spend 15 minutes each morning doing one thing before they
do anything else. Now you can have the same advantage!
Some people take abstract ideas so seriously they are
dangerous. An article in Monday's International Herald
Tribune told of a cruise organized by The Nation magazine.
"Caribbean Sea, 18 miles off the southwest point of Cuba"
began the article, helpfully pinpointing the cruise ship
for anyone with a handy missile and GPS. More than 300
"silver haired pinkos," as the IHT called them, readers of
The Nation magazine, "sipped coffee and ate breakfast
pastries in a dimly lighted auditorium, where they had
gathered to hear a lecture about the environment titled,
'Are Humans an Endangered Species'." [many of the attendees
no doubt hoping the answer would be positive].
They had each spent an average of $2,400 to join the cruise
- on a Holland America ship which must contribute massively
to the global warming these people fear...and operated with
a non-unionized crew.
For the money, they got the dubious pleasure of listening
to panellists such as Tom Hayden, Barbara Kingsolver and
Molly Ivins discuss topics such as "chlorocarbons,
atmospheric radiation, God and global warming" - topics
that none of them actually knew anything about.
But that is the nature of Big Ideas - they allow people to
divert their attention from the real problems of everyday
life - with its uncertainty, complexity and baroque
absurdity - to big problems that they can pretend to
understand and do nothing about.
I have promised a fuller introduction to the Daily
Reckoning. In today's letter I will let you in on our
little secret...the insight that gives us, I believe, a
competitive advantage.
The secret, dear reader, is that the Daily Reckoning
harnesses the power of modern life's most underrated
resource: ignorance. Or maybe you guessed as much?
At last night's dinner, a group of executives from our
publishing company sat at a table in a local diner, trying
to solve some of the business problems that confront us. We
were not small progress, but what else could we do?
Meanwhile, the group at the next table was deeply engaged
in another subject - politics. There were two young men -
eager to comment on Gore's speech, which was on the TV at
the time...arguing about how the Democrats might organize
themselves for a comeback in 2004...and how Gore would
likely take Hillary as the VP candidate...or would it be
the other way around?
The older man walked with a limp and might have had severe
arthritis - as if even his body as well as his soul had
been corroded by too many years as a political hack. Like
the silver-haired pinkos, this man seemed to have an answer
for everything.
As I discussed yesterday, Darwin left the world in
ignorance. He merely described the evolution of species as
he saw it. Likewise, the Efficient Market Hypotheorizers
described the movement of stock prices - as best they could
make them out. But both ideas were taken up by the mob,
vulgarized and hollowed-out...giving the "pretense of
knowledge"...and ultimately producing grotesque results.
If random mutations and the `survival of the fittest' were
the guiding principles of life, reasoned the Darwinists,
then God really was dead, just as Nietszche said.
Henceforth, there could be no sin. Even murder could be
redefined as the process of natural selection...in which
the more fit survived while the less fit perished..
With his "you can't make an omelette without breaking some
eggs" rationale, Stalin did not have to ask the Kulaks if
they wanted to be collectivised. He did not have to poll
the Black Sea Greeks to see if they wanted to be relocated
to Kazakhstan. Nor did he need to survey the bourgeoisie to
find out if it wanted to be exterminated. The "pretense of
knowledge" that Darwinism gave him was enough. If he were
able to kill his enemies before they killed him, that must
be the way nature intended it. No punishment - either in
this life, or the next - was expected.
And yet, if the promise of heaven is anything more than a
empty slogan, there must be a million Bolsheviks, Nazis and
tort lawyers roasting at this very minute.
Believers in the random movement of stock prices,
meanwhile, seem to have engineered their own destruction.
If stocks move in a completely random way, the only
reasonable thing to do is to "buy and hold". Price would
not matter...since the odds that an expensive stock would
rise should be the same as for a cheap one.
Thus, investors were encouraged to enter the market -
anytime during the last four years - when prices were
absurdly expensive. "Prices always go up over the long
run," they were told.
And now we come to a paradox. I do not believe you can
predict the future. Yet, I also believe that prices matter.
If you buy a stock producing $1 of dividends at $10 - you
get a 10% return. If the stock costs you $100 - you only
get a 1% return.
Without pretending to know the future, common sense tells
us that the stock is a better buy at $10 than $100 - you
can get 10 times as much for your money!
Put another way, a buyer at $100 has 10 times the risk of
loss per share.
But bullish investors believe risk is no problem - they,
relying on the Efficient Market Hypothesis, think all price
levels carry the same amount of risk, because price
movements are random.
And yet, Smithers and Wright show that stock prices do not
just go upwards forever. Instead, they swing from expensive
to cheap - around a ratio called q, which measures stock
prices in terms of book value. Historically, whenever the q
ratio is extremely high, stock prices tend to "revert to
the mean." Smithers and Wright describe the pull of q as
though it were a rubber band. The farther prices move away
from the mean - the greater the tug on the rubber...and the
more likely stocks are to move back to the mean.
Stock prices are now higher than they've ever been, as
measured by the q ratio. That doesn't necessarily mean they
will fall right away...but it does mean that they are
extraordinarily risky.
"We expect the stock market to fall," write the authors,
"to a level that is less than half what they were at the
end of 1998." This implies a Dow of about 4,000.
Your very ignorant correspondent,
Bill Bonner
About
The Daily Reckoning:
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Reckoning.
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Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly
contrarian. It's also among the fastest growing e-letter on the Internet.
It's a brand new service... but it has a distinguished history..
For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market
falters. Here's more from his online readers...
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directly to The Daily Reckoning" (Timothy)
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serious warnings and the state of the market with gentle humor" (Makram)
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making some money in put options" (Frank)
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Last modified: April 01, 2001
Published By Tulips and Bears
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