He who exalts himself shall be humbled.
He who humbles himself shall be exalted.

Somewhere in the Bible

The bells of St. Merri’s are tolling this morning. Why? A holiday? Remembrance of some dead saint or president? We don’t know the cause, but tipped off by the funereal pace, the smart money in the office is betting that some poor sod has shuffled off this disreputable ball. A man, a woman? We were going to send a runner across the street to peer into the casket and report back, settling the matter, but judged it too gauche, even for Americans.

The ancient bells put us in a reflective mood. What makes this world go ’round, we wondered? Is it nothing more than an “old chaos about the sun,” as Wallace Stevens put it? Or, is there more to it? Something that might give meaning…or even predictability to the sturm and drang of it all?

We will never know. But we flatter ourselves by imagining that we see patterns, especially after drinking a lot. What goes up, goes down – or so it appears to us. And people get what they deserve. And even if they don’t, they ought to.

“Markets make opinions,” say the old-timers on Wall Street. A few years ago, we might have not cared what the rumpled graybeards thought. It was a new era, after all…and the geezers were hopelessly dundefinedmodundefined. But now that we are almost old-timers ourselves – suddenly, we pay attention.

As the great bull stocks shot up in the late ’90s, opinions changed. People thought they saw a pattern then too – stocks always went up, they said. They looked back as far as they could see, and except for a few declivities here and there over the year, they saw nothing but the rising slope behind them. Turning around, they could imagine nothing else.

But hardly had they advanced 100 paces into the new millennium than, whoosh, the ground gave way. Trudging forward, our guess is that they will find themselves stumbling downhill for years. That is just the way things seem to work. Once a major peak in stock prices is reached, investors need to march for many years before they come to another one. And all the exalted landmarks – that looked so fetching on the way up – the rising dollar, the growing current account deficit, the tycoons of American capitalism, analysts’ forecasts, earnings reports, new technology…all of them begin to look a little shabby on the downhill slopes.

We take all of this for granted: greed gives way to fear. And as the Great Bear Market of ’00 – ? continues, we expect to see all the conceits and pretensions of the late ’90s destroyed…and replaced by new ones. But the world would be a dull place if the Great Comedy were as predictable as a crime show.

Last week marked the 60th anniversary of one of the most lunatic military adventures in history – Operation Barbarosa – in which Adolf Hitler launched his wehrmacht against Soviet Russia. It would have been amusing to watch the war from a safe distance, hoping both sides would lose. But some forms of madness are so infectious almost no one escapes. Soon the entire world was exchanging gunfire.

The Soviet Union was founded on envy and eventually destroyed by it, not by Hitler’s troops. Like the French Revolution before it, the Russian uprising targeted tradition in all its forms. In its place, the Bolsheviks promised two things – that their system could produce more goods and services…and that they would be more fairly distributed. They could keep neither promise. But along came the Germans just when they were most needed. In a jiffy, the failures of the Bolsheviks were ignored; Mother Russia was under attack. The war enabled the communists to squeeze the country like a boa for another 4 decades.

But by the ’80s, both the snake and victim were exhausted. Too many East Germans had peered across the border at the West. The envy that had once led people to join the communist party now turned against it. The communists couldn’t deliver and almost everyone knew it. The laws on the books in the Kremlin at the end of the 1980’s were little different from those in force in the ’60s or ’70s. The logic of Soviet communism was a solid as ever. And yet, in one of the most remarkable events in all history, on Dec. 17th, 1991, the communist party leadership was forced to admit that the whole idea had become absurd.

In America, the politicians patted themselves on the back…and the Great Boom continued. Americans exalted themselves, their government, their markets…Hardly anyone noticed that a dangerous envy had slouched into the American system too.

“Marx’s theory of economic causation is not dead yet,” writes Gary North. Marx believed economics was everything that really mattered. Most people in America seem to believe it today. “The mode of production determines the social order,” wrote Marx.

“The Western Christian tradition teaches that moral order is primary, not economics,” North replies.

We know which side we are on. We grant that markets make opinions; a bull market turns an investor into a bullish investor. But what makes markets? We don’t know the answer.

“Western Capitalism contains the seeds of its own destruction,” North continues, “not the mode of production, but rather the mode of consumption.”

Americans so envied the rich that they couldn’t wait to join them. First, they jumped into the stock market just as it reached its highest level in history. The lumpeninvestoriat actually seemed to believe the Marxists’ rhetoric – that capitalism exploited the masses; they wanted to exploit the masses too.

When stocks failed, the patsies took to buying houses, mortgaging them for as much as they could get.

And throughout the last three decades…Americans worked harder and harder. Not only did the average man work longer hours himself – but he expected his wife to work too. Anything for a buck. He didn’t seem to notice that his own hourly wages actually fell – from ’91 to ’01…during the biggest boom in history.

And now, he turns to the government…looking to the U.S. government and the American capitalist system to make good on the very same two promises once made by the Bolsheviks.

“The retreat of the Left saddled the Right with all the government programs created by the Left, which gained the support of politicians on the Right as soon as the special-interest constituencies that were created by Federal spending began hiring lobbyists,” Gary North explains. “There has been an irreversible ratchet upward of the welfare state. It never backs off to a lower level. It locks in until another spending program gets legislated.”

“The raid on the U.S. Treasury has only just begun,” Gary concludes.

Now that the bells have tolled for communism, what madness is next? We will find out.

Your correspondent,

Bill Bonner
Paris, France
June 28, 2002

Yesterday, we had a feeling that the market was getting dangerously close to panic. Even the patsies must be getting tired of reading about corporate accounting scandals.

What’s more, they’ve lost more money than the averages suggest. Floyd Norris, writing in the N.Y. Times, points out that of the 20 stocks most often owned by Merrill Lynch customers, 16 of them are down more than 15% this year. Fourteen are below their Sept. 21 low points. And overall, the 20 stocks – which include Lucent, AOL, AT&T, Intel, IBM and EMC – are down 36% so far this year.

But instead of stampeding out of stocks, the herd is still holding and hoping…while giving the insiders and foreigners plenty of time to get out.

“Foreign demand for U.S. assets has virtually vanished,” notes an article in the Financial Times. Tyco and Worldcom have been big stories in the European press. “Crooks Rock World Markets,” says a headline in leftist paper, The Liberation, with a certain schadenfreudian glee. Europeans are quietly bailing out of U.S. markets; why else would the dollar fall again yesterday, even as stocks rose?

But let’s hear from Eric with more details…


Eric Fry, reporting from New York:

– As if recovering from a stroke, Mr. Market is struggling these days just to put one foot in front of the other. Yesterday, to the delight of all the investors who are wishing him a speedy recovery, he managed to take several steps in a row. (And no ne’er- do-well CEOs stuck out their legs to trip him up as he shuffled along).

– The Dow gained 149 points to reach 9,269, while the Nasdaq moved ahead 29 points to 1,459. Gold responded to the rallying dollar by falling $1.20 to $319.60 per ounce. Gold stocks fared even worse, with XAU Index sliding nearly 4%.

– However, despite the gold selloff and stock market rally, the dollar didn’t play ball. It continued to slide lower. What’s going on with this thing? Isn’t the dollar supposed to rally along with the stock market? Instead, it slipped more than half a percent against the euro – boosting the European currency’s value to 98.8 cents. Parity with the dollar is only 1.2 cents away.

– Now that the stock market has been falling for many, many months, the financial world is a very different place. The celebrity analysts are gone…and outlaw-CEOs are sprouting like weeds. Meanwhile, many of the formerly esteemed Wall Street strategists now stand on somewhat shorter pedestals. It’s amazing that they still have a pedestal to stand on at all, much less a cushy job paying several million dollars per year.

– Wall Street strategists must be the most highly paid unskilled laborers in America. How hard would it be to find a pleasant individual who would happily accept the minimum wage to recite publicly each day, “We think stocks are a solid buy at current levels…Our year-end price target for the S&P 500 remains 1,300?”

– During the boom, Goldman’s Abby Joseph Cohen enjoyed ever-increasing celebrity as a kind of financial prophet. She was ALWAYS bullish, and therefore, she was ALWAYS right…until she wasn’t. But she remained bullish, just the same. She continued to spout the same robotically bullish blather she had always spouted…and that blather encouraged millions of investors to cast their savings into the stock market like so many twigs into a bonfire. – Now that millions of investors have lost trillions of dollars, the dubious value of Cohen’s forecasts is self- evident. But does she show any visible remorse for having cost so many so much? Of course not. Any sheepish admission of error? Heck no! Rather, like a museum tour guide, she unapologetically and unflappably recites the identical bullish refrain over and over and over again.

– “As we had expected,” boasts Abby Joseph Cohen in this week’s Barron’s, “the economy is getting better.” Conveniently, Ms. Cohen neglects to mention the utterly unexpected (by her) bear market that buried her bullish predictions as completely and as devastatingly as Vesuvius buried Pompeii. All that remains of Cohen’s errant advice are the smoldering portfolios of anyone who trusted her forecasts. – It’s okay to be wrong, of course. Even the best investors get it dead wrong on occasion. But it’s more than a little bit disingenuous to pretend that you have been right all along.

– Isn’t it amazing that the Wall Street strategists ever commanded respect, or even attention? Certainly, a light bulb does not command respect for illuminating when the switch is flicked. It is merely “on”. Likewise, when Wall Street flicks the switch, the strategists light up and utter their monotonously bullish forecasts. The charade would be comical, if it weren’t so destructive.

– An honest assessment of the stock market’s prospects must at least acknowledge the presence of risk and allow for the possibility of loss. An honest assessment would not neglect to mention the severe and palpable risks of a prolonged market decline, or the fact that stocks are – historically speaking – extremely overvalued.

– To access honest analysis, one must seek independent voices like Dr. Kurt Richebacher and Jim Grant of Grant’s Interest Rate Observer.

– “At the March 2000 peak,” Grant remarked recently, “the indices were obviously overvalued. At what is widely hoped to be the bear-market bottom, they are still overvalued. Here is what an overvalued bear market looks like (I quote from the June 12 Barron’s): the S&P 500 at 41.6 times trailing earnings and 4.7 times book value, the Dow Jones Industrial Average at 26 times trailing earnings and 7.3 times book.”

– Can the market rally from current levels? Absolutely. Can a new, enduring bull market begin from such lofty valuations? Highly unlikely, dear reader, highly unlikely.


Back in Paris…

*** Why are stocks falling? Dan Denning quotes Michael Vronsky, The Deer Hunter:

“You see this? This is this. This ain’t something else. This is this.”

“This,” explains Denning, “is a bear market.”

“The great and irrelevant debate goes on,” he continues. “The market rallies yesterday and experts proclaim the bottom is in. Meanwhile, the irrefutable fact is that we are in a secular bear market.”

*** What happens when you are in a bear market? Prices go down. But that is not all. “Markets make opinions,” say the old-timers on Wall Street. What do opinions make? More below…

*** Another saying from Wall Street is “don’t fight the Fed.” But there are two times since the Fed was created that fighting the Fed actually paid off, says Richard Russell. One was following the crash of ’29. The Fed cut rates. Neither the market nor the economy responded. The second time was following the Fed rate cuts that began in January 2001. The Fed cut 475 basis points from the fed funds rates. Yet, the S&P is 28% lower than it was went the cuts began.

*** But don’t worry about a thing. The number crunchers at the Labor Dept. finally tortured the first quarter’s GDP figures into a shape they liked – leaving us with the impression that the economy grew at an even faster rate than originally alleged – up 6.1%.

*** But can you believe it? The numbers are a “house of mirrors,” says Stephen Roach. Worldcom neither invented the art of lying with statistics, nor will it be the end of the accounting scandals story. Someday, maybe even the government’s number crunchers will be cited for digit-abuse.