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* * * * * * * * * * * * 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.
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The Height of Idiocy
THE DAILY RECKONING
PARIS, FRANCE
WEDNESDAY, 28 NOVEMBER 2001
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*** The chips were down...a little...yesterday - end of
the rally?
*** What will consumers, investors, businessmen do?
We'll take a guess...
*** Confidence down. House prices down. Dow down. The
whole world economy falls down, down, down into a
burning ring of deflationary fire...
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Yale Professor, Robert Shiller, quoted in the Wall
Street Journal: "We face a big unknown today in how
consumption and investment will evolve in the next few
years. Will consumers further cut their spending in
response to terrorist threats? Will they continue to cut
back travel and vacations? Will they cut back their
demand for housing, and reduce the price for housing,
thereby further amplifying the downward wealth effect?
Will business become too pessimistic to launch new
campaigns, sink money in new plants and equipment, and
hire and train new employees? Will entrepreneurs be
unwilling to commit themselves to new risky ventures
that will drain their time and emotional energy in
return for some uncertain possible reward in the
future?"
Questions, questions, questions. And who knows the
answers?
No one. But we don't mind making a guess and
proposing a reason.
The chips fell a little yesterday. Our guess is
that whenever the percentage of stocks to GDP is greater
than the average investor's I.Q. - the chips are too
high. We wouldn't be surprised to see the chips fall and
keep falling, until they are finally down to a level
where people are no longer so confident of the future
that they're willing to buy a stock at a price 30 times
its earnings and with a measly 1% dividend yield. Unsure
about the return OF their money, they're going to want a
bigger, surer return ON their money to make up for the
risk.
Bonds have outperformed stocks this year, but have
headed down lately because investors think they see the
end of the downturn. But Fed. Governor Meyer admitted
yesterday that it would be "misguided" not to cut rate
further if the economy refuses to respond.
So far, we see no evidence that the economy is
improving...and we would not be surprised to see lower
rates, and higher bond prices, in the months ahead.
Over to you, Eric.
*****
Eric Fry in Manhattan...
- Hey! What happened? Where did all those confident
consumers go? Contrary to the expectations of the
"imminent recovery" crowd, consumer confidence dropped
in November to its lowest level in seven and half years.
- This latest confidence reading reflects unalloyed
anxiety. The "present situation" component of the
confidence index fell to 93.5 this month from 107.2 in
October.
- What might we glean from this latest report? Not much
more than what we should have known already - when
unemployment rises, confidence wanes.
- Is confidence waning on Wall Street as well? Don't you
believe it!
- "Call buying is off the charts," an institutional
options trader informed me yesterday. "The sentiment is
extremely bullish."
- Likewise, the VIX Index of options volatility
indicates that fearlessly bullish investors are out in
force. But then, we kind of knew that already.
Many traders rely on these signals from the options
market as contrary indicators. When the indicators show
extreme levels of bullishness, the stock market often
falls shortly thereafter. By contrast, high levels of
bearishness - as existed in mid-September - often
precede significant market rallies.
- At the moment, the crowd is bullish...which is bearish
for stocks.
- Yesterday, the Dow tiptoed toward the 10,000-mark,
before getting a little spooked and finishing 110 points
lower at 9,872. The Nasdaq gyrated between a 37-point
and a 23-point gain before falling 5 points to 1,936.
Perhaps yesterday's negative finish heralds a change in
the wind for the stock market - a change that is not
bullish. Certainly, investors do not lack for reasons to
sell stocks.
- Through the end of October, industrial production has
dropped 7.3% year-over-year. Capacity utilization has
dropped a similar amount. Both of these key
manufacturing indicators have suffered their most severe
yearly slumps since 1982.
- Within the other major industrialized countries,
Bridgewater Associates observes, "Production growth
still stinks, and if anything the industrial sector's
problems look like they are getting worse, not better."
- If our economy were as robust as Abby Joseph Cohen
would have us believe, why are folks taking out new
mortgages for the purpose of buying almost anything
except homes?
- Mortgage refinancing activity has soared 500% year-to-
date. Yet, the number of new mortgages for home
purchases has actually fallen this year. And so have
home prices. Despite the remarkable decline in mortgage
rates over the last 12 months, new single-family home
prices have fallen year-over-year.
- A contributor to the DR discussion boards provides an
eyewitness account from ground zero "in the HEART of the
Silicon Valley." He writes, "Home sales have increased
from 5 pages of ads of open houses in the local paper to
25 pages. You now have a choice of 3-4 homes on the same
street...Just the tone of the valley has changed; my
kids and I went to a mall on a sunny Saturday; it looked
like a ghost town. Let's have a reality check: Layoffs,
businesses folding, homes and apt. vacancies, lack of
shoppers...believe me it's FAR from getting better."
- For every story we read about the imminent, hoped-for
recovery, there is at least one troubling tale about the
present, undeniable slowdown - one of the more poetic
recent anecdotes being the dismal attendance two weeks
ago at the technology company love-in in Las Vegas known
as Comdex. "From the moment the media, exhibitors,
analysts and attendees got off their respective flights
at the Las Vegas International Airport, it could be seen
that Comdex 2001 would not be living up to its previous
self," PCstats.com reports. "The first tip-off was how
easy it was to get a cab...As the cabbies themselves
said, last year they averaged about 25 rides a day, this
year it was down to 10 or 15."
- So just how poorly attended was this Comdex confab?
"NTT DoCoMo, a Japanese firm that makes some of the
wildest cell phones you will ever see on the planet, had
a large booth this year with a small armada of Booth
Babes. At most times, the lovely ladies equaled or
outnumbered the number of visitors to the NTT pavilion."
- In hard numbers, pcstats.com writes, "When the number
crunching had been completed, the attendance figures
from last year, which stood at about 211,000 people,
were down to a mere 57,000 in 2001."
- Better luck next bubble.
*****
Back in Paris...
*** What else?
*** Well, today is the anniversary of the invention of
the guillotine.
*** What else do you need to know?
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The Daily Reckoning Presents: An attempt to grapple with
the tough business of economic prognositication...
THE HEIGHT OF IDIOCY
By Doug Casey
"The only element in the universe more common than
hydrogen is stupidity."
Einstein
I'm not a fortune teller. In fact, the only things
anybody knows about predicting - even if you gussy the
concept up by calling it "forecasting" - are 1.) Predict
often and 2.) Never give both the time and the event.
The worst offenders are those who pretend they know
where the economy's headed. Statistics - so often the
basis of conjecture with regard to the economy - are so
subject to interpretation, and so easy to take out of
context, that most of the time they're best used as
fodder for cocktail party conversations.
Still, as potentially wrong-headed and tendentious as
the subject is, "the economy" is occasionally worth
talking about simply to establish a clear point of view.
In fact, I place the phrase "the economy" in quotes
because I don't even accept the validity of the concept,
nor that of "the GDP"; they're both chimeras.
The idea of GDP gives the impression that it is not
individuals that produce goods and services, but rather
a machine called "the economy." This leaves the door
open to all manner of nonsense, like the assertion that
what may be good for individuals may not be good for the
economy, and vice-versa.
For instance, an advance in the GDP doesn't necessarily
mean increased prosperity: What if the government
embarked on a massive pyramid building program, an
archetypical example of public works? GDP might rise,
but it would add absolutely nothing to the well being of
individuals. To the contrary, the building of the
pyramid would only divert capital from wealth-generating
activities. On the other hand, if a scientific
breakthrough was made which cut energy consumption by
80% for the same net output, or magically eliminated all
disease, the GDP would collapse because it would
bankrupt the energy and health industries.
But people would be vastly better off.
Entirely apart from that, the whole idea of GDP gives
the impression that there actually is such a thing as
the national output.
In the real world, however, wealth is produced by
someone and belongs to somebody. We're not ants or bees
working for the hive. The whole idea of a GDP just
allows the "authorities" to bamboozle people into
believing they can actually control "the economy," as if
it were some giant machine.
The officials pretend to be the Wizard of Oz, and Boobus
americanus is trained to think they're omniscient. Thus
whenever the rate of growth slips "too low," officials
are expected to give "the economy" a suitable push.
Conversely, whenever "the economy" is growing too fast,
the officials are supposed to step in to "cool" it.
It's all an embarrassing and destructive charade.
Nonetheless...
I remain of the opinion that we're headed into the
biggest economic smashup in history.
That's an outrageous statement, and it's always
dangerous to say something like that. After all, the
longest trend in motion is the Ascent of Man, and that
trend is unlikely to change; indeed, it's likely to
accelerate. And it's usually a mistake to bet against an
established trend. Furthermore, science and technology
will continue advancing, people will continue working
and saving, entrepreneurs will continue to create. And
downturns in the economy have always been brief. There's
a good case for staying bullish.
Even most of those who talk of a recession tend to write
it off as either a simple reversal of recent "irrational
exuberance," or a passing change in people's psychology,
or temporary shock from the 9/11 events. Unfortunately,
it goes much deeper than that. Those things have very
little to do with what recessions are all about.
A recession, according to the conventional parlance, is
a period when economic activity declines for two or more
quarters. That's a description of what happens, but it's
really not very helpful, much like saying a fever is a
period during which your temperature is above 98.6 F. A
better definition of a fever might be a period when the
body's temperature is elevated as a consequence of
fighting an infection, in that it gives you some insight
into the cause as well as the effect.
That's why I prefer to say a recession is "a period of
time when distortions and misallocations of capital
caused by the business cycle are liquidated."
What causes the business cycle? Excess creation of
credit by a central bank (e.g., the Fed). The injection
of artificially created money and credit into a
country's economy gives both producers and consumers
false signals, causing them to do things which they
otherwise would not do. The longer the upswing of a
business cycle continues, the longer and more severe the
down cycle will be.
A depression is just a really bad recession.
One thing that - contrary to popular opinion - can help
get an economy out of a recession is a large pool of
savings; savings give people the money to invest in new
production, as well as the money to buy that production.
That's why it's the height of idiocy for pundits to talk
about how patriotic it is to go out and shop. It can
only deplete the capital that will be needed in the
future, and deepen the bottom with more bankruptcies,
stealing consumption from the future.
That's why the Fed's lowering interest rates on the
federal funds rate from 6% to 2.5% since January is such
a bad idea; it encourages people to save less and borrow
more. This engineered decline may well, after a certain
lag time, cause a cyclical upturn - but it will only
aggravate the underlying problem, guaranteeing yet a
bigger bust.
We're going to see lots more bankruptcies before this is
over. Bankruptcies are about debt.
There's no question we're already in a recession, and
have been for over a year; here come the GDP stats:
Year-on-year industrial production fell by 5.8% in
September, the 12th consecutive decline. Non-farm
employment was down by almost 200,000 in September
alone. The GDP's rate of growth fell to an annual 0.3%
in Q2, from 1.3% in Q1. And Q3 and Q4 are going to be
much worse.
We're on schedule to make 2001 the biggest year in
history for personal bankruptcies, well over 1.5
million. The average amount of debt per household is 15%
of disposable income, the highest ever. The average
credit card debt per household is over $9,000-about
three times the level of 1990.
Until just last month, stats show consumers were adding
credit card debt at 16% per annum. Total revolving
consumer credit rose more than $75 billion, to over $700
billion. The percentage of both delinquent credit card
loans and mortgage payments are the highest since 1992.
In the last recession, in 1990, 71% of credit card users
carried their balances forward, making only partial
payments from month to month; only 29% paid their bills
off in full each month. During the boom of the '90s,
with full employment and stocks skyrocketing, the number
financing their balances dropped to a low of 56% in
2000.
That number is going to be heading up with all the
economic indicators going into reverse at warp speed.
Figuring 18% interest on the average balance of $9,000,
about 2,000 non-tax-deductible dollars a year, and
figuring how many people are already living paycheck to
paycheck, and not counting the fact that the
unemployment rate could go at least to the levels of 20
years ago before this is over, it seems like really big
trouble.
The Federal Reserve indicates that - not counting home
mortgages - Americans are over $1.6 trillion in debt.
Home mortgage debt, however, is the biggie, increasing
by $1.2 trillion over the past three years alone.
Of course it's looked grim plenty of times before. But
this is just the start of a recession, not the bottom of
one.
This isn't just an American problem, because the U.S. is
truly the engine of the world's economy. But a lot of
the drive behind the engine is the gigantic trade
deficit. The $450 billion the U.S. sent abroad in the
last year alone, after over a decade of increasing
deficits, has caused a lot of capital investment that
will become uneconomic, and created a lot of economic
activity that will come to a screeching halt when that
deficit inevitably reverses.
The whole world is levered on what happens in the U.S..
The effect in economies around the world will be
devastating. The Smoot Hawley tariff of 1930, which
acted to collapse world trade, greatly exacerbated the
last depression. It could be that economic conditions in
the U.S. alone could do it this time, without the overt
"assistance" of the government.
In fact, the U.S. and Japan account together for 46% of
world output. When the U.S. radically decreases its
buying of foreign manufactured goods, and the Japanese
do the same with raw materials as a consequence, it's
going to hit world trade like a sledge hammer.
I don't believe we're looking at just another cyclical
downturn this time. We could be - but I don't think so.
The meltdown of the bubble economy; the dissipation of
perhaps trillions in the busted tech boom; the negative
wealth effect from the collapse of stocks; now real
estate, and next the dollar; the huge buildup of
capacity which will go idle; the historic debt burden;
and now a war that could go on for many years add up to
a truly deadly combination.
Noting a real trend he called "The Top-Out Parade," [oft
noted here in the Daily Reckoning] Richard Russell
pointed out some time ago: "Daily new highs topped out
on Oct. 3, 1997. Advance/Decline ratio topped out on
April 3, 1998. Transportation stocks topped out on May
12, 1999. NYSE Financial Average hit its peak the next
day. Utilities registered their high on the 16th of June
1999. NYSE composite topped out a month later. The Dow
itself hit a high of 11,722 on Jan. 14, 2000. The NASDAQ
peaked on March 10 at 5,048. The S&P topped out on the
24th of March at 1,527. What's left? The dollar."
Of course, since the dollar is by far the biggest market
in the world, constituting the reserves of almost every
government on the planet, the de facto currency of
probably 50 countries, and the savings of hundreds of
millions of people around the world, when it collapses,
it will cause a financial earthquake, Magnitude 10.
Use any rallies as selling opportunities. Diversify your
assets out of the U.S.. Build a good position in gold.
Buy gold stocks with speculative capital. Get your debt,
if any, down to comfortable levels.
Doug Casey
for The Daily Reckoning
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