Maximus Greenspan

"We can’t ensure success, but we can deserve it."

George Washington

George Washington’s remark comes to us from a curious provenance. Valery Giscard d’Estaing has been trying to figure out how to organize the European Union. Currently, the union is held together by a series of treaties. When it suits them, member states simply ignore the treaties or find reasons to explain why they do not apply.

The situation is similar to the original days of the American republic, when Virginia or Pennsylvania still had the gumption to conduct themselves like the sovereign states they were supposed to be. Giscard spent his summer reading about Adams, Washington, and Madison and the gang that created the strong, central American government. There, he discovered Washington’s remark.

Today’s letter, you will be relieved to hear, has nothing to do with the European Union. Money is our beat, not politics. But we can’t help but notice the similarities. Both involve mob sentiments and events that are unpredictable…and very hard to understand, even after they’ve happened.

"What was that all about?" we ask ourselves, and then spend hundreds of years wondering.

When Henry Kissinger famously asked Deng Xiao-Ping how he thought the Napoleonic Era had affected Europe, the Chinaman replied: "It’s too soon to tell."

It will always be too soon to tell, for all of history is conjecture mixed with lies.

Still, things happen and people try to make sense of them. They try to learn from the mistakes, or like Giscard, from the successes, of others. And so they spin their lies, embellish their myths, and conjecture late into the night…until they run out of cigarettes and alcohol and there is no where else to go but to bed. And even there, in their sleep, they dream of glory and defeat…of sturm and drang…of greed and fear. Of the monuments…or follies…they have built, or should have built.

What must Alan Greenspan, alone in his bath, think of himself, we wonder? What will be history’s judgment of the man? What is his own verdict?

In the late ’90s, you will recall, he was one of three members of the "Committee to Save the World." Then, Larry Summers left for Harvard. And Rubin disappeared when administrations changed. But Greenspan was still there…the last man standing of the triumvirate…the Caesar of the world’s financial system.

Greenspan, it was thought, wouldn’t allow a serious recession. Nor would he let the stock market collapse. And even after stocks did collapse, he was still there…and still credited with having saved the world. But for his prompt action in cutting interest rates – and thus encouraging consumers to go even further into debt – the mini-recession of 2001 might have been much worse…and who knows what might have happened to stocks.

And was it only a few weeks ago that we learned that he was to be knighted by the Queen?

The Queen’s honor’s committee may be a very lagging indicator. Or perhaps the news has not yet reached them… that Greenspan’s bubble may not have been such a good idea after all.

More to come….

Bill Bonner
September 4, 2002

God bless those American consumers…the poor, hopeless turnips.

For an entire year, ever since Sept. 11, says yesterday’s Wall Street Journal, "their purchases saved the U.S. economy from deep recession."

Spending money they didn’t have on things they didn’t need, consumers allowed Alan Greenspan and the Fed to continue expanding America’s great credit bubble.

"The latest evidence," the WSJ tells us, "came Friday, when the Commerce Department reported consumers had increased spending by 1% in July, the largest advance in 9 months. Even as Americans’ incomes, which include wages, interest and government benefits, were flat in July, rising home values, booming mortgage refinancing and low interest rates kept consumers reaching for their wallets."

Income from wages and salaries actually fell in July – 0.2%. But that didn’t stop them. Surveys show they are as confident as ever.

But we note that Japanese consumers had much the same sentiments after their economy began to fall apart in 1990. Eric has done our work for us today; he remembers the poor Japanese consumers, for whom nearly 2 decades of stock market gains have been wiped out…and who have come to see the virtues of saving money rather than spending it. Eric?

******

Eric Fry, reporting from the Big Apple:

– Another ugly day on Wall Street. Stocks got crushed, as the traders say. The Dow tumbled 355 points to 8,308, while the S&P 500 and the Nasdaq dropped about 4% each. The dollar also had a rough day, falling 1.3% to 99.7 cents per euro…But it could be worse.

– We think WE have it bad! But what about the Japanese? As of Tuesday’s close, the Nikkei had fallen to its lowest level in nearly 19 years! At the peak of the Nikkei bubble, few could have imagined the devastation that was to follow. The Nikkei Index has plummeted a breathtaking 76% since it peaked at 38,916 on December 29, 1989.

– Is Japan’s endless bear market an isolated incident? Or is it an unnerving preview of the US stock market’s fate? Perhaps the Nikkei is the "Ghost of Christmas Yet To Come" in a kind of macro-economic "A Christmas Carol" – a ghost that points to a grim future that the Dow – a.k.a. Scrooge – is destined to follow.

– The Nikkei’s collapse – to paraphrase Dickens – is a "shadow of the things that have not happened, but will happen in the time before us."

– There is perhaps some slim hope that the US stock market "may yet change these shadows…by [living] an altered life."

– But James Stack, editor of Investech Research, is not very hopeful.

"28 months into the unwinding of the U.S. stock market bubble," Stack observes, "there’s no sign of the dreaded ‘deflation’ that marred Japan’s repeated attempts at recovery over the past decade. With that said, one might be surprised or shocked to learn the following assessment of Japan’s bubble at 30 months after the Nikkei Index had peaked, from a July 11, 1992, story in The Economist called ‘How Japan Will Survive its Fall.’ (It’s subtitled ‘The economic slowdown in Japan should not be confused with a Western-style recession. Which is why Japan will come bouncing back.’)

"The Economist said, ‘Is Japan heading into a humdinger of a recession? The answer is no…High employment is helping to support consumer confidence. Much is made of the fact that business investment…is falling. But consumer spending, which is almost three times as big, grew by 3.3% in the year to the first quarter…The main reason that Japan…should be able to dodge a deep recession is that it starts off with the soundest fiscal and monetary policies of any industrial economy. This gives the government more ammunition with which to fend off a recession.’"

– Sounds eerily familiar doesn’t it?

"Yes, there are important differences between the U.S. bubble of the late 1990s and Japan’s bubble of the late 1980s," says Stack. "And there is an even greater difference in how aggressively the central bank tackled the problem…Our Federal Reserve has undertaken more easing in less than half the time as the Central Bank of Japan a decade ago."

– And yet, says Stack, the similarities are "downright scary."

"The parallel paths between our S&P 500 Index and the post-bubble Nikkei carries a worrisome, if not ominous, message…And the realization that economists’ optimistic assessments were almost identical at this stage of the unwinding only adds to the anxiety. It’s not that we think the U.S. economy is doomed to traverse the same decade-long series of recessions that hit Japan after their bubble burst. But unlike many analysts out there, we won’t dismiss the parallels as trivial nonsense."

"This is not a normal cyclical bear market," Stack concludes. "It has lasted 28 months, making it the longest and largest bear market since the 1930s. And for the first time since the creation of the Fed in 1913, a recessionary bear market is hitting new lows six months after the recession apparently ended. The next month or two are a very critical time…perhaps the most critical in 60 years. If confidence doesn’t stabilize and turn higher…and if stock prices don’t hold above their July lows…then the economic outlook will take a significant turn for the worse. And all the jawboning, reassurances, and hot air won’t prevent the economy from dropping back into recession."

– "Oh, tell me I may sponge away the writing on this stone!" – Scrooge.

******

Back in Paris…

*** Well, our vacation ended yesterday with a trip to Milan. Your editor escorted his 16-year-old daughter to the city so she could take up her latest assignment in the fashion industry. By accident, he learned enough about the modeling business to open his agency…

The girls can be seen all over the streets of Milan, wandering around with their "books" – large photo albums – in their arms and city maps in their hands. They go from assignment to assignment all day long, waiting in lines with dozens of other girls for hours, hoping to end up as a cover girl on a major magazine, or at least walk the runways with the latest goofy outfits and the look of drugged indifference that seems to have become de rigueur at fashion shows.

It is a dreary life, for all your correspondent was able to tell. Maria is to spend a month in Milan, put up by her agency in a basement apartment where the only window looks out on heating pipes. Living in that apartment would be good practice for a prison term. If she is lucky, she will come home no poorer than she left…for the agency charges the girls for the use of the apartment and other expenses and credits them, after 20% commission, with whatever measly money they earn. It is not unusual for girls to spend years in debt to their agencies.

Maria is a serious girl and believes this is a good way for her to get into show biz. But she has a major problem…

Just as some people suffer severe seasickness and others never get over their gambling fever, Maria cannot bear to be away from home.

"Oh Daddy," she said to me as I was leaving, with tears in her eyes, "I’m so afraid I’m going to be homesick."

Her father hates to see her suffer. More than that, he hates to see himself suffer. He would miss her, of course. And how could he go about his business and enjoy his faux filets and St. Emilion ’98s in Paris knowing his daughter was so unhappy in Milan?

"You are only 16," he told her, hoping she would agree with the suggestion he was about to make. "Perhaps you should wait until next year to do this."

"No," she replied bravely, "I’ve got to do this or I’ll let everyone down…"

By the end of the conversation, Maria’s spirits had lifted. She had a train ticket and could come back to Paris if she felt the need.

Still, her father left for the airport with a heavy heart….