--- Begin Message ---
-Caveat Lector-
* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you receive
Bill Bonner's DAILY RECKONING. This will help you to keep
pace with the changes in the markets. Bonner and I agree
on most things in the field of economics, so the two letters
reinforce each other.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
The Fabulous Destiny of Alan Greenspan
The Daily Reckoning
Ouzilly, France
Wednesday, 28 August 2002
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*** Dow down...led by disappointing tech stocks...
*** Poor Ted Turner...another rich guy less rich than he
used to be...
*** Gold moves up. Cheney gets hysterical. The world is
going to hell in a handcart...and more!...
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Poor Ted Turner. We noticed his face on the cover of the
International Herald Tribune yesterday as we rushed
through the train station. He looked sadly comic, like
Terry Thomas after a late night out. All we read was the
headline: He's not as rich as he used to be.
Not hard to figure out why. The poor man parlayed a few
billboards into Turner Broadcasting into Warner Bros.
into TIME Warner and Jane Fonda. Then Jane turned
religious on him and then he got parlayed into AOL...
The AOL/Time Warner merger was both one of the most
brilliant corporate moves of all time and one of the
stupidest. It was all very well for the rubes, patsies
and gilders to sacrifice themselves in the Great
Internet Illusion, but what did TIME Warner think it was
doing? The company had billions of dollars worth of real
assets, and expertise that it took nearly a century to
accumulate. What did it hope to gain by hitching itself
to an internet portal?
Who knows?
But one of the many charms of the market gods is that
they look for your weakness and provide a little moral
instruction.
Greedy...lazy...megalomaniacal...hallucinatory...
stupid...fearful...ignorant...arrogant, whatever your
problem, the market gods have a solution. Yes, it will
be costly and painful. But it almost always works; you
may want to repeat your mistakes, but you won't be able
to afford them.
Right now, for example, (and remember, we're just
guessing) we suspect the gods are baiting naive
investors. Stocks have gone up for the last few weeks.
The International Herald Tribune and other sources of
amusement have declared the bear market over. Grubman is
out of a job and MicroStrategy is on the rebound.
There was even a report in yesterday's news that durable
orders jumped much more than expected in the month of
July.
And so, the lumpeninvestoriat is encouraged. Things are
looking up; buy the dips.
But what's this? Intel announced that the 3rd quarter
wouldn't be so good after all. Hewlett-Packard said its
sales were off. And Ciena, the Maryland fiber optics
company, reported sales off 89% from last year...and a
loss of $160 million in the last quarter.
So things are not exactly looking up in techland. What
had been moving the market forward these past few weeks
were the tech stocks - which rose twice as much as other
stocks. Investors didn't like hearing discouraging words
from the tech sector yesterday; disappointed, they took
the Dow down 94 points and knocked the Nasdaq down 43.
And what's this? The price of gold is finally moving
again, up $2.90 to $313. What's moving the price of
gold?
Big government deficits, for one thing. The
Congressional Budget Office forecast a $157 billion
deficit for the fiscal year ending Sept. 31.
And, of course, there was the Vice President of the U.S.
in the news yesterday saying that Iraq constituted
a "mortal threat" to America. In politics, as in
markets, people always have a good reason for doing the
wrong thing - whether it is launching an attack or
taking on AOL. The gods set them up...and then destroy
them.
If that is not the way the world works, that it is the
way it ought to work.
*** Forget the market and the WAT (war against
terror)...the entire world may be in danger. A Daily
Reckoning reader tells me that the world may be getting
better, but not in his neck of the woods:
"Perhaps if Mr. Bonner lived in a country that was being
greatly affected by climate change TODAY, he'd recognize
Bjorn Lomborg as just another crackpot, like the
extremists on the other side of the debate (e.g. Brown
and Ehrlich).
In Canada our northern ice pack is thawing, adversely
affecting the wildlife and the natives that depend on
it.
Our perma-frost is melting, causing multiple
infrastructure problems - things like buildings,
pipelines and roadways that normally depend on a solid
base underneath are sinking!
We're currently suffering through what is probably the
worst drought in our recorded history, and our cattle
and grain producers are asking that a 'national
disaster' be declared. A country-wide relief program has
had to be established to try and help the cattle
ranchers.
Our fresh water is evaporating and not being replenished
- yes, that very same fresh water that you Americans
want to buy.
The water levels in the Great Lakes are so low that
shipping channels are in danger - freighters commonly
report brushing the bottom of the lakes. And the
proposed solution of dredging deeper channels will
simply increase the flow of water out of the lakes.
I'm advised by the weather forecasters that I shouldn't
go outside today (or yesterday, or tomorrow) because the
heat and air pollution are too great for anybody's
health. When I do go outside, I must lather myself in
sun block so I don't get skin cancer because the ozone
layer has a huge hole in it.
Other examples of climatic change from around the world
are broadcast on television every day, most recently
images of great floods in Central and Eastern Europe.
Please recognize that these are not normal events - the
climate is changing, world wide.
Proposals for reductions in greenhouse gases (and other
environmental improvements) have been made, most
recently in Kyoto. But the biggest stumbling block to
implementing them is the refusal of the United States
to ratify the program and start working to solve the
problem.
GET WITH THE PROGRAM MR. BONNER! LOOK AROUND YOU! There
may have been examples of environmental extremists
predicting doom & gloom, but ignoring the very real
problems that we see today is like cutting off your nose
to spite your face.
I do enjoy reading the Daily Reckoning, and I shall
continue to read it, but for Heavens sake, Mr. Bonner,
how about using some common sense when you write."
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* * * * * * * * * * * * * * * * * * * * * * *
The Daily Reckoning PRESENTS: A DR Classique, first
published December 3, 2001, in which your editor returns
to one of his favorite topics...
THE FABULOUS DESTINY OF ALAN GREENSPAN
By Bill Bonner
This week marks an important anniversary.
"How do we know when irrational exuberance has unduly
escalated asset values, which then become subject to
unexpected and prolonged contractions, as they have in
Japan over the past decade?" asked the Fed chairman,
when he was still mortal. The occasion was a black-tie
dinner at the American Enterprise Institute in December
- five years ago.
"We as central bankers," Greenspan continued, "need not
be concerned if a collapsing financial asset bubble does
not threaten to impair the real economy, its production,
jobs, and price stability. But we should not
underestimate or become complacent about the complexity
of the interactions of the asset markets and the
economy. Thus, evaluating shifts in balance sheets
generally, and in asset prices particularly, must be an
integral part of the development of monetary policy."
Mortals make mistakes. But Greenspan was right on target
in '96. It was later, after he became a demi-god, the
"Maestro," that the Fed chief erred.
In 1996, the bear market of '73-74 and the crash of '87
were still functioning as caution signs. Greenspan spoke
on the evening of the 5th. On the morning of the 6th,
markets reacted. Investors in Tokyo panicked...giving
the Nikkei Dow a 3% loss for the day, its biggest drop
of the year. Hong Kong fell almost 3%. Frankfurt 4%.
London 2%. But by the time the sun rose in New York,
where the Fed chairman was better known, investors had
decided not to care. After a steep drop in the first
half-hour, as overnight sell orders were executed, the
market began a rebound and never looked back. By the
spring of the year 2,000, the Dow had almost doubled
from the level that had so concerned the Fed chairman.
But while the maestro was alarmed at Dow 6,437 he was
serene at Dow 11,722. Fatal to Greenspan's judgment was
a combination of bad information, bad theory and a human
nature that - though unchanged for many millennia -
seems to have avoided the notice of central bankers.
Greenspan's theory was that by carefully controlling the
cost of credit and the money supply he could avoid
serious economic downturns. You have suffered enough
discussion of this issue here in the Daily Reckoning,
dear reader. For today's purpose, we will just point out
that Mr. Greenspan has everything he needs to get the
economy back on track, except the essentials. He cannot
make telecom debt worth what people paid for it. He
can't restock consumers' savings accounts. He can't make
Enron a good business. He can't erase excess capacity,
nor make investment losses disappear.
In addition to the bad theory, Mr. Greenspan had bad
information. The "information age" brought more
information to more people - including to central
bankers...but the more information people had, the more
opportunity they had to choose the misinformation that
suited their purposes.
Since the late '90s, however, many of the figures used
to justify the New Economy have been revised, downward.
"The government previously decided that neither
corporate profits nor productivity improvements were
nearly as good as they appeared to be in 1999 and 2000,"
reports Floyd Norris in the New York Times. "And now the
industrial production numbers have been sharply revised
downward."
"The new numbers show industrial production was
dramatically overestimated, particularly in the high-
technology area," Norris quotes John Vail, the chief
strategist of Fuji Futures, a financial futures firm in
Chicago.
What was true for the nation's financial performance was
also true for that of individual companies. Companies
engineered their financial reports to give investors the
information they wanted to hear - that they earned one
penny more per share than anticipated. But what they
were often doing was exactly what Alan Greenspan worried
about - impairing balance sheets in order to produce
growth and earnings numbers that delighted Wall Street.
Curiously, during what was supposed to be the greatest
economic boom in history, the financial condition of
many major companies - such as Enron and IBM - actually
deteriorated.
But by 1998, Alan Greenspan no longer noticed; he had
become irrationally exuberant himself. Markets make
opinions, as they say on Wall Street. The Fed chairman's
opinion soon caught up with the bull market in equities.
As Benjamin Graham wrote of the '49-'66 bull market: "It
created a natural satisfaction on Wall Street with such
fine achievements and a quite illogical and dangerous
conviction that equally marvelous results could be
expected for common stocks in the future."
Stocks rise, as Buffett put it, first for the right
reasons and then for the wrong ones. Stocks were cheap
in '82...the Dow rose 550% over the next 14 years. Then,
by the time Greenspan warned of "irrational exuberance",
stocks were no longer cheap. But by then no one cared.
Benjamin Graham's giant "voting machine" of Wall Street
cast its ballots for slick stocks with go-go technology
and can-do management. Stocks rose further; and people
became more and more sure that they would continue to
rise.
"Greenspan will never allow the economy to fall into
recession," said analysts. "The Fed will always step in
to avoid a really bad bear market," said investors. Over
the long term, there was no longer any risk from owning
shares, they said. And even Alan Greenspan seemed to
believe it. If the Fed chairman believed it, who could
doubt it was true? And the more true it seemed, the more
exuberant people became.
"What happened in the 1990s," says Robert Shiller,
author of the book "Irrational Exuberance," is that
people really believed that we were going into a new era
and were willing to take risks rational people would not
take...people did not feel they had to save. They spent
heavily because they thought the future was riskless."
But risk - like value - has a way of mounting up, even
while it seems to disappear. The more infallible Alan
Greenspan appeared...the more "unduly escalated" asset
values became. Having warned of a modest "irrational
exuberance," the maestro created a greater one.
Your editor,
Bill Bonner
P.S. The most exuberant phase is passed. But neither
investors nor consumers could be said to be acting
"rationally". Consumers are still spending as if there
were no recession. And investors are still buying stocks
- as if they were bargains.
"People are habitually guided by the rear-view mirror,"
explains Warren Buffett, "and, for the most part, by the
vistas immediately behind them."
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-- Been to the Daily Reckoning Marketplace Yet? --
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Want to read more from our regular contributors? This
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commentary available anywhere and presented it to you
all in one place. Take a look:
http://www.dailyreckoning.com/marketplace.cfm
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