In Today's Daily Reckoning:
*** Al is dead...Al is dead...
will the bubble turn to lead?
*** Clouds over the 'summer rally'
*** Conspiracies...manipulating the price of gold, stocks
and the next presidential election
*** Al is dead...Al is dead...like the hidden lyrics in a
Beatles song...a rumor spread yesterday morning that the
chief of the world's most powerful banking cartel and price
fixing organization - Alan Greenspan of the Federal Reserve
- had died.
*** At first, prices fell. Then, they went up. Then, they
fell again. Investors and floor traders didn't seem to know
whether to take it as good news or bad news.
*** But by the end of the day, the rumor had been dispelled
- it was revealed that 'Easy Al' still had his bony hand on
the levers of interest rate policy, and a cold eye on the
inflation figures. The Dow lost 1.2%, or 121 points. GM
fell to $60 - down from a high of $94 in April.
*** A cloud seemed to pass over the 'summer rally' picnic.
The Nasdaq fell 3.1% - down 127, closing well below the
4,000 mark.
*** Down, down, down, down...Amazon drifted further into
the heart of darkness and closed at $42. This river of no
returns stock was at 113 on Dec. 9.
*** Only 49 stocks hit new highs on the NYSE yesterday.
*** Gold lost 90 cents - the day before the World Gold
Conference begins here in Paris. I'm going over to the
Intercontinental Hotel later to day to peek in at the
events. Sure to be discussed: the global conspiracy to
drive down the price of gold. I am surprised at the outrage
this notion provokes. Large holders of gold will certainly
do all they can to manipulate its price. If they can keep
the price down - so much the better. As George Soros
advises, you should try to "profit from the folly of
government." Buy gold, sell dollars.
*** We are still waiting to see if the dollar has reached
'the end of greatness.' Yesterday, it fell sharply against
yen - after Bank of Japan officials threatened to stop
giving money way. Japan has had a zero interest rate policy
for years. It may be ending.
*** Lumber futures fell $6.10 - further evidence of a
slowing economy. Lumber is selling for 27.63 cents/bd.
foot.
*** Labor, though, remains tight. The International Herald
Tribune reports that employers are turning, in desperation,
to the last pool of labor available to them - people over
the age of 50. Census Bureau figures show the number of
people 20-34 years old fell by 6 million in the past
decade. The number of people over 50 rose by 12 million.
Making these fossils work harder has become a big concern
of personnel departments throughout the nation.
*** "Fear Grips Zimbabwe" says the headline in today's
Financial Times. The election is scheduled for this
weekend. So far 30 voters have been killed - thought to be
opponents of Mugabe's ruling party.
*** Fear might be gripping the White House too, according
to Bill King. The Justice Department is proposing to
investigate Al Gore's fundraising abuses. Conspiracy-minded
readers might wonder why, just before a close election, a
Clinton-controlled Justice Department would take up such an
explosive issue.
[If you're interested in Bill King's service, just call 1-
800-433-1528 and ask for code 3457 to receive a FREE one-
month trial.]
*** Well...reasons Bill King...if Clinton were afraid Gore
was going to lose...and also afraid that Hillary was going
down...he might want to clear Gore out of the way in the
hopes of a better chance with a different candidate. Maybe
even Madame Clinton.
*** Hillary has been making a point of privacy lately. But
her opponent, Lazio, charges that she hired a PI to
investigate him as soon as he announced his candidacy.
*** Remember, I spoke about Nicuraguan beachfront property
a few weeks back? Well, Kathie Peddicord writes to tell me
prices are already on the rise. Still, "For just $12,000
you can own a lot in a wooded enclave set back from a
private, fine-sand beach and with wonderful sunset views
out over the ocean..."
(http://www.dailyreckoning.com/body_headline.cfm?id=202)
*** "Now you can get the best up-to-the-minute financial
news and commentary ABSOLUTELY FREE," says the Internet
message I just received from TheStreet.com. Apparently,
with so much free information on the web, people were not
willing to pay for what TheStreet had to offer. The trouble
with free information is that it is worth what you pay for
it.
*** The Daily Reckoning is an exception because it only
appears to be free. In using it as a source of information
and ideas, you are also forced to read various
advertisements and promotions...plus my gratuitous
reflections on subjects that have nothing to do with
investing...
Your state and local governments aren't telling you
everything.
Fact is, where you live could actually determine how much
of your hard-earned money you get to keep. What's your
state's favorite tax poison: Income tax...sales tax...gas
tax...the 15 disguised taxes on your phone bill...or some
other insidious charge? Find out how to cut your tax burden
and protect your wealth - in the 2000-2001 edition of the
State Tax Report. (http://www.taipanonline.com/staxdr622/)
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
"At long last," to repeat yesterday's quotation from Dr.
Kurt Richebacher's recent letter, "the great global bear
market in stocks has arrived"
But what happens next?
I ended yesterday's letter with an interrogative that must
have left you on the edge of your seat. Why did corporate
profits decline after 1997? Surely, with the spread of
Information Technology...and the beneficent light of the
New Era sun ...profits should have risen.
But they did not. Why?
You may be worried that this subject will be too narrow and
dull to be worth your time. Let me assure you - you are
probably right. Yes, I do explain why life as we know it on
planet earth will soon end...and how. But if you have other
things to do...I will understand.
America has, since WWII, enthusiastically taken up its role
as the consumer of last resort. Like the teenager with an
infinite appetite at the family table, America has been
willing to consume just about anything and everything that
the world wanted to send its way.
In economists' terms, we provided the Keynesian demand
required for global growth. "But the long-term effect of
Keynesian economics," writes Dr. Richebacher, "was
dwindling capital formation and 'stagflation,'...an unusual
coexistence of economic stagnation and inflation."
The answer to this problem of the late 70s was supposed to
be a shift to the supply side - Reaganomics. Lowering taxes
and reducing regulations produced new growth. But the
growth was not the investment-led growth that was expected.
"The reality," as Dr. Richebacher puts it, "was the precise
opposite: an unprecedented consumer borrowing and spending
binge, with exploding budget and trade deficits."
Instead of increasing the amount of investment, Reaganomics
actually reduced capital formation and increased
consumption. Once again, America played its role well -
absorbing products from all over the world (especially from
Japan, which was the economic miracle of the time)...and
going deeply into debt.
"Over the decade," again, quoting Dr. Richebacher, "total
outstanding debts skyrocketed from $4.1 trillion to $12.8
trillion. During the three decades since World War II, each
dollar in incremental GDP growth required approximately
$1.40 of additional debt. At the end of the 1980s, the
debt-to-GDP ratio had soared to $2 with a rising trend."
The 1990s merely continued the trend. We were getting good
at it. Debt-to-equity, total debt, and debt-to-just-about-
every-other-measure-under-the-sun has gone up. "The
American reality of the last four years is the wildest and
most reckless credit and debt binge that the world has
every seen," as Dr. Richebacher puts it. (See:
http://www.dailyreckoning.com/corprofits2/)
That is the trouble with Keynsian demand-side growth. It
gives the illusion of growth - the effect and essence of
growth, as it were, but much of the growth is virtual, not
real.
Nothing comes from nothing. Real growth still and always
requires real investment of real money. It requires
sacrifice - giving up current consumption in favor of
capital formation. In the most primitive economy, progress
requires that a man give up his leisure in order to do some
work. In a more advanced economy, a person must forego
additional consumption in order to devote the money to
investment purposes.
But instead of saving their money and investing
it...Americans spent it. And instead of making capital
investments that would have boosted earnings and profits,
US companies preferred to give the consumer/investors what
they wanted - a fast return on their money. They preferred
to substitute virtual profits (in the form of stock market
increases) for actual increases in productivity and
earnings.
A real return requires time. And sacrifice. But a fast
return could be had by embracing the latest jingoes of
American corporate management. In the 1960s, American go-go
management was the envy of the world. But after in the bear
market of '73-'74, the American model was discarded. For a
few years, it was the German model that the world wanted.
Then, in the 80s, books on Japanese corporate management
were the rage. By the 1990s, a new American model was back
in style - one that was consistent with the underlying
trends in the U.S. economy.
The single imperative of U.S. executives has been to
"maximize shareholder value." And do so quickly. You do
this by cost cutting, restructuring, merging, acquiring and
buying back your own shares - not by investing in new plant
and equipment. Each announcement of a merger, for example,
produces a pop in the share price. So does a large purchase
of your own shares. But these gains are virtual - they
produce no additional profit.
In his 1997 book, The Synergy Trap, Mark Sirower showed
that two thirds of all the 168 mergers and acquisitions he
studied failed to produce additional shareholder
value...instead, they destroyed shareholder value.
And even the gains from cost-cutting are largely an
illusion. That is, companies are always trying to remove
unnecessary costs. And while one company can,
theoretically, boost its net earnings by eliminating costs,
what really happens is that the culture of cost-cutting
produces cuts across the entire economy. One company's
cost, it turns out, is another's revenue. The aggregate
effect is merely a reduction in economic activity, not an
increase in profits.
In short, corporate profits leveled off after 1997 because
there was so little real investment in the preceding years.
There was not enough money going into new plant and
equipment to produce new profits.
While American corporations were trying to squeeze out
additional earnings by cutting costs, and goose up their
share prices by buying back their own shares...their
workers were on a spending spree. This too contributed to
the lack of profits. The money paid to employees did not
come back in sales revenue. Instead, much of it ended up in
the hands of foreign businesses. Then, when it did come
back to America, it came back as capital investments in
stocks and bonds. The dollar was boosted up...so were U.S.
equities. Interest rates, on the other hand were held down.
And U.S. corporate profits suffered.
Dr. Richebacher: "The U.S. current-account deficit
increased to $338.9 billion in 1999, from $220.6 billion in
1998, and $143.5 billion in 1997. That is, the deficit has
doubled within the two years. It is already well above
$400." In fact, the first quarter of 2000 the deficit -
which measures the difference between goods and services
sold abroad and those imported from overseas - hit $100
billion for the first time ever.
"Follow the trail of debt excesses," urges Dr. Richebacher,
"The decisive causes of every single, serious economic and
currency crisis are credit and debt excesses. Apparently,
one cannot repeat it often enough: the U.S. credit and debt
excesses of the past few years are beyond past
experience...essentially leaving behind a horribly
vulnerable economy and financial system. This tells us to
expect a very hard landing of the economy with a steep,
steep fall of the dollar."
Bill Bonner
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Last modified: April 02, 2001
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