Debt and Dying

Why London gangsters should always pay their debts…as John Q. Public should, too. Mr. Bonner weighs in with "life after debt," below…

"Tony was such a kind man, he had a big heart. He shone like gold."
– Lou

We went, as usual, to the obituaries this morning…and found them crackling with good humor and good advice.

Obsequies for gangster Tony Lambrianou must have been entertaining. The East End hoods and mobsters gathered – dressed in dark glasses, black leather coats, and heavy gold jewelry – and watched the hearse go by. "On the roof was perched a huge, ungainly floral boxing ring in vivid red, white and blue and a card-board cut-out of Elvis Presley,’ explained the press reports.

But the affair was a bit of a disappointment to journalists. The scribblers were hoping for some glamour. In the past, gangsters were real celebrities…and brought out the stars. Judy Garland, Sonny Liston and Lord Boothby used to hobnob with the London underworld. Now, many of these stars of stage and crime are dead or washed up. Today, the world’s attention focuses on terrorists; old-fashioned hoodlums go to their graves like an accountant to the Laundromat. Nobody cares. The local shops remained opened, says the article in the Daily Telegraph. In the old days, they would have closed out of respect for the fallen crime boss. And people would have lined the route of the funeral cortege and doffed their caps as the dead man went by. Yesterday, hardly anyone noticed.

Tony was remembered as a ‘gentleman’ and a ‘good man’ in the bouquets. The papers recalled that in 1969, he and his brother Chris lent a hand to their pals, the Kray brothers. The frères Lambrianou carried off the body of Jack "The Hat" McVitie, after the Kray boys had gone to work on him with a carving knife. But what fine thanks you get when you help a friend; Tony and Chris were grabbed by the Bobbies and got 15 years in the hoosegow.

What attracted our interest was how ‘The Hat’ came to be in such trouble in the first place. Apparently, ‘The Hat’ had lost his head…and failed to settle his accounts as gangland honor required. The Krays – unschooled in modern banking’s loan workout procedures – had their own way of dealing with deadbeat debtors.

Henchman Tony, dead suddenly at 61, will not come back this time. He’ll have to settle his own accounts, and good luck to him.

Credit Boom:  19 Credit Cards

Meanwhile, in another part of town, the Lewis family continues to grieve over their man, Stephen. Like ‘The Hat,’ Stephen might be considered a victim of EZ credit. The average man in Britain has far less debt than the average American. He is said to have only two credit cards with about $1400 on each one. But Stephen Lewis managed to run up bills equal to 3 times his annual income. At the time of his death at 37, he owed 71,913 pounds – over $100,000 – on 19 credit cards.

He is described as a "vibrant, popular man who was such a lovely personality." But for all his vibrations, he couldn’t seem to get in tune with the modern credit industry. He took it all too seriously, in our opinion. Rather than stiff his foolish creditors like everyone else; the poor man killed himself last July. He must have thought he had to pay it back; someone should have explained. But now his pretty widow is in the papers, suggesting that the credit industry ought not make it possible for people to dig such deep holes for themselves.

"The credit boom of recent years has brought great advantages to many individuals and families, and helped to raise standards of living," sympathized the Citizens Advice Bureau, "but it is also taking a huge toll on the those who have found themselves on the wrong side of the very narrow dividing line between successfully managing credit commitments and plunging into serious debt."

Credit Boom: A Debt-Laden People

"We have become a debt-laden people," added the Daily Telegraph in editorial comment. "Unsecured borrowing on credit cards and personal loans averages 4,400 pounds per person. The average new mortgage is about 100,000 pounds. In short, debt is darkening a great many lives."

Well, so far debt is probably brightening more lives than it darkens. As long as interest rates are low and falling…and asset values do not fall…the lights should remain on for most people. It’s when the juice stops flowing that the trouble begins. That’s when you wish you hadn’t borrowed so much…and feel faintly like blowing your brains out.

But at the Lambrianou funeral, Tony’s surviving sibling looked on the bright side. He warmed hearts with this remembrance of how the two brothers-in-crime felt as they were on their way to prison:

"We were going away for a long, long time. We were in the darkness and we began to comprehend what was happening. You find something there in that darkness; there is a life there. There is always hope, a future."

Fear not, dear reader, there is life…even after debt.

Bill Bonner
The Daily Reckoning
March 12, 2004

Editor’s note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the international bestseller: Financial Reckoning Day: Surviving The Soft Depression of The 21st Century (John Wiley & Sons).

Never have we seen such long lines and tight security on the Eurostar. Luggage was searched…travelers frisked…passengers eyed each other suspiciously, wondering who might want to blow it up.

"I might as well have taken an airplane," said an American standing in line in front of us.

The proximate cause of all this security was, of course, the bomb blasts in Madrid.

"It is being called Europe’s 9/11," said newscasters on British TV this morning.

We doubt that the event will rank with the destruction of the Twin Towers in history books, but like 9/11, it is almost certain to raise terrorists’ stock beyond book value.

European stocks fell…yesterday morning, followed by Wall Street in the afternoon. American analysts attributed the decline to "fears of more terrorist incidents." Perhaps, but we warn readers that the Dow was already headed down…and has much, much further to go before it gets to where we think it is going to go.

The ‘recovery’ was a fraud, we keep saying. The Feds splashed enough money and credit around to stimulate consumer borrowing and spending. "You give me a trillion dollars to spend, and I’ll show you a good time too," as Buffett put it. This activity looked like ‘growth.’ But it was actually no more than a temporary acceleration on the road to ruin.

As in Japan 10 years ago…the rally seems to have stalled, topped out…and now has rolled over. Mr. Bear is back…or at least, that is how it appears today. Yet, investors, analysts, and economists are bullish…almost to a man. They are sure the good times are here to stay – forever. Were it not for terrorists, they will tell each other, everything would be okay.

In finance, as in politics, terrorists are overrated. They are deadly, but not serious.

Over to Addison with more news:

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Addison Wiggin, in the City of Light…

– Here’s a freaky little stat. The blasts in Madrid happened 911 days after 9/11…Coincidence?

– Whatever the case, Mr. Market didn’t like the odds. In early trading yesterday, while most of the world seemed to suspect the terror attack was the work of Basque separatists, the Dow trended sideways…waiting. Then at roughly 3pm New York time, the London-based al-Quds al-Arabi received a letter reading: "This is part of settling old scores with Spain the crusader, and America’s ally in its war against Islam."

– The Dow then set its sights southward and never recovered. The blue-chip index closed out the session 169 points lower at 10,128. The S&P 500 lost 17 points, and the Nasdaq was down 21 points. Stocks fell all across Asia and Europe…Paris was down by 3.1%, Frankfurt 3.5%…and they were down over 2% in London.

– Surprisingly, after a brief spike to $403 in Hong Kong overnight, gold lost $1.50 to $398.50. But another traditional "safe haven" did get a boost yesterday – the Swiss franc. It leapt nearly 2% versus the dollar, and hit 4-week highs against sterling and the euro.

– The deaths in Madrid mark the one-year anniversary of the reflation bull market of 2003-2004, but it’s clear the rally was already straining under its own weight. Following two straight 160+ losses in a row, the Dow is now down 3.1% for the year and nearly 6% from its high on February 11th. The Dow’s recent dip marks the first 5% correction for a major index in 244 trading sessions.

– You might have expected yesterday’s bombs to rip a hole in the euro, too. But instead, it jumped 0.5 cents to $1.22. Dollar weakness is more prevalent than ever. Why? Well, isn’t it obvious? It is to Dan Denning, who has recently quit the rainy climes of Paris for the equally soggy environs of London.

– "The monthly e-mail bulletin from the U.S. Treasury reveals quite a surprise," Dan blurted out to our colleagues in the London office this morning. "Of course, as you might expect, the U.S. government ran a deficit again in February, but it’s the magnitude that’s surprising…$96 billion! That’s billion with a ‘B’ – in one month! A short one at that. I believe that’s the largest single monthly government deficit in the history of the Republic…"

– Data junkie that he is, Dan can’t help but note: "$15.2 billion of the total went directly to interest on existing public debt. In other words, 8% of the government’s outlays were just to pay lenders. Meanwhile, total spending for the first five months of this fiscal year, compared to the first five of last year, has grown 4.2% from $898 billion to $937 billion. The deficit is up 16.4% year-on-year."

– Everbank’s Chuck Butler, our guru on the euro-dollar trade, pointed out, too, that the Lehman Bros. currency desk put out a report this morning saying that "it’s time to sell the dollar vs. the euro, and that the dollar’s current rally isn’t justified…"

– "Good!" writes Chuck, "That’s the kind of message I want the markets to hear…Now if the other Big Boys could get their collective soap boxes out, to sing from the same song sheet, we could have something!"

– "If you had access to no data other than a graph of U.S. Treasury yields," Bloomberg’s Caroline Baum wrote yesterday, "you’d think the U.S. economy was in big trouble." But it’s not just the massive spending habit of the U.S. government Dan Denning refers to above.

– "Never has job growth lagged economic growth to the degree it’s lagging now," says Baum. Of the supposed 21,000 jobs created last month, not a single one came from the private sector. It was the first month since August that no jobs were created outside the government. Last Friday’s job report set off an explosive rally in bonds that lasted through Monday and Tuesday. Friday’s gain itself was the largest one-day gain in 13 years. Bond investors, rightly so, fear that the continuing effluence of bad news from the jobs front means the "economy will roll over in coming months." Yesterday’s attack in Madrid only exacerbates those fears…

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Bill Bonner, arrived in Paris and off the train…

*** If we are right…if we have begun the next phase of the Great Bear Market of 2000-??…we would not be surprised if, this time, we see some panic selling. You will recall that the first phase was marked by calm. Paper profits in the Nasdaq were wiped out…huge losses were taken in the Dow…but who really cared? It was just a temporary setback on the way to wealth. Americans still believed that average people – with no knowledge of specific stocks or specific companies – could get rich simply by "being in the market for the long haul." All they had to do was to get into a good mutual fund. The geniuses at the mutual fund would take care of everything else.

This next phase should challenge this comfy view. People now know that stocks can go down substantially…and take years to come back. This time, they may not want to wait.

Gustave le Bon explains how panics develop:

"The precise moment at which a great belief is doomed is easily recognizable; it is the moment when its value begins to be called into question. Every general belief being little else than fiction, it can only survive on the condition that is be not be subjected to examination….Finally, when the belief has completely lost its force, all that rested upon it is soon involved in ruin."

At some point in the next few years, people will begin asking questions. Was putting all our retirement money in stocks really such a good idea? What if this bear market lasts longer than we expect? What do we know about the stock market? What if the whole idea is a fraud…what do we really know about the silicon chip business…what business do we have putting our money in it?

When the questions get asked, the answers are not likely to be reassuring.

*** Dan Dorfman: "What’s cheap? Over the past several decades, the average stock has sold for about 15 times earnings, 1.7 times book value (corporate net worth) and 0.9 times revenue. Today, the average stock sells for about 23 times earnings, 3.4 times book value and 1.4 times revenue. Those are pricey multiples by historical standards."

*** After a day in Germany and a day in London, we are back in Paris, dear reader. For a few hours, that is…tonight, we go to the countryside for the weekend.

We enjoy our life of traveling…and writing. And here comes a note on both subjects, from our colleagues at AWAI:

"Participants are already claiming seats at AWAI’s upcoming Travel Writer Workshop here in Paris, scheduled for May 9-12, 2004," writes Lori Appling, director of the program. "Now is the time to sign on. Do so before the end of the month, and you save $100 on the enrollment fee.

"If you’re interested in attending – and learning how you can travel the world as a VIP – then I urge you to reserve your seat soon…"