Natural Born Killers

When it rains, it pours.

Old saying

War. Now, pestilence.

“I ask myself,” wrote Richard Russell yesterday, “does all this have anything to do with the fact that we’re in a bear market? Or is it just a coincidence? Maybe I’ve grown up with too much belief (misguided belief?) in the mysterious power of the primary trend. Yet, I keep wondering, why did all this occur within the grip of a primary bear market rather than say in 1985 or 1990 or 1995 when the primary trend was still bullish? Strange, eerie, very weird indeed.”

Here at the Daily Reckoning we wonder, too.

At the top of a bubble market, people develop such a distaste for cash that they search for ways to unload it – spending it recklessly and investing it in loony ventures without a prayer of success. So deep is their contempt for liquidity that they will borrow money from credit cards – at 14% interest – just for the pleasure of getting rid of it. And so great is their craving for ruin that they will mortgage their homes in order to buy stocks trading at record prices.

Eventually, the madness reaches a peak – and people suddenly rediscover that having a little money in the bank is not such a bad thing. Academic economists draw a line at the high water mark of the mania and then watch it drop off. But the tide of ruin runs deeper; beneath the surface lies a sea of trouble…enough dark, cold water to drench the reputations of economists, analysts and central bankers…and destroy the confidence of an entire generation.

It is as if, from time to time, people need to have their money taken away and their spirits crushed. Something always comes along to do the job.

After 43 years of peace in Europe, a terrorist incident in Sarajevo set off a series of mishaps and misjudgments that left 8.5 million dead. Whatever lesson the gods were trying to teach – one would think that would have been enough to get the message across. But as the war came to an end a new and even more lethal menace appeared…

Whatever Osama bin Laden and other terrorists are cooking up in their germ warfare laboratories, they are likely to be second-rate maladies compared to nature’s hitmen…

In October, 1918, 200,000 Americans died of influenza. At first, people worried that this new strain of virus must be the work of German scientists. But the hysteria proved groundless. The Huns were not responsible…these were natural born killers.

The following winter of 1918-19, the virus swept around the world. Eight million people died in Spain alone, so many that the disease was henceforth known as the “Spanish Flu.”

In America, 675,000 people died – ten times as many as were killed in the Great War. Forty-three thousand soldiers died of the flu. Nearly one in three Americans got sick – including President Wilson. But, oddly, young adults aged 20-40 were most likely to die. People died quickly. One anecdote told of 4 women who played bridge together in the evening. Three of them died before morning.

“The 1918 has gone,” noted the December issue of the Journal of the AMA, “a year momentous as the termination of the most cruel war in the annals of the human race; a year which marked, the end at least for a time, of man’s destruction of man; unfortunately a year in which developed a most fatal infectious disease causing the death of hundreds of thousands of human beings. Medical science for four and one-half years devoted itself to putting men on the firing line and keeping them there. Now it must turn with its whole might to combating the greatest enemy of all – infectious disease.”

Before it was over, the flu had killed 20 to 40 million people – more in a single year than 4 years of the Black Death, 1347 to 1351.

Why did the “Spanish flu” come along when it did? No one knows. What was it…and why did it go away? No one knows that either.

But the threat of bioterrorism is bound to dampen enthusiasm for global trade, just as it did when Mr. Smoot got together with Mr. Hawley, back in the ’30s.

Your correspondent…wondering…

Bill Bonner
October 16, 2001

Bonds up…gold down – off $3 yesterday.

Go figure. The Fed and Congress are working around the clock to inflate the economy…and still the markets are telling us that it is deflation we have to fear, not inflation.

Robert Samuelson explains why, in NEWSWEEK: “Even zero interest rates can’t reinvigorate the economy if other conditions are sufficiently unhealthy. Monetary policy is not some magical potion that can erase any disagreeable problem.”

Samuelson points out that even as the Japanese lowered rates to zero, total bank lending went down for 45 consecutive months.

Meanwhile, Bloomberg reports that the U.S. is suffering from “the longest downturn in manufacturing since the ’40s.” Output is down for 12 months in a row. If this isn’t a recession, it is doing a good impersonation of one. A few days ago Polaroid declared bankruptcy. Yesterday it was Bethlehem Steel that went belly up.

Let’s see what else happened on Wall Street… Eric?

*****

Eric Fry, reporting from Manhattan:

– Given the fact that almost no American companies are making more money this year than they were last year – and that many are not making any money at all – the stock market is putting in a mighty fine performance.

– Stocks recovered from an early morning sell-off to finish the day just about where they started. The Dow gained 3 1/2 points to 9,348, while the Nasdaq lost 7 to 1,696.

– Maybe it was the new crop of anthrax incidents that kept the market from falling (remember, terrorism is bullish). Yesterday, Senator Tom Daschle’s office became but the latest locale to receive a letter containing spores of the deadly bacteria.

– “Despite terror’s current resurgence,” writes Doug Casey, “and the fact that it’s the only way relatively weak groups feel they can strike at their enemies, I feel it’s not going to be a really long-lived factor. In the world created by capitalism spilling over borders, in the world of the Internet, in a world which will inevitably become more prosperous, people simply won’t put up with it…”

– But even if by some fluke, anthrax turns out NOT to be bullish for stocks, it is making an exciting contribution to our national vocabulary. Words like “pulmonary,” “cutaneous” and “necrotic” now roll off our tongues as effortlessly as “tree” or “cat.” Think of it as a bull market in arcane medical terms.

– Meanwhile, the same old bear market in semiconductor stocks keeps dragging on and on…like a tiresome anecdote. The SOX Index of semiconductor stocks dropped almost 5% yesterday. Part of the problem, or maybe all of the problem, is that neither businesses nor individuals are buying very many computers these days. “U.S. retail PC unit sales are expected to fall 25% in 2001 and 18% in 2002,” reports Fred Hickey, editor of the High Tech Strategist.

– Rental housing is another sector signaling economic weakness. “Apartment REITs are not immune from the effects of the slowing economy,” observes Kathy Shanley of Gimme Credit. Last week, the “segment leader” Equity Residential Properties “threw up its hands on guidance, saying there is ‘no road map’ for the current environment.”

– All in all, the brain trust at the International Strategy & Investment Group (ISI) predicts that fourth- quarter GDP will be a “wipeout” – falling as much as 10% on an annualized basis.

– “The total value of US stocks is STILL 120% of GDP,” Dan Denning of the DR Blue Team reports, citing research by Jim Bianco. “Whenever this indicator has approached 80% in the past – 1968, 1972, 1987 – severe bear markets followed.” But considering that Greenspan and Congress are tossing a kitchen sink of monetary and fiscal stimuli at our economy, GDP might bounce a bit next year…unless, of course, we start saving too much.

– Oh, oh…what’s this? Recently, the ratio of consumer installment debt to disposable personal income has been shrinking. In other words, the famously spendthrift American consumer has been backsliding…into a saving mode.

– If we Americans ever again expect to taste the fruits of economic prosperity, we will need to get out there in the malls and break out the plastic. At least, such is the sage advice of none other than New York Fed president William McDonough. “What we dearly want is for Americans to behave like Americans – to do the patriotic thing and go out and spend,” Mr. McDonough exhorted in a recent Chicago Tribune story.

– “Can you believe that a sane adult, much less the head of the New York Fed, would act as though the only thing an intelligent person should ever do is spend?” asked an incredulous Bill Fleckenstein in yesterday’s Market Rap on Grantsinvestor.com. “There’s never a time to save? These clueless types either don’t know that there is such a thing as a business cycle, or they believe they have conquered it. I am not sure which is more dangerous.”

– Fortunately, from McDonough’s point of view, the credit-based consumption that will rescue our economy requires only two things: an interest rate low enough to induce a borrower to take on more debt and a banker dumb enough to make the loan. Seems doable.

*****

Back in Paris…

…A mad world gets even madder…

*** The Figaro reports that “Americans are on the edge of panic” because of a few cases of anthrax, a disease still as rare as a sympathetic IRS agent. New York journalists, continues the report, have been gripped by a “psychosis.” How could anyone tell the difference?

*** White powder, so recently the subject of grins and smirks among the hip media set, is now treated as a health threat, we are told…

*** Following the WTC attacks I got a note from a friend in Nicaragua suggesting “with all the violence in the US,” now might be a good time to relocate…Kathie Peddicord, who recently returned from Nicaragua, tells me the bar that Lonely Planet calls “the best bar in Central America” is for sale.

*** “Ricardo’s Bar is like something out of a Hollywood movie set…frequented by lovers, gangsters, and James Bond types. It has been visited by the rich and famous traveling incognito and by the elite of Nicaragua’s government. It’s also the meeting place for San Juan’s expat community – the retirees, the real estate hustlers, and the local eccentrics.” For the property lease and the bar, Ricardo is asking $110,000.

*** Hmmmm…maybe I’ll buy Ricardo’s…and write the Daily Reckoning from a barstool in Nicaragua.