Mid-Winter Sleeper

The Daily Reckoning

Weekend Edition

January 20-21, 2001

Paris, France

By Addison Wiggin

MARKET REVIEW: Mid-Winter Sleeper

The earnings season is underway… results are mixed. Home Depot and Sun Microsystems reports were disappointing Friday. Not so with Intel and IBM earlier, but both companies report they expect hard times a comin’.

The end of the week saw many investors are “taking profits,” as they say in the business, also in expectation of the economy slowing further. Likewise, most analysts expect the Fed to once again cut rates when they meet again later this month.

The Dow lost 90 on Friday to close the week at 10,587, still higher than last week’s close by 62. The Nasdaq, dominated by another wave of speculation, rose modestly on Friday to end the week at 2770, a gain of 5.5% overall. The Nasdaq is now up more than 12% since the beginning of the 2001.

The S&P 500 fell slightly to 1342, but climbed a little over 24 for the week.

Markets around the globe: The Nikkei shimmied up 0.8%. The DAX, the ‘footsie’ and the CAC-40 all remained virtually unchanged.

The Russell 2000 closed Friday at 488 up 3 for the week… and the Wilshire 5000 gained 202 to 12,383.

PRICES FOR THE WEEK:

Gold: $264 unchanged

Crude Oil: $30.19 up $1.43

Natural Gas: $7.45 down $1.02

CRB Index: 230 up one

Dollar Index: 110 up one

The Euro: $.93 down two cents

British Pound: $1.46 down one cent

Japanese Yen: $.86 up a pfenig

FLOTSAM & JETSAM: ‘Out Of Thin Air’ or ‘Bitter Medicine’?

– From Doug Noland’s

Credit Bubble Bulletin

“‘A pathetic side of the manipulation of credit in modern times is that the owners of capital, especially the little capitalists, are swept into a pool of adventure, in which the actual lending of the capital is on a great scale and performed by central agencies alleged to be so expert in debt-trading that it is better to entrust all to them. In this way loans are made and debtors accommodated, representing risks that the owner of the money, were he lending directly, would never dream of taking. It is supposed that the great professional lenders are vastly experienced, and possess almost magical discretion. The truth is that these pompous egotists throw money around, in prosperous times, with as much abandon as though it were confetti.’

Freeman Tilden, A World In Debt, 1935

‘The way to deal with a collapse of exchange is not to pretend that ‘prosperity’ is merely in a temporary eclipse, to return again if everybody will act optimistically; but frankly to acknowledge that conditions were unsound, and permit the natural impulses of trade to rectify them. This prescribes a bitter medicine, which people do not like and politicians cannot collect upon; but quack remedies merely put off the final day of reckoning.

‘The natural remedies, if the credit-sickness be far advanced, will always include a redistribution of wealth: the further it is postpones, the more violent it will be. Every collapse of credit expansion is a bankruptcy, and the magnitude of the bankruptcy will be proportionate to the magnitude of the debt debauch. In bankruptcies, creditors must suffer.’

Freeman Tilden, A World In Debt, 1935

‘While bubbles that burst are scarcely benign, the consequences need not be catastrophic for the economy. The bursting of the Japanese bubble a decade ago did not lead immediately to sharp contractions in output or a significant rise in unemployment. Arguably, it was the subsequent failure to address the damage to the financial system in a timely manner that caused Japan’s current economic problems. Likewise, while the stock market crash of 1929 was destabilizing, most analyst attribute the Great Depression to ensuing failures of policy. And certainly the crash of October 1987 left little lasting imprint on the American economy.’

Alan Greenspan, June 17, 1999

There is not one paragraph from the volumes of Greenspan material that I have read that I ponder more than the above. Somehow, monetary policy has regressed to the point of complete disregard for financial and economic excess. Why worry about a boom, when there is always monetary policy to insure against a bust. Why worry about poor and excessive lending when monetary policy is always available to make the reckless lenders whole? Why worry about the type of investment funded by the lenders, when new lending capacity can be created as easy as ‘the Federal Reserve reduces interest rates by 50 basis points’? For Greenspan, as well as Wall Street, ‘the answer’ can always be found with accommodative monetary policy. Lower rates, create a positive yield curve, and ‘free money’ is created out of thin air. Keep the leveraged financial players in the game, credit remains available, and a perpetual boom is assured.”

Enjoy your weekend,

Addison Wiggin

The Daily Reckoning