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Co-brand
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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
THURSDAY, 4 OCTOBER 2001 |
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Today:
Still
Turning Japanese
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*** "Good value" at 25 times current earnings?
*** Sharpshooters on Wall Street...
*** The best investment to own, right now! Think Japan
has it bad? And more!
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The Dow was up again yesterday. Is it a
continuation of the "dead cat" bounce from September's
2147 point drop? Or a major new rally?
Of course, we don't know...nor do we especially
care.
Stocks bounce around in a largely unpredictable
fashion. Smart investors don't worry about it. Instead,
they merely buy the good companies they want to own...
when they are cheap, hoping that they will be less cheap
in the future.
Barron's thinks stocks are cheap now. The current
issue lists 25 "good value" picks. Wait - what's this -
GE at 25 times its current earnings? Microsoft at a P/E
of 28? Cisco at 112? Viacom at 412? Oracle, Fannie Mae,
Verizon?
And the dividend yields? 1.8% from GE...nothing
from Microsoft, Cisco, or Oracle. Verizon at least gives
you a dividend almost equal to the inflation rate. And
Viacom? Heh, heh...
These may be great companies, but these are not
great prices. Why not wait? GE has lost 25% of its value
in the last 12 months. Viacom is down 29%. And Oracle
has lost 58%. What's the hurry?
Eric, what's shakin'?
*****
Eric Fry, right in the thick of things:
- "Remember when Alan Greenspan was the most powerful
man in Washington?," Moody's John Lonski wrote earlier
this week. "For the first time in a long while, the
President of the United States seems to matter more to
both the U.S. and the world economy than does the
chairman of the Federal Reserve."
- How right you are, John! Two days ago, Greenspan
worked his magic on Wall Street. He cut interest rates
and voila, stocks rallied. But yesterday, it was the man
himself, George W., who kicked the stock market into
high gear. All he had to do was show up on Wall Street
and stocks bolted higher. And while it may be impolite
to compare such things, George's rally was much bigger
than Alan's.
- The Dow raced ahead 173 points to 9,124, climbing
above 9000 for the first time since the terrorist
attacks. The Nasdaq soared 88 points - nearly 6% - to
1,581.
- President Bush and an entourage of several hundred
security personnel paid a visit yesterday to the Federal
building on the corner of Wall and Broad - immediately
adjacent to my office at 30 Wall St.
- While he was inside yakking away with "business
leaders" about our resilient economy, all the worker
bees here inside the building were "locked-down." No one
was allowed in or out of the building between 10 AM and
1 PM. It was like being grounded by your parents, or as
my childhood friend's mom used to call it, "room
confinement."
- Outside our windows on the surrounding rooftops, a
bevy of police sharpshooters stood watch - each one
packing some kind of serious firepower.
- Meanwhile, across the street inside the stock
exchange, retailing stocks led the charge amid
pronouncements from the talking heads on CNBC that "the
consumer is back." How the consumer could be back so
soon after going AWOL is a mystery to me. My friend,
Michael Martin: "Maybe Americans can lose their jobs and
still buy twice as much stuff. What do I know?"
- Investors must think they know something because
retail stocks were flying off the shelves. The S&P
Specialty Retail Index jumped 9%. A few individual names
put in an even more sparkling performance. Surfware
retailer Quiksilver rode the wave up 15% and Williams
Sonoma, vendor of $100 wine openers and other household
necessities, popped 22%. (The fact that Wine.com filed
for bankruptcy earlier this week should in no way be
taken as a leading indicator of wine-opener demand). The
consumer may not actually be back, but the consumer of
consumer goods stocks returned with a vengeance
yesterday.
- If the consumer has returned at all, it is because he
never completely left. Despite the fact that September's
consumer confidence reading plunged a jarring 31.5%
year-over-year, it did not fall evenly from coast-to-
coast. Confidence dropped precipitously in the regions
close to "ground zero." But distance seemed to soften
the negative impact of the attacks. In the Northwest,
September consumer confidence actually increased by 3.6%
from August.
- That said, a vigorous consumer spending rebound seems
unlikely. "September's tally of those actually
collecting state unemployment benefits could be up by
49.5% yearly," John Lonski observes. "A year-to-year
advance of that magnitude has not been seen since the
recession years of 1980-1982."
- Furthermore, Lonski continues, "One of the U.S.
economy's remaining pillars of strength may have
succumbed to the terrorist strikes. Prior to September
11th, home sales were apparently proceeding at a brisk
pace. Unfortunately...a residential real estate trade
association claimed that home sales have only partly
recovered from their near standstill immediately
following September 11th's terrorist attacks."
- To judge from recent stock market action, life in the
U.S. is almost back to normal. But there is still that
small matter of finding and disposing of Osama bin
Laden, along with several "terrorists to be named
later." And there is that other small matter of American
businesses doing a lot more firing than hiring.
- Certainly, life in the U.S. is less abnormal then it
was three weeks ago, but "normal" seems a ways off.
*****
Back in Paris...
*** You've been extremely generous, Christoph Amberger
tells me.
*** As you know, we've been following the Taipan Group's
"Open For Business" relief drive for victims of the WTC
attacks. Including the $5,000 Christoph kicked in,
readers of the DR have helped to raise over $36,000!
100% of the proceeds will be handed over to the Red
Cross to help out the disaster relief efforts in New
York. (If you haven't donated yet, you can still do so
at the following link: Taipan's Red Cross Relief Drive -
Last Chance!)
http://www.taipanonline.com/red_cross.html
*** If you plan to donate you should do so today. The
funds will be awarded next Thursday, October 11, at 2 PM
at our company headquarters. "Tell you what," writes
Christoph. "Since it's your donation I'll be handing
over...if you happen to be in the area, just come join
us. The event will take place at 14 W. Monument Street
in downtown Baltimore. (If you decide to come, just
shoot us an email, so we can mentally prepare: Taipan
Red Cross - hng@agora-inc.com)"
*** Meanwhile...What's the best investment to own, right
now?
*** The price of gold rose 70 cents yesterday. Gold
stocks fell 4%. "I'm still pushing gold as the ONLY
asset to own right now," writes the Mogambo Guru, "The
Fed has announced that they are fully aware that their
easy-money posture will create inflation in the future!
They admitted it right to your freaking face! Every
textbook ever written on economics says that vastly
increasing the money supply is a cause of inflation!
Gold is the ultimate hedge against inflation! Every
economist in the world agrees with that, as far as
I know. It is selling at little more than the #%@& cost
of production RIGHT NOW! The WORST it can do is just sit
there for no gain!
"Gold is, RIGHT NOW, the bargain of the century..."
(More on gold, tomorrow...)
*** "Think Japan's Economy is Bad Now?," writes William
Pesek in a Bloomberg article. "Just Wait."
*** The poor, dumb Japanese. All of the magic of the New
Economy and other illusions of the late '90s were lost
on the Japanese. Their economy limped along and their
stock market fell, from a high of nearly 40,000 down to
under 10,000. An entire decade, and what do investors
have to show for it? A 75% loss!
*** And not for lack of trying. All the elixirs and
patent medicines upon which Americans put so much hope
were administered by the horse bucket...Rates cuts?
Japan went all the way...down to zero. Fiscal stimulus?
Oh la la...they ran enough juice through the body
economic to straighten out a lunatic.
*** But for what? The situation just gets worse. Why?
You'd think the inquiring minds at the Federal Reserve
or the Treasury Department might want to know. But no.
So, it's up to us, dear reader, to figure it out. More
below...
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STILL TURNING JAPANESE
by Bill Bonner
I think I'm turning Japanese
I think I'm turning Japanese
I really think so.
The Vapors
Learning from the mistakes of others is cheap tuition.
An e-mail message yesterday told the story of an amateur
pyrotechnician. Sure that diesel fuel would not
ignite...and wanting to show off to coworkers...he
passed a cigarette lighter over a stream of fuel
spilling out of a tank, without effect. Then, just to
prove his point, he repeated the trick, perhaps coming
in closer contact with the fuel.
He is presently recovering from burns over most of his
body.
Today's letter is written in the spirit of the
inquisitive onlooker...amazed that anyone could be so
dumb...fascinated by the spectacle of it all...and happy
to let someone else conduct the experiments.
The economic engineers in Washington, too, might be just
a little bit curious. Opening the jets of both monetary
and fiscal stimulus, they may at least wonder about what
it takes to set them on fire...and spark a real
recovery.
There has been only one major experiment with such
vigorous rate cuts in a fully modern economy. It was
conducted under imperfect conditions. Still it may be
worth studying.
In the 1980s, the Japanese economy was a marvel, the
most successful, most dynamic, most self-confident
economy the world had ever seen. American businessmen
cringed and quaked before the threat of Japanese
competitors and the Japanese economy grew at 4% per year
throughout the decade.
But epic levels of confidence, like epic P/Es,
eventually give way. Japanese economic power soon proved
an illusion. Stocks crashed in January of 1990...and the
economy went into a slump.
Of course, by 1990 books by Milton Friedman and John
Maynard Keynes could be found in any good Japanese
library...and it was not long before Japanese
policymakers were doing exactly as the two great
economists counseled. Interest rates were cut...and
cut...and cut. Rates fell below 1% five years ago. Since
then, they've dropped all the way to zero. Did the
Japanese economy bounce back?
No, it didn't. GDP has grown only about 1% annually
since 1991. And unemployment rose from 2.1% in 1991 to
around 5% today. This number is probably low. In Japan
it is disgraceful to be unemployed...so it is often
unreported. Bankruptcies and suicides have surged.
You may recall a note in Daily Reckoning more than a
year ago. So many Japanese businessmen were committing
suicide by jumping in front of trains that the rail
stations began to put large mirrors on the edge of the
tracks so those planning suicide could "reflect" before
doing themselves in.
Zero interest rates are not new to the world. They were
a feature of the Depression in the U.S. too...when rates
dropped as low as 0.02%. Then, as in modern Japan, they
seemed to have no effect.
U.S. economists may want to reflect on that. And on what
effect fiscal policy can have on such an economy.
Yesterday, a $78 billion "stimulus package" was
announced in Washington.
But, here too, there is empirical evidence on which to
draw. Japan has already subjected itself to the
stimulating effects of spending the taxpayers' money
before the taxpayers earn it. In the 1980s, Japanese
consumers went wild...getting, borrowing, and spending
with the confidence of a teenager. In the following
decade, their confidence declined as their savings and
frugality increased. Government stepped in to fill the
gap, spending money people did not have on projects they
did not need.
"Think of it as the W.P.A. on steroids," suggests
economist Paul Krugman, writing in Sunday's New York
Times magazine. "Over the past decade Japan has used
enormous public works projects as a way to create jobs
and pump money into the economy. The statistics are
awesome. In 1996, Japan's public works spending, as a
share of G.D.P., was more than four times that of the
U.S. Japan poured as much concrete as we did, though it
has a little less than half our population and 4% of our
land area. One Japanese worker in 10 was employed in the
construction industry, far more than in other advanced
countries."
In 1992, Japan ran a budget surplus. In that year, too,
it had public debt of about 60% of GDP - in line with
other modern economies. Today, after 10 years of
vigorous boondoggling, the public debt in Japan is the
highest in the developed world, at 130% of GDP.
And still no economic turnaround. In fact, a dozen years
after the slump began...things look worse than ever.
"We're in a very bad way at the moment and things are
getting worse," says James Malcolm, senior economist at
J.P. Morgan Securities (Asia) Ltd. Kazuhiko Ogata.
"Japan is no longer in recession," adds a colleague,
"it's a depression."
For all their stimulating effects, neither fiscal nor
monetary policy has aroused the Japanese economy. Why?
As promised, here is the answer.
"Alan Greenspan's aggressive rate cuts are proving to be
a complete failure," writes Dr. Kurt Richebacher. "They
ought to have reinvigorated the U.S. economy long
ago...when was the last time the Federal Reserve cut
interest rates 8 times in a row and the stock market
still kept falling?
"It is indeed different this time..." Dr. Richebacher
continues. "The single most important, most unusual, and
also most ominous feature in the U.S. economic
development during the past few years has been the steep
drop in profits, which started at the pinnacle of the
boom. It's definitely the downturn's one key cause.
Everything else - the protracted plunge of stock prices,
the savage cuts in business capital spending and the
shrinkage of consumer income growth - is but a
consequence of the profit carnage."
Profit levels, generally, have made no progress since
1997. Nasdaq companies, according to the Wall Street
Journal, "haven't made a collective dime since the fall
of 1985."
Without profits, as Keynes once pointed out, "the whole
process [of capitalism] comes to a halt." No profits, no
new investments. No new employees. Instead, companies
cut costs - including laying off employees - in order to
become profitable again. That is the real source of the
slump - not consumers, not terrorists, not high interest
rates.
Does lowering interest rates help? Not when companies do
not want to borrow. They borrow to build new plants and
buy new equipment. But the problem they face is that
they can't make any money on the capacity they've
already got. Instead of investing in new capacity...
they're liquidating the bad investments they made when
they were more confident.
Floyd Norris, in the N.Y. TIMES, elaborates:
"Broadly speaking, companies raise capital for two
reasons, because they need the money to pay bills or
because they want to make investments that appear
attractive. Markets are not eager to provide cash to
those who need it the most, and the volume of investment
spending has fallen sharply from peak levels because
some industries, notably telecommunications and
technology, have excess production capacity. That glut
is not likely to ease soon..."
If lower rates and massive public spending do little
good, might they, in fact, do harm? Possibly. The glut
of capacity will not ease as quickly if businesses are
encouraged - by low interest rates - to continue adding
capacity, even in a downturn. And public works - which
produce no profits - may also have a negative effect,
absorbing resources that might have been invested
profitably elsewhere else.
Why else has the Japanese economic malaise lasted so
long, if not for all their efforts to cure it? Even in
this post-ironic age...Mr. Market still sniggers.
More to come...as usual...
Bill Bonner
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| About
The Daily Reckoning: |
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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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