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===================== Sample Issue =====================
I, Greenspan ... Part One
THE DAILY RECKONING
PARIS, FRANCE
MONDAY, 28 MAY 2001
* * * * * * * * * * * * * * * * * * * * * * * * *
*** Dow and Nasdaq drop...home sales down
*** Slowdown worldwide...dollar up against euro and gold
*** Can the dollar stay up forever? Dead fish...and more
* * * * * * * * * * * * * * * * * * * * * * * * * * *
Market Watch
To remind you, this section of the Daily Reckoning is
written by Eric Fry, editor of Grantsinvestor.com. Eric
will also be the guest host on CNN-FN next week, 9:30 - 11
E.S.T. My notes and letter follow, as usual.
>From Eric:
*** The promising economic shoots of the last few weeks now
find themselves surrounded by the tares of a stubborn
slowdown.
*** Weekly jobless claims jumped back above the 400,000
mark, new home sales fell for the first time in three
months, factory orders declined 5% and orders for
semiconductors dropped an astonishing 31%.
*** Capping off the week's news, the government ratcheted
down its first-quarter GDP estimate from 2% growth to a
more-subdued 1.2%. In short, the US economy seems unlikely
to produce the kind of earnings growth that Wall Street of
late has begun to expect.
*** Maybe that's why the stock market sagged a bit last
week. The Dow lost 117 points on Friday and 296 points for
the week. This may be the year to follow the old adage:
"sell in May, go away."
*** The hottest American export these days seems to be
recession. Last week, the German Ifo business sentiment
index fell to its lowest level in two years. "The news will
heighten concern that the German economy is being affected
by the US slowdown," the Financial Times surmised.
*** Not even a dismal US GDP report or a sell off on Wall
Street seems to help the beleaguered euro these days.
Europe's currency-by-committee fell -2.5% against the
dollar last week amid reports of slowing German and French
economic growth. The euro plunged to new lows for the year
against all major currencies and trades very close to its
all-time lows.
*** The euro is fast becoming the Chicago Cubs of
currencies - often in the news, but never in the World
Series. It's a dollar dynasty in this league, and everybody
seems to want greenbacks.
*** The US dollar is another hot export. We can't seem to
print greenbacks fast enough to meet demand. Other
countries send us stuff to buy - wicker chairs, pinatas,
Land Rovers and the like - we send them dollar bills.
Before you know it, we've got a record trade deficit. A
large and growing trade deficit, like a large and growing
tree, is not the kind of thing that seems to bother too
many people...unless it falls on their house. Why should
the trade deficit bother anybody? It's been putting down
roots and growing at a healthy clip for many years, and
still, the sun rises and sets every day on a prosperous
nation.
The deficit is no problem, of course, as long as foreigners
are happy to trade the stuff that they've got for the
currency that we've got. If they change their minds, the
dollar falls, probably the stock market falls and a
Parisian vacation becomes tres cher. Don't lose any sleep
over it, folks, but pay attention.
And a few notes from Bill:
*** Not only is the euro down, so is the dollar's other
major competitor - gold. The yellow metal gave up $8 last
week. Gold stocks declined an average of 8%.
*** But TIPS (inflation adjusted treasury notes) are doing
well. They've returned 6% so far this year.
*** Can the dollar stay up forever? Or will it fall up to
30% as I [continue to] predict? I don't know, dear reader,
but it would be a good idea to have some insurance - just
in case.
*** "I'd like to see a copy of your son's senior thesis,"
wrote a DeaR reader. "I want to see what you got for your
$100,000." I have not read Will's paper, but I suspect that
investing in education is no different from other
investments. You begin with money and no knowledge. You end
up with knowledge and no money.
*** It was a warm, sunny weekend out at Ouzilly. Taking a
stroll around the pond, we enjoyed the sweet perfume of
chestnut and locust trees in full bloom. But along the
shore of the pond we counted at least 20 dead fish. A heron
is apparently diving in the water and killing them...only
to discover that they are too big to carry off.
* * * * * * * * * * * * * * * * * * * * * * * * *
I, Greenspan ... Part One
"The primary mission of Fed policy this spring," says a
column in the Financial Times, "is to prevent the capital
spending slump from having serious spillover effects on
personal consumption through job losses and wealth
destruction in the equity market."
The world's financial press has realized what you and I saw
months ago (thanks to Dr. Kurt Richebacher): This is no
ordinary inventory correction. It is more like the busts of
the 19th century...or maybe even the period leading up to
the Great Depression of the 1930s. It is caused by a
collapse of capital spending and cannot be readily reversed
by interest rate cuts...
"The severe and protracted recessions that regularly defy
monetary easing for a prolonged period," observes Dr.
Richebacher, "are invariably the upshot of a prior,
pervasive 'bubble economy' - the age-old phenomenon in
which soaring asset prices stoke borrowing and spending
binges in investment and consumption that burst once asset
prices decline.
"It has been labeled a 'post-bubble recession,' in contrast
to the garden variety inventory recession. The distinction
is vital. There is no question that the current U.S.
economic downturn belongs to the 'post-bubble' type.
Measured by the phenomenal extent of the prior borrowing
and spending excesses, it has been the greatest bubble in
history."
The type of downturn we are looking at, Dr. Richebacher
explains, is "by nature akin to the U.S. Depression of the
1930s and Japan's current prolonged recession...the
official data do not allow any doubt that the present U.S.
downturn belongs to the latter, very dangerous type."
Spending on new technology soared in the last half of the
last decade of the last century. At the beginning of the
decade, each year saw about only about $3 billion per year
of tech IPOs. But by the end of the ten years, this number
had increased 1200%. Both individuals and businesses were
sure that the new technology would pay off big.
This was not a new phenomenon. It happened several times in
the 19th century - when investors became excited about the
possibilities offered by the railroads and the industrial
revolution. Then, again, in the late 1920s, it was
electrical appliances and automobiles that caught
investors' fancy. In both cases, the technology proved
hugely successful, but it took years of booms and busts in
the capital markets before accounts were settled and
investors (or, often, their heirs) finally got what they
deserved.
Markets eventually sort things out. In the free give and
take of the marketplace, people get, more or less, what
they've got coming. Fear, greed, stupidity, patience,
self-discipline, hard work, independent thinking - human
strengths and weaknesses are rewarded or punished as the
case may be. And if the results seem unfair, who are we to
argue with them?
But the world of politics is different. The operating
principle is different - free give and take is replaced
with assault and battery. And the results are different
too. Nothing quite works out as promised...and almost no
one gets what he deserves. Scalawags and mountebanks get
public adulation, while honest citizens are robbed, bossed
around, and from time to time, killed.
Governments promise voters the sun, the moon and the stars
- that is, things that are out of reach...such as gain
without pain...progress without savings...boom without
bust. What they actually deliver up is something different.
For even they are subject to the laws of nature...and
nature always gets her price. (More about this
tomorrow...)
But today's letter is not written to complain about
politics. Instead, it merely offers a modest prediction:
the sun, moon and stars will stay where they are. Even the
most revered bureaucrat since Dwight Eisenhower will not be
able to lure them from the heavens.
Have the tech investors of '98 - '01 gotten what they
deserve? Certainly, some have. Investors in the dot.com
sector have been nearly wiped out. For example, anyone
foolish enough to invest in Microstrategy, the "data
mining" firm, near its peak, now has little more than a
hole in the ground. The stock traded above $300 a share for
a brief period.
Today, shares are approaching zero.
But most investors seem to be in relatively good shape. The
stock market, worth 180% of GDP at its peak, is still worth
140% of GDP - far above its long term average. The Dow
remains only a few hundred points below an all-time high.
Dow investors have, so far, enjoyed nearly two decades of
gain, with very little pain. Until recently, they have
realized annual profit growth of 18% per year...a level
more than twice the average. And the 'greatest bubble in
history' has, so far, been followed by one of the least
impressive economic downturns.
Is that all there is?
Investors hope so. And they are pinning their hopes on Alan
Greenspan. Armed with the powers given to him by the
Federal government, Greenspan - it is hoped - will make
sure investors never get what they've got coming... Using
some magic that has yet to be explained, he is supposed to
guarantee that their return on investment will remain far
above what markets typically allow, not just for 20 years,
but forever.
While capital spending has collapsed, consumer spending has
fallen off gently. "In light of the relentless carnage in
the stock market and virtual stagnation in real disposable
personal income, consumer spending has held up amazingly
well," reports Dr. Richebacher. "A resilient consumer is
the great hope of those who are still venturing that a U.S.
recession may be avoided."
Two-thirds of the economy is consumer spending. To succeed,
Mr. Greenspan must prevent the illness in the capital
spending from infecting the consumer. Can he?
More tomorrow...
Bill Bonner
Your man on the scene in sunny Paris...across from the Le
Paradis cafe...where you always get what you deserve...even
if you didn't order it.
================= End of Sample Issue ==================
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