Cold Day in Hell
It’s the end of the world as we know it, And I feel fine…
In the 1970s, you may recall, dear reader, Lester Brown and the proto-environmental groups of the time thought they were on to something. It seemed to them that the days were getting colder. What if the entire world was entering a cold spell?
Cooler weather would cause big trouble, they said; crops yields would go down and millions would starve. The alarum was also rung on the energy situation; it was widely believed that the world would soon run out of oil and that people would soon "shiver in the dark."
But in the next two decades people began to notice that they weren’t shivering at all; they were sweating. And the price of oil wasn’t going to $100 a barrel as forecast; it was dropping below $10.
One of the charms of this tattered old ball we live on is that it continually frustrates those who try to figure it out. Nature, in her majestic coquetry, is not about to make it easy for the soothsayer, market strategist or professional meddler. No sooner has he announced his forecast than the whole world seems to change and he is held up to public ridicule.
That stops the smart ones. The rest of us go on with our guesswork. We know we will never get the whole picture, but we think we might get enough of it to claim a little edge over the next fellow.
The average baby boomer is about 47 years old. He probably first became of aware of stocks only 10 to 15 years ago. Until recently, his entire experience with the stock market was one of rising prices. And everything he read or heard on TV confirmed his observation – that stocks always go up. Then, James K. Glassman confirmed his fantasies with his book entitled, "Dow 36,000." Who could blame the poor boomer for not laughing?
Your editor can recall a time when the winters seemed colder. In the ’50s and ’60s children played ice hockey on the West River, a salty indentation in the Chesapeake Bay, and one year the river froze so solid that you could drop a Republican congressman from a height of 10 feet or more, head first, without cracking the ice.
It was in 1964, or perhaps ’65, that Oscar Turner got drunk and drove a school bus across the river, just to prove how thick the ice had become.
In Europe too, most people over 40 recall cooler winters. Of course, many years ago, Europe must have been much colder. Just look at the Dutch masters. Back in the 16th century the canals of Holland must have frozen over regularly; now, they rarely do. Huge piles of firewood are still ricked up throughout the countryside in anticipation. But for the last few years, winters have been mild and few people have smirked or giggled at the global warming crowd.
Is the earth really heating up?
"It depends on where and how you measure it," say the scientists. But most measures confirm a warming trend. And for the last 2 decades, Lester Brown and the other career alarmists have been on the case. There is no need to worry about oil, they say; we’re not running out of the stuff after all. Instead, we have too much, and it’s heating up the planet. Global cooling has been orphaned; global warming has been taken in by nearly everyone. And, of course, it is a big threat to the world; millions will starve, and so forth…unless we do something involving spending a lot of other peoples’ money.
What a pity! Along comes Robert B. Gagosian, chief of the Woods Hole Oceanographic Institution with a surprise:
"Evidence from several sources has amassed and coalesced over the past 10 to 15 years. it points to a completely different – almost counterintuitive – scenario.
"Global warming could actually lead to a big chill in some parts of the world. If the atmosphere continues to warm, it could soon trigger a dramatic and abrupt cooling throughout the North Atlantic region…
"Average winter temperatures could drop by 5 degrees Fahrenheit over much of the United States, and by 10 degrees in the northeastern United States and in Europe. That’s enough to send mountain glaciers advancing down from the Alps. To freeze rivers and harbors and bind North Atlantic shipping lanes in ice. To disrupt the operation of ground and air transportation. To cause energy needs to soar exponentially.
"These changes could happen within a decade, and they could persist for hundreds of years."
Gagosian explains that the climate of the north Atlantic is dominated by "the Great Ocean Conveyor," commonly known as the Gulf Stream. As the water from the Gulf arrives in the north Atlantic it gives up its heat to the atmosphere…which is carried over to Europe and softens winter temperatures.
As it becomes colder it also becomes more dense and begins to sink, flowing at deep levels back to the south. But as the earth has warmed up, the ice cap at the North Pole has melted, releasing fresh water into northern oceans. The saltier water is, the denser it is. This polar melt is neither. Instead, it falls grudgingly into the conveyor system.
"Since 1970," Gagosian reports, "the equivalent of an extra 20 feet of fresh water across the surface of the northern North Atlantic has been transported down into the ocean depths, most of that since 1990.
He goes on to tell us that when the sponge gets full, the whole conveyor will come to a stop! "A sponge that is three-quarters saturated can still absorb more water. But the moment that sponge is fully saturated, it can absorb no more water."
Already surface waters in the Greenland Sea are sinking at a rate 20% slower than they did in the ’70s, he warns.
It won’t be the first time the conveyor stops. About 12,500 years ago, in the space of about 3 to 10 years, the North Atlantic suddenly cooled off dramatically. The "Ice Age" lasted about 1,300 years. There have also been several smaller shutdowns, such as the period about 500 years ago. Norse settlers had planted vineyards in Greenland during the warm spell. Then, when the weather turned cold, they abandoned them.
"We have strong evidence that we may be approaching a dangerous threshold," Gagosian concludes.
Wouldn’t that be just like Mother Nature? Just when we are all putting in swimming pools and sun decks – to send on an ice age?
But she loves surprises. Especially those that make us look like fools. And it will be a cold day in hell when she stops.
October 9, 2002
Consumer confidence slipped last week.
"Problem loans", bankruptcies, delinquencies, foreclosures are all at record levels.
Consumer debt rose in August, as we reported yesterday, but not half as fast as it had in July, and at the slowest pace in 8 months…
* Every major Asian economy, except North Korea, is in deflation…(more below…)
* The current account deficit is running at $1.5 billion per day.
* Brazil threatens to hand the world the biggest default in history – with $335 billion of debt.
* The S&P has fallen for 6 months in a row. And it looks like the stock market will stretch its losing streak to 3 years in a row. The Dow began the year at 10,021. Of course, it could get back to that level before year-end. Some think it will (see Barton Bigg’s comments below…). We wouldn’t bet on it.
"Something’s gotta give…" says a headline in the Financial Times.
On the one hand, the news is so relentlessly bad that you’d expect a surprise rally to mislead people and shake things up. On the other hand, it is not yet bad enough to panic stockholders and get the whole thing over with.
So, what happened yesterday, Monsieur Eric?…
Eric Fry in the soft(ening) underbelly of the beast…
– Mr. Market took a little break from his sadistic game playing yesterday by allowing stocks to rally a bit. The Dow Jones Industrial Average tacked on 79 points to 7,501, while the Nasdaq Composite added about 1% to 1,129.
– No particular news seemed to propel the advance… Sometimes stocks just go up for no good reason. And who knows, maybe they’ll keep going up for no good reason… for a while. Morgan Stanley’s Barton Biggs, for one, expects a "powerful" rally between now and year end. Why? Mostly because the bears have become too numerous and too vocal. "The bears are everywhere and outspoken," says Biggs. In other words, its time for Mr. Market to teach them a lesson. "My instincts tell me this is a time to be a buyer of stocks, not a seller," the strategist said.
– Barton’s instincts are pretty good, so he’s probably onto something. Furthermore, the market "deserves" a little rally. But after stocks stop going up for no good reason, we suspect they’ll fall again…for plenty of good reasons.
– For starters, the stock market is still very richly priced. For another, earnings aren’t growing. "Earnings for the most part aren’t bad," says Alan Abelson, "they’re terrible. You have to really strain to see more than a wisp of smoke coming out of those smokestacks. As for jobs, there aren’t as many as there used to be and it’s increasingly harder to find one."
– So it looks like the "second-half" recovery that so many folks predicted earlier this year is turning into a second-half relapse. And the fact that unemployment is on the rise once again is particularly worrisome.
– The term "jobless recovery" is a bit like the term "sexless marriage" – neither delivers the full range of anticipated benefits. (And the knowledge that somebody, somewhere is getting jobs only increases the pain of living in a jobless recovery).
– A jobless recovery is a very un-sexy thing – financially speaking. Would we not all prefer a job- filled recession?
– Wall Street’s employers (or should I say, un- employers) are leading the pink slip parade. The nation’s securities firms having already trimmed their work forces by about 8.8% since year-end 2000. But the mass firings just keep on coming. "Wall Street firms and the broader professional investment community are writing more pink slips than they are trade tickets," quips ContraryInvestor.com.
– In the latest move, Credit Suisse Group announced plans to shave its workforce by 5% to 7%. Meanwhile, both Goldman Sachs and the beleaguered J.P. Morgan Chase are taking an axe to their investment banking divisions. Morgan plans to slash headcount in its investment- banking division by a whopping 20%.
– Unfortunately, the job losses on Wall Street are not an isolated incident. The weekly claims for unemployment insurance are spiking higher. Initial jobless claims increased 5,000 to 417,000 during the week ended September 28, which boosts the four-week moving average of initial claims moved to 423,000 – the highest number in five months. Meanwhile, continuing claims for unemployment insurance are also on the rise – a clear sign that finding new jobs is getting tougher. The median duration of unemployment has jumped from 8.4 weeks in August to 9.5 weeks in September.
– "We find very few business leaders who are expanding hiring and making big and bold plans," observes Donald H. Straszheim of Staszheim Global Advisors. "Rather, it is – care, caution, doubt, wait and watch." Straszheim notes that total payrolls are unchanged from the trough of the recession 8 months ago. "Typically we would have created about 2.1 million jobs eight months into a recovery," he says. "Not this time."
– Many of those that still hold a job aren’t making as much of the green stuff as they used to. Venture capitalists, for example, have suffered a substantial drop in take-home pay. But don’t pull out your hankies just yet. "People who make their living off venture capital aren’t exactly going poor," the Wall Street Journal reports. "But they surely aren’t getting quite as rich." The top quartile of managing general partners will only earn about $1.4 million each this year. That is a far cry from the $3.2 million median income they received in 2001.
– Looks like the venture capital community might be ordering fewer cases of Chateau Petrus this year.
Back in Paris…
*** Ooops…what’s this…the price of gold went somewhere yesterday – down $3.70, December contract. But wait, the Dow is down 23% so far this year. Gold began the year at $278. It is now $318. Who’s complaining?
*** Gold shares have been disappointing….falling along with the rest of the stock market. But my friend, Evan Pickworth, reports from South Africa that buyers of SA gold stocks aren’t complaining either:
"Yes, it was a double whammy – the weak rand coupled with the stronger gold price…
"The JSE gold mining index rose 167% in the past year while the best of the gold mining funds, the Standard Bank Gold Fund, was up 148%…
"Gold stocks have risen significantly since early last year, though they took a small knock recently, attributed mainly to profit-taking…
"In just one year the price of our biggest gold miner, Anglogold, has doubled…I’m tipping Gold Fields as a value play…due to the fact that it was our only totally unhedged miner…"
*** John Myers, too, has fared well with his own gold picks… Harmony Gold is up 167%… Tocqueville Gold, (a gold fund), another 42%… and Newmont Mining of Canada, up 63%…
*** And along comes Stephen Roach to explain why bonds may continue to rise, as deflation comes to America:
"The American economy now has a record exposure to global competition. In the second quarter of 2000, America imported a third as many goods as it produced. More and more, these goods are coming from highly competitive Asian producers who have much lower cost structures than their American counterparts.
"Every major Asian economy except South Korea is in the throes of deflation. Courtesy of ever-expanding trade relations with Asia, America is now buying more and more from China, Japan and other countries that are already in deflation. The growing market share of these increasingly cheap foreign goods helps drive down prices of products made at home.
"The impact of deflation would be most acute for wage earners and debtors. To stay profitable, companies would have to cut jobs or wages, eventually inhibiting consumer purchasing power. Meanwhile, the fixed obligations of indebtedness would have to be paid back in deflated dollars, squeezing over-extended borrowers all the more.
"America is already at the brink of deflation. The GDP price index recorded only a 1 percent annualized increase in the second quarter of 2002. That is the lowest inflation rate in 48 years. Prices of goods and structures are already contracting at an annual rate of 0.6 percent."