Awaiting The Big V's

The Daily Reckoning Presents: A Guest Essay in which the author tries to define the big “V”…


Asked to define “victory” in the war against terrorism last week, Defense Secretary Donald H. Rumsfeld had difficulty coming up with a concise answer. After 500 words of hovering, he landed on his definition. “I say that victory is persuading the American people and the rest of the world that this is not a quick matter that is going to be over in a month or a year or even five years,” he said.

Washington Post

Sept. 23, 2001


Some of us remember a photo of Churchill, sitting in front of a camera – Karsh’s, as I recall – displaying a V sign. It was V for victory.

Now we are told to expect two victories: one against terrorism, the other a fast recovery of the stock market. But the only image I have of two V’s is Richard Nixon waving them and smiling in 1972. This is not reassuring.

A few days before the attack, I was watching a show on MSNBC (I think). The person being interviewed was an academic type. He had completed a study of which month was worst historically for the U.S. stock market.

“September,” he said. The interviewer was all aflutter to hear the good news. This meant that the fall in the market might be temporary. The academic concurred. Then came September 11.

The fall in the market in the week following the attack was a bad one – the worst in 70 years, several media sources reported. The week began on MSNBC with the most intense stock market cheerleading I have ever seen on-camera.

The New York Stock Exchange had not yet opened.

The cheerleader was Jim Cramer of The Street.Com. He was adamant: this was a great buying opportunity. His company had committed money to the market. This was the bottom. Get on board now! Another person being interviewed was judicious, saying that there were reasons not to be so optimistic. Cramer pitched the opposite line with great intensity and confidence.

Then the market opened. Instantly, it was down 50. It kept going down, down, down. It was down by 250 within an hour. Cramer kept saying this was a great time to buy.

About the time it hit 500, he began to modify his tone…somewhat. He said that it would be unwise to commit all of your money today. Save some extra money for the rest of the week, he said. The Dow closed below 600.

An hour before the stock market opened, Greenspan’s FED had lowered the short-term federal funds rate by half a percentage point. The market ignored it.

Economists call the turnover of money per unit of time the velocity of money. When it slows, it is deflationary in its impact. This is why Greenspan has more leeway to lower rates again by creating new money. We are heading into a massive slowdown of spending.

Consumer confidence was already down in the week before the attack. When people are scared, they slow down their spending even more. They stop buying discretionary items.

Lower rates won’t solve the problem of reduced sales. Lower rates allow businesses to borrow more money, but businesses today are not interested in borrowing more money. Capital spending has fallen like a stone for a year. Even before the attack, entrepreneurs were convinced that the public was not going to buy what businesses produce.

Despite all the cheerleading on TV and in the financial press, businesses decided a year ago that the consumer was tapped out. That’s why businesses pulled the plug on capital spending long before September 11.

New York City is the center of the world’s equity markets. The American financial industry is close-knit – one might even say “incestuous.” These people run in packs and think in herds (or maybe vice versa). This is why none of them saw what was obvious to me in February and March of 2000: the Nasdaq was insanely overvalued and ready to crash.

According to Fortune magazine, before the attack, 183,000 people worked in the financial services industry in lower Manhattan. These people will be emotionally scarred for months, maybe years. Their professional lives will never be the same. They saw everything come crashing down around them, literally. One of them put it this way:

“As traders, we are taught to stay at our desks during fire alarms. You serve your clients. You don’t run. Well, in this case the people who ran were the smart ones. The people who stayed are dead. That’s counter to everything you are taught on Wall Street. But we’re just moving money around. It kind of makes you think.”

It kind of does, indeed. Stock options? For your widow. These people have been through what few Americans have seen since Vietnam. They have seen death face-to- face. They have been through something that tends to get people’s priorities straight.

Now they must return to cheerleading. But how? The stock market is down, a long war is looming, and they or their colleagues are sitting at strange desks in new surroundings.

September 11 marks the end of an era.

The markets will still function. People will still go to work in New York City and move all that money around. But the ones who moved it around from the caverns of lower Manhattan will never again move it around with the same confidence or arrogance.

There is no more talk about a second half recovery of the economy or the stock market. That was the party line six months ago. Now there is endless chatter about the Big V. The V means a sharp downward move, followed by a sharp upward move. Presto: “It won’t hurt any more! Uncle Alan will kiss it and make it all well.”

What V? The Nasdaq, which is still under 1500, down from 5040 a year ago March. So, where is the sharp upward move? It takes two moves to make a V. One move makes a cliff.

Gary North,
October 3, 2001

for The Daily Reckoning

At age 25, Dr. North was the youngest elected member of the Economists’ National Committee on Monetary Policy. He served as a senior staff member of the Foundation for Economic Education and as a research assistant to U.S. Congressman Ron Paul.

For more see: Derailing the New Economy

“There are still 600 basis points between here and zero…”

That cheerful comment was made in happier times by Ed Yardeni, back in January, explaining how, even if the first rate cut did not revive the economy, there were plenty more where that one came from.

But, now the dogs of war have been unleashed. So have some stray cats. Rate cuts seem to have lost their puissance…

All over the world, governments are mobilizing to fight the threats of bear markets, recession and terrorism. Rates are being slashed. Credits are being provided. New subsidies, bailouts, and spending projects are under way. Lock boxes are being pried open. Peace dividends are being cut.

And the era of big government is back.

Yesterday, the Fed took another step towards zero – its 9th so far this year – cutting rates another 50 basis points, leaving only 250 bps to go.

The poor Japanese want to help by weakening their currency too. Alas, they can’t cut rates; they have no more rates to cut. Key bank lending rates in Japan have been near zero for years. So, the Japanese have had to content themselves with intervening in currency markets to lower the value of the yen.

And yet, despite the flood of cash and credit, the bond market shows no signs of worrying about inflation. Long bonds rose sharply yesterday; inflation-adjusted bonds, relatively, sank.

Gold, too, went down a bit.

The dogs of war are bound to bite a few innocent people…but – astonishingly – investors, so far, are not anticipating any collateral damage from inflation.

Eric, how did the rate cut go over on Wall Street yesterday?


Eric Fry in New York…

– Like the future Hall of Famer, Cal Ripken, Fed Chairman Alan Greenspan has been striking out lately a lot more often than he has been hitting the ball. Despite nine interest rate cuts in little more than nine months, the economy and the stock market are both far worse off than when Greenspan began the process.

– But that doesn’t mean that “The Chairman” can’t still jack the ball out of the park every once in awhile – economically speaking. Yesterday, he reduced the Fed Funds rate by one half percent to 2.5% and the stock market rallied, just like old times.

– The Dow gained 114 points to 8,950. The Nasdaq fared slightly less well, advancing only 0.8% to 1,492.

– The Nasdaq just seems to limp along – gaining less than the Dow on up-days and falling more than the Dow on down-days. One clear difference between the two indices is that most Dow stocks make money. “Nasdaq,” quips Sean Corrigan of, “stands for No Actual Sales, Dividends, Assets or Quality.”

– Sales and assets are certainly in short supply these days, on Nasdaq and elsewhere. In a sign of the times, The Daily Deal introduced a new weekly section called ‘Bankruptcy Thursday.’ “The Manhattan-based chronicle of mergers and acquisitions leads the section with two standing features,” explains Paul Colford of the New York Daily News. “‘Letter from Delaware’ rounds up the latest bankruptcy filings and their casts. ‘DIP Dimensions’ looks at firms operating with debtor-in- possession funds.”

– Now that bankruptcy filings are a weekly news feature, the U.S. economy must be getting closer to hitting bottom, even if it is not quite there yet.

– Joblessness tells the tale of our economy…and the story line is a bleak one. Consumer confidence has hit a five-year low, and the unemployment rate is on target to hit a five-year high. Initial unemployment claims reported last week rose by 58,000 to 450,000, the largest weekly gain and highest level in nine years. The monthly unemployment report comes out on Friday and it won’t be pretty.

– “In the first major cutback by a large Wall Street firm since the terrorist attacks, Morgan Stanley plans to let go as many as 200 investment bankers, or about 10% of its banking staff,” the Wall Street Journal reports. Remember, not a single IPO came to market in the month of September. So, one might be tempted to ask, what are the remaining 90% of the bankers going to be doing all day?

– Morgan Stanley reported a few days ago that its net income fell 43% in the quarter ending August 31. It’s just a guess, of course, but maybe there will be more staff reductions in the future.

– Perhaps defense stock IPOs will be the new hot thing that bails out the investment banking departments on Wall Street. “Spending for defense-related activities is on the rise, but has a long way to go to reach levels of years past,” writes, citing the work of International Strategies & Investments (ISI). “The defense sector has suffered through years of under investment…U.S. military employment is at its lowest level in postwar history, and down 50% from the peak reached in 1968. Although nominal government spending on defense equipment and structure has turned up over the past four years, [it] represents only 0.8% of GDP, a postwar low. Many things changed on September 11th, not the least being America’s renewed interest in defense. Investors, take note.”

– As defense spending increases, stocks like Boeing will likely benefit. Boeing has endured a very turbulent ride over the last three weeks, but it gained almost 6% yesterday to $34.25.

– Three unrelated news items bode well for the aircraft manufacturer. First, domestic air travel continues to rebound. Second, both the Air Force and the Navy are nudging Congress to speed up appropriations for new surveillance and tanker aircraft from Boeing. Third, yesterday China agreed to buy 30 aircraft from Boeing for $1.65 billion. Bloomberg reports, “Chicago-based Boeing has predicted that China will buy commercial aircraft worth over $144 billion during the next 20 years, making it the second-largest market after the U.S.” (see:

– Boeing may or may not be a good stock to buy. But it’s nice to know that even if the U.S. economic news is mostly bad, it’s not all bad.


Back in Paris:

*** “I’ve spent a lot of time traveling all over the world…and I’ve seen situations similar to what’s happening in Nicaragua right now,” Kathie Peddicord passes on from her recent travels there. One International Living reader points out that “Every time, within a few years…in places with similar conditions, the prices skyrocket. The same thing’s going to happen in Nicaragua…very soon.”

*** But for now…prices are still cheap. For example, a 1.7 acre lot on the Pacific Ocean, 5 minutes outside of San Juan, is currently US$15,000. A private island in Lake Nicaragua – the largest body of fresh water south of the Great Lakes -is available for as low as US$8,000 (the whole island). Or a lot at Rancho Santana, a private reserve on 2.5 miles of spectacular Pacific coastline, can be had for as little as US$25,900.

*** “The new data reveals a profits disaster,” notes Dr. Kurt Richebacher in his latest letter. “Profits hit their peak in the 4th quarter of 1997…from there they have steadily declined.” They are currently “below their level in 1995,” Richebacher observes.

*** Consider the Nasdaq alone and the profit picture is even worse. The Wall Street Journal reports that if you take all of the profits of all Nasdaq companies over the last five years, and subtract the losses, the result is a negative number. “Put another way,” says the WSJ, “the companies currently listed on the market that symbolized the New Economy haven’t made a collective dime since the fall of 1995, when Intel introduced the 200-megaherz computer chip.”

*** “There Was No New Economy,” Dr Richebacher reminds us.

*** But markets make opinions…and years of rising prices on Wall Street led investors to search for an explanation. It felt like a “New Economy” to the right side of the brain. The left side merely had to invent a cluster of corollary propositions to support it.

*** Those myths and misapprehensions are now being destroyed. But more importantly, to the right side of the brain, it no longer feels like a New Economy. Greed is giving way to fear…

*** “You never know,” said a New York secretary to a reporter from the French newspaper Liberation, “if there is a war…or if a recession is coming…I feel better saving my money…”