Small Gains

The Daily Reckoning Weekend Edition
November 10-11, 2001
Paris, France
By Addison Wiggin

MARKET REVIEW : Small Gains

Yesterday, the Dow Jones industrials closed above their levels of September 11 for the first time since the attacks, but the percentage was barely enough to register: up 0.2%, the Dow closed at 9608. The Nasdaq (which surpassed pre-attack levels last month) gained a very modest .04% to close at 1828.

Despite these small gains, and this week’s 10th consecutive Fed rate cut – including two mid-meeting surprises – the Dow is down 11% for the year. The S&P and Nasdaq are suffering similar fates, down 15% and 26% respectively.

“It has to be realized that Fed Chairman Alan Greenspan’s aggressive rate cuts,” says Dr. Kurt Richebacher, “are proving to be a complete failure. At the very least, they ought to have invigorated the U.S. stock market long ago.”

Instead, U.S. stocks have been leading markets around the world to the brink of free fall…(More below…)

THIS WEEK in THE DAILY RECKONING By Bill Bonner

11/09/01 ROLLING THUNDER

“…Some things just don’t work as well as you think they should. Arguing with your wife, for example. Or diet plans. Or hair growth tonic. The rhythm method. Psychotherapy. Momentum investing. Handouts to poor people. Strategic air power…”

11/08/01 CASUS BELLI

“…’Afghanistan is the U.S.’s latest Vietnam. Just as it was the Soviet’s Vietnam in the 1980s’…”

11/07/01 DOING THE INTEREST RATE LIMBO Guest Essay by John Mauldin

“…Rate cuts do nothing to offset the deflationary winds sweeping the world economy. Deflation is going to push long-term rates even lower, which ultimately is bullish. Then things will change, and we will talk of inflation. But not forawhile…”

11/06/01 IN THE DUST

“…One of the most enduring myths of the New Era was that the Fed had mastered the boom/bust cycle. Since the Fed could eliminate recessions, there was thought to be no reason why corporate earnings should decline and, therefore, no reason for bear markets. So why not pay 200 times earnings for a stock, if the price only went up?…”

11/05/01 THE HARDEST PLACE OF ALL

“…Americans are accustomed to seeing the cost of life’s essentials go up, not down. They have no experience with deflation, and no resistance to it…can the problem be corrected? Can the pain of deflation be prevented by the powers that be?…The Fed governors were recently thought to be able to avoid recession. Now we have one…”

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HEADLINE, NEWS And INSIGHT : The Corporate Profit Squeeze…Japan Still Headed South – Will They Ever Hit Bottom?…America, Of Course, Following Suit…

The Shareholder Value Cult by Dr. Kurt Richebacher

The current profit squeeze besetting corporate America is structural – not cyclical. Misguided financial restructuring and investment spending are backfiring on profit performance. In our view, the obsession with shareholder value in America is the greatest folly in economic thinking and theory in history.

Is Japan Incapable Of Recovery ? by Marshall Auerback

“…leaving aside the question as to whether this idealized view of the American system conforms to current reality, it is indeed ironic to hear such an outspoken defense of the American model at a time when the U.S. itself appears to be on the verge of a Japanese style liquiditytrap…”

Bottom? What Bottom ? by Mark M. Rostenko

After all their blundering prattle, the “experts” are now telling us that this recession will be one of the tiniest in 50 years. Is anybody still listening? If so, why?!

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FLOTSAM AND JETSAM : Major Misallocations And Just Plain Bad News

– from Dr. Richebacher

“…After nine months of the Fed’s most aggressive interest-rate cutting ever, the news on the U.S. economy and corporate earnings [is] becoming ever gloomier. But the news gets readily shrugged off with the argument that the coming economic recovery in the United States is only a question of time.

Expectations and forecasts have remained amazingly positive. For sure, there is little understanding of the looming economic and financial problems. But it has to be realized that Fed Chairman Alan Greenspan’s aggressive rate cuts are proving to be a complete failure.

At the very least, they ought to have invigorated the U.S. stock market long ago.

…Tracing the U.S. economic development, our focus has been and remains on the collapse of profits and capital spending as the key forces driving the downturn. Second- quarter profits before tax declined from a year earlier. It was the steepest year-over-year drop in 21 years.

Business chiefs around the world are not hiding how scared they are. Many of them readily admit that the downturn’s speed and breadth already exceeds any past experience.

Ironically, their drastic cuts in capital spending happen to be its main cause. U.S. business fixed investment was down 14.6%, annual rate, in the second quarter of 2001. Within the total, equipment investment fell 19.8%, annual rate, from the first quarter. The biggest loser was information-processing equipment, with a decline of 35.3%, annual rate, following a 28.2% decline in the first quarter.

Non-residential construction also fell for the first time in seven quarters, clearly marking a peak for the cycle. Plainly, business fixed investment is the epicenter of the U.S. economy’s sudden sharp slide, setting it fundamentally apart from all previous experiences with the business cycle in the postwar period.

Past recessions reflected little more than the correction of excessive inventories that had been run up during the prior upturn. Inventory recessions, though sometimes pretty violent, were by their nature limited in time. For obvious reasons, there is a general inclination to discard the present downturn as just another cyclical inventory recession.

…On the pretext that the new information technology had substantially increased the U.S. economy’s non- inflationary “speed limit,” Mr. Greenspan allowed and fostered credit excesses of unprecedented magnitude, and the results were imbalances and maladjustments in the economy of unprecedented magnitude.

We have been tracking this development for years with highly critical comments, warning of disastrous long- term implications for the economy and the financial markets.

[And we have shown] that the stellar performance of the GDP aggregate during these years has disguised major changes in allocation of existing resources – away from capital spending and towards chronic over- consumption…”

Cheers,

Addison Wiggin,
The Daily Reckoning

P.S. According to Dr. Richebacher’s findings, the direct effects of the terrorist attacks in New York and Washington, however costly in terms of human life, are economically trivial. But they have come at a time of weakness and great vulnerability for the American and the world economies.