American Peso

“So…who eez zee president ov zee Yooo Esss? Ha ha…”

Addison and I were having lunch at a crowded little restaurant near the Pompidou Center, not far from our office. The words quoted above were delivered by a man with gray hair who leaned over towards us, after hearing us speaking with our American accents.

In the space of just a few days, America has gone from being on top of the world…to its laughing stock.

“Like Italy!”

Thus did a headline echo the thoughts of a bar owner in Rome.

Count on the foreign press to get the story wrong. In Italy, governments come and go. Civilized Italians don’t take politics very seriously. They ignore their leaders and cheat on their taxes.

America is completely different. Americans pay their taxes and pay attention to politics as if it mattered.

But a Roman newspaper, La Republica, elaborated: “The first election of the new millennium,” said the Italian editorialist, “has brought America into the realm of the surreal.”

Newspapers, the chattering classes, and bar owners all over the world are enjoying the public spectacle of U.S. presidential politics. One of the dullest election campaigns in generations – with two candidates no one really cared much about…one without a heart and one without a brain (as the media characterized them) – has been transformed in its final hours into one of the most exciting collective dramas of our day.

A Russian web-site jokes that the “latest reports show Vladimir Putin in the lead.”

“Banana Republic” said La Republica… Yes, “it does sound very Mexican” said a political scientist named Federico Estevez.

Lynn Carpenter set my brain to work yesterday with an offhand comment on the dollar. I cannot quote her, because I cannot remember exactly what she said, so I will make up a quote:

“All currencies,” she did not say, “including gold and silver, are features of the collective imagination. Their only value comes from what people en masse believe them to be worth.”

In the world’s collective imagination, the U.S. has become a subject of ridicule. The question I pose today: Will its currency become a joke one day, too?

Like most of the rest of the world’s press, Die Welt has it backwards: “It’s not a cheap detective novel, not a soap opera, but a debacle that could turn into a comedy.”

Quite the contrary, dear reader, the presidential elections are a farce that could turn into a disaster.

This is not the first time an election was close. Nor is it the first time an election turned on a small number of disputed votes. In November, 2000, the voters of Missouri elected a dead man. But in November 40 autumns ago, dead voters probably elected a live president.

That was when John Kennedy beat Richard Nixon, thanks perhaps to the deceased voters of Chicago. Some campaign managers are better than others, of course. And no one could get out the vote in Chicago like Mayor and Kennedy- supporter Richard Daley. So effective were his efforts that even the corpses of people long dead managed to cast their votes. And people still among the quick were so animated by civic responsibility that they decided to vote more than once!

Daley has left office to join the dead voters of Cook County, but his son, William, is the head of Al Gore’s campaign. Yesterday, Mr. Daley joined with Warren Christopher and fellow Cook County voter Jesse Jackson to proclaim that although “we do not intend to provoke a constitutional crisis…” simply recounting the votes may not be enough. “This is the start of a process,” said Daley.

What process? Where does it lead? No one quite knows.

Richard Nixon discussed the 1960 election in his memoires. He might have contested the results, but “the effect could be devastating to America’s foreign relations…” Al Gore may not have quite the same reluctance to challenge the election.

The value of the dollar – like a dot.com stock or a candidate’s intelligence – rests on nothing more than a collective illusion… They are worth what we, en masse, are willing to give them.

So far this year, the triumphalism with which the U.S. marched into the new millennium has begun to yield – to doubt, chaos and losses. The U.S. economy no longer appears to be so miraculous. Growth rates have fallen. There are signs of distress in several areas – from falling inventories of heating oil to rising personal bankruptcies. Nasdaq stocks are down 40% from their highs, while the leading sectors – techs and dot.coms – have been crushed. Only the dollar, so far, has resisted the general retreat.

But even the dollar seems to be giving ground. It hit an all-time low against the euro of 82 cents in October. Now a euro is 86 cents. I don’t know any better than anyone else what will happen… but the collective illusion that supports the dollar has been weakened. And the smart money is probably hedging its bets – buying assets with their roots in other currencies, other places and other illusions.

Your reporter, watching the U.S. elections and the dollar from the other side of the Atlantic,

Bill Bonner

Paris, France November 10, 2000

P.S. How big a debacle might the election chaos cause?

Life has a funny way of going in directions you don’t expect. Just when things seem to be going well – boom, something unexpected happens. That, as I have pointed out, is what happened in the 20th century. It began as the most promising century of all time. But the Archduke Ferdinand’s driver took a wrong turn in Sarajevo…touching off a series of events and catastrophes that resulted in the deaths of 100 million people over a 75 year period. At one point, more than half the world’s people – and half its landmass – were under the control of murderous regimes with no sense of humor, nor any concept of property rights. Could the Palm Beach ballots be the 21st century’s equivalent of a wrong turn in Sarajevo?

There are trillions of dollars worth of bad investments that have been made in the last few years. In other letters, for example, I’ve estimated that U.S. equity prices might represent $5 – $10 trillion in wealth that exists only on paper. Sooner or later, this ‘wealth’ is going to disappear. Gently…or not-so-gently. A sharp decline in the dollar could bring about a very hard landing of U.S. stocks and the economy…causing widespread anger and bitterness. Who knows what the ultimate consequences might be?

*** Gridlock! That’s what Americans really wanted from Washington. And that’s what they got – even more than they expected. Americans elected at least one dead senator, an almost perfectly deadlocked Congress, and a president (whoever he is) disabled by ballot irregularities and election disputes.

*** Something always seems to go wrong on the road to perfection. The perfect, Goldilocks story of last January has turned into a different kind of fable. American triumphalism has been replaced by comic uncertainty in Washington…the U.S. economy has slowed down to a rate of growth no greater than in Europe…and the bears have come home and chased the Nasdaq down 21% since the beginning of the year.

*** The Nasdaq fell 31 points yesterday. It is down 40% from its high in March.

*** The Deathwatch continues and the sick list grows. Dell announced its numbers after the close of business. Earnings were fine, but sales are growing at only a 20% rate. The stock fell $1.75.

*** Investors have noticed that a good story is not enough. Neither is a good business. The stock has to be priced reasonably. 20% growth is fine for a company with a P/E of 15. But not for Dell with its P/E of 41.

*** Early yesterday, the ECB intervened on the euro’s behalf without much consequence. But later, Gore’s campaign chief, Daley, and Jesse Jackson, meddler without portfolio, announced that a recount alone may not be good enough. This had a remarkable effect. The dollar promptly fell by 1.1 cents against the euro. More below…

*** The euro was not the only thing to fall. The Dow also collapsed – 288 points. Prices came back after Warren Christopher reassured the world that Bill Clinton was still in the White House and would remain there until January 20th, when a new president would take up residence.

*** “Banana Republic!” was how a Roman newspaper characterized the U.S. election process. In a Banana Republic, an incumbent president might decide to ignore a tainted vote. He would call for a new election, say, in 18 months – and call out the National Guard to maintain order. Bill and Evita, I mean Hillary, Clinton wouldn’t do that, would they?

*** The Dow ended the session down only 72 points, down 5.8% for the year. There were 1086 advancing issues; 1730 declining one. 57 stocks hit new highs on the NYSE; 51 hit new lows.

*** And it doesn’t look good for today. “Friday looks grim,” said one analyst – citing the reaction to Dell and the continued uncertainty of the election. Stocks fell in Asia this morning and the Financial Times thinks they will fall in Europe too. But who knows?

*** Oil rose to nearly $34 in Asian trading. Traders fear a cold winter with tight supplies. Long-term, though, experts say producers are pumping 2 million barrels per day more than the market can take up.

*** Gold rose 80 cents.

*** Mark Hulbert reports that his five top-rated markets timers – newsletter gurus with the best records for predicting market direction – are bearish, though none has pulled 100% out of stocks. Bob Brinker recommends a 65% cash position. No-Load Fund Investor Sheldon Jacobs is similarly only 35% invested in stocks. Value Line and the PAD System’s Dan Seiver, meanwhile, recommend having half your money in stocks. Only one of the 5 best market-timers, Michael Burke of Investors Intelligence, recommends being fully invested in equities.

*** Looking at sentiment, Hulbert found that advisors who concentrate on the Nasdaq have become very pessimistic – which he looks at from a contrarian viewpoint. “Bearishness in the Nasdaq,” he observes, “may have become so pessimistic that a wall of worry now firmly is in place for a Nasdaq rally to resume.”

*** Are we in a bear market? Of course, it depends on which market you look at. “If a bear market is defined as a decline of at least 20% from the indices high point,” writes Ray DeVoe, “the Nasdaq’s 35.8% decline from March 10, 2000 level…would qualify. The Dow Industrials would have to close below 9,378 to qualify as a bear market according to that widely held standard.”

*** In response to my “when investors will meet their Waterloo” question, William Fleckenstein:

[Referring to the election] “Personally, I had hoped we wouldn’t head down this path. It is fraught with risk and is exactly the kind of unanticipated event that can undermine the currency and the stock market. Given the absurd valuations of stocks, the weakening economy and earnings problems, this could be a real Waterloo for the market. We shall have to see, but folks should be on red alert.”

*** And this recent experience with a dot.com, from Steve Sjuggerud: “If personal experience is any indication, eBay’s online auction monopoly could be in trouble… Cleaning out my garage on eBay, I’ve actually made many thousands of dollars on junk. On Sunday alone, I sold two musical items gathering dust for $2,500. I know what they’re worth, and I started these two particular Sunday auctions at a dollar, just to get rid of them. So I’m a satisfied eBay customer.

“But now, apparently eBay’s patchwork programming is finally catching up with them. I’ve got five more things out of my garage on eBay that haven’t seen bids in days. One item, top-notch wireless stereo headphones which should easily fetch $75 or more, hasn’t seen a bid yet, and it’s listed for $1. I went in to figure out why, and found that I COULDN’T BID ON ANYTHING RIGHT NOW EVEN IF I WANTED TO.

“No word from eBay on this situation. Trying to find customer service or tech support online, I quickly found out that there is none. Here’s a quote from their tech support message board – the only place where you can get support, run by users, not the company (this quote from a thread with over 600 “where-are-you-eBay?” complaints):

“I would have never thought of leaving my beloved eBay. I have been a huge fan…buyer and seller since May of 1999. But I too am exhausted over the problems. Sad to say, I am taking my auctions to yahoo also. I use this as income…. I can’t afford the problems and with zero customer support… well I am just a small fish that I am sure eBay won’t miss. I have some auctions on now but once again (this month)….all of a sudden…the photos aren’t loading and I am going to have to sell items at a loss. I can’t afford eBay anymore.”

“EBay is at a P/E of 515,” Steve concludes ominously, “And customers are unhappy.” Another candidate for the sick list…