05/19/02 If you listen hard enough you can practically hear the cheerleaders braying:
* "Gimme an ’s’, gimme a ‘t’, gimme an ‘o’ gimme a ‘c’… what’s that spell?… "
* "Buy and Hold, Buy and Hold…yeah!"
The Dow closed well above ten thousand on Friday sustaining a week-long rally and holding onto a gain of 413. Incredible.
The tech-busy Nasdaq ended 140 points higher, too, following its first five-session winning streak in seven months – and the biggest weekly gain it has been privy to in over a year.
Even the S&P 500 basked in speculative euphoria… the broader market index ended with nearly a 5% boost for the week.
* "Like, what’s all this noise about a double-dip recession, anyway!?"
"Just because it hasn’t happened yet," cautions Morgan Stanley’s Stephen Roach, "doesn’t mean it won’t occur in the future." Of course, I don’t want to rain on anybody’s parade. But the fact is, this week’s rally in the stock market makes our work here at the Daily Reckoning seem… well, almost important.
Either that or I’m feeling ornery. While I’m scribbling away here on a Sunday the sun is shining and the street in front of Le Paradis below is teeming with cackling touristas, tinkling glasses, the random jazz musician and a myriad of other noises you might associate with cafe life in Paris…
Heck, even our local inebriate street bard seems to have taken the day off. I didn’t see him at his post in the church doorway across the street while I was coming into the office, nor can I hear him singing as he’s wont to do on weekdays.
Either way, I feel it’s my sworn duty to point out: we ain’t out of the woods yet with regard to the economy. Taking a page from our own Dr. Kurt Richebacher, Roach suggests "the unrelenting squeeze on Corporate America is at the top of my list [of reasons to suspect a double dip]."
According to Richebacher, "corporate profits of the non- financial sector as a whole peaked in the second quarter of 2000 at $518 billion, annualized. By the fourth quarter of 2001, they were down 44.4%. Manufacturing, meanwhile, earned $175 billion during the second quarter of 2000. That dropped 71.2% – to $50.3 billion – by the fourth quarter of last year."
Nor should you rule out "potential capitulation" of the American consumer. Personal bankruptcies, for example, were up 15% for the 12 months through March 2002, over the same period a year before. And a cursory look at the headlines for the week will give you an idea what strategy corporate America is employing in an effort to get through this mess with share prices in tact. (Hint: Can you say: "layoffs up the proverbial wazoo"?)
"Five of the past six recessions," Roach reminds us "have, in fact, contained a double dip. Moreover, there were actually triple dips in the cyclical downturns of the mid-1970s and early-1980s. The double dips of the past all have one thing in common — they were triggered by a relapse on the demand front that occurred at just the moment when businesses had started lifting production in order to replenish depleted stocks.
"Needless to say, with industrial production now on the rise in the US — four months of consecutive gains in early 2002 — any relapse on the demand front would be especially problematic. And then, of course, history would end up having an uncanny knack of repeating itself."
The US dollar, too, has been buffeted by a less-than-stellar week. The greenback hit a 5-month low against the euro this week. and watched the euro inch up to $.92 – a level it hasn’t seen since October. And yet, according the Big Mac index – the Economist magazine’s legendary measure of currency valuation – the U.S. dollar is still 40% overvalued.
That is, on average, consumer items like a Big Mac, cost 40% more in America than elsewhere. "Overall, the dollar now looks more overvalued against the average of the other big currencies than at any time in the life of the Big Mac index," says the magazine. In other words, despite recent signs of weakness, there’s plenty more room to the downside.
"The long bull market in the dollar will soon come to an end," writes my friend and colleague Porter Stansberry. And "typically those currency bull runs don’t end gently…"
Hope you’re enjoying your Sunday, too.
Addison Wiggin,
The Daily Reckoning
May 18-19, 2002 — Paris, France
P.S. "All previous postwar recessions," writes Dr. Richebacher, "were of the so-called ‘garden-variety’ pattern, in that they mainly reflected a temporary inventory liquidation."
But "for the first time in history, the economy and stock market have slumped [simultaneously] against the backdrop of rampant money and credit creation."
"These experiences," suggests Richebacher, "raise some highly critical questions: Why has the deluge of money and credit failed to boost the economy and financial markets in any significant way? And what, exactly, is behind the U.S. economy’s miserable profit performance?" The good doctor takes a stab at the answers in Flotsam $ Jetsam below…
P.P.S. As you may know by now, Porter and his team at the Pirate Investor came across some interesting information in the middle of last week regarding a pending agreement between the Russia and the US… and the potential boon it represents for one US company.
Here’s an update: "A few readers [to the Porter Stansberry Investment Advisory] have already made four times their money on the tip via options," writes Porter in The Blast, his weekly e-mail advisory. "The stock has moved from $7.00 to $9.34… but there’s still room to make good money if the stock goes to $14," as they are predicting.
Because of the speculative nature of the trade, the stock was not added to Porter’s portfolio. Nor has anyone on the Daily Reckoning team bought it. It’s a speculative play. And definitely not something we would consider "investing." If you’re interested, don’t put any more money in the trade than you can safely… even comfortably… afford to lose.
* * * * * * * * * * * * * * * * * * * * * * * * * * *
THIS WEEK in THE DAILY RECKONING
by Bill Bonner
05/17/02 IMPERIAL MONEY
"…The dollar has been around for so long it is thought to be as permanent as Rushmore or psoriasis. But today’s dollar is an impostor. It is not the same dollar it used to be back when America was a mererepublic…"
05/16/02 SUN SETS ON EMPIRES
"…Bubbles and empires have a logic of their own; that they will end in grief is a foregone conclusion. Still, they are entertaining to historians and stock marketkibitzers…"
05/15/02 THE BEAR MARKET ACCORDING TO EMERSON
Guest Essay by James Davidson
"…Technological innovation is almost certain to be the most important variable precipitating change around the globe for our lifetimes and those of our children. To overlook its wealth-creating potential would be stupid…"
05/14/02 THE EMPIRE STRIKES OUT
"…A great empire is to the world of geopolitics what a great bubble is to the world of economics. It is attractive at the outset…but a catastrophe eventually. We know of noexceptions…"
05/13/02 REFORMATION
"…While the world once basked in the light of faith, religion and the church…Today’s world is lit up bypolitics…"
* * * * * * * * * * * * * * * * * * * * * * * * * * * *
FLOTSAM & JETSAM:
Not Your "Garden-Variety" Recession
- Dr. Kurt Richebacher
"…Pondering the U.S. economy’s prospects, we deem two features to be of foremost importance. One is the prolonged profit implosion, which has hit the manufacturing sector with devastating force. The other is the fact that the recession was not caused, as usual, by money and credit stringency. For the first time in history, the economy and stock market have slumped against the backdrop of rampant money and credit creation.
These unprecedented experiences raise some highly critical questions: Why has the deluge of money and credit failed to boost the economy and financial markets in any significant way? And what, exactly, is behind the U.S. economy’s miserable profit performance? These are the two most important questions to scrutinize.
All previous postwar recessions were of the so-called "garden-variety" pattern, in that they mainly reflected a temporary inventory liquidation. Once this had been accomplished and the Fed eased in response to lower inflation rates, the economy promptly took off in a steep trajectory.
Inventory liquidations did contribute substantially to the U.S. economy’s downturn last year. Yet its overwhelming source was an unusually steep plunge of business fixed capital investment.
Looking for the cause of the unfolding capital spending crisis amid double-digit money and credit growth, there is but one reasonable explanation: the profits implosion. It began in the fourth quarter of 2000, while the dive of fixed capital investment began just two quarters later.
Corporate profits of the nonfinancial sector as a whole peaked in the second quarter of 2000 at $518 billion, annualized. By the fourth quarter of 2001, they were down 44.4%, to $287.7 billion. Manufacturing, meanwhile, earned $175 billion during the second quarter of 2000. That dropped 71.2% – to $50.3 billion – by the fourth quarter of last year. During the same period, however, retail-trade profits edged up from $83 billion to $84.3 billion.
This profits pattern is, of course, the exact mirror image of what has been happening in the economy. The worst-ever profits crisis in production coincides with debt-fueled booming consumption. Conspicuously, the consumption boom failed to prevent the profits disaster…"
Dr. Richebacher’s prediction of the dollar demise, while initially greeted with derision, is proving to be rather prescient. Despite strong stock market gains this week, the dollar dropped to a 5-month low against the yen, a 7-month low v. the euro and long-term lows against both the Canadian dollar and Swiss franc.
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