SPIFF

*term employed by Gary Winnick, meaning ‘benefits’, ‘loot’ or ‘dead presidents’

Doth any man doubt, that if there were taken out of men’s minds, vain opinions, flattering hopes, false valuations, imaginations as one would, and the like, but it would leave the minds, of a number of men, poor shrunken things, full of melancholy and indisposition, and unpleasing to themselves?

– Francis Bacon

So much of what goes on in the world is nothing more than fraud and buncombe.

But without it, what would be left?

That is the problem, dear reader. For, take away the spiff, the vanity, and the pretensions and do you have any world at all? Strip off his Armani suit and his Brooks Brothers underwear…and what corporate chieftain wouldn’t look ridiculous?

Sometime in the late ’90s, Gary Winnick – chairman of $47 billion Global Crossing – did something unusual. He decided to take time off from touring art galleries with David Rockefeller, playing golf with Bill Clinton, and enjoying the Malibu beach, just a few doors down from legendary screecher, Babs Streisand…and learn a little about the business he was in; he bought a video describing how undersea cable was laid.

That was all Winnick needed to know about laying cable. For he understood what business he was really in, and it had nothing to do ships or optic fiber. Winnick was doing nature’s work: separating fools from their money. And he knew he was good at it.

Winnick was supposed to know the undersea cable business. Then too, the people from whom he raised money were supposed to be the best pros on Wall Street – those who managed big money. If they didn’t know how to place money so as to get a decent return, what did they know? And the people who put money in their hands were supposed to know what they were doing too.

But that is one of the great marvels of life…Not that fools and their money are soon parted, but that they ever get together in the first place.

It is a bright, sunny Monday morning in Paris. Here at the Daily Reckoning office, we gaze out the window. The people in the hotel room across the street are still sleeping. The curtains are still drawn. The woman on the top floor apartment is sunning herself…after watering the plants on the balcony. And, on the other corner, alas, there is no sign of the young woman who was walking around in her underwear last week…

Life goes on, we note, for no particular reason…other than the vanity of it all. One lie replaces another like cars along a Paris street; a parking spot rarely remains open for very long.

“The sad fact is, Global Crossing had a decent shot at survival,” says a FORTUNE article on Gary Winnick. “It planned to build an undersea broadband network that would link continents together and serve global carriers like Deutsche Telekom and AT&T. Early estimates of construction costs were around $2.7 billion…”

Whose fault was it, dear reader? Winnick…who had the gumption to ask for the money? Or, the goof-balls who gave it to him? They might have ponied up the $2.7 billion, and maybe Global Crossing would still be in business. Instead, they kept shoving big bills in Gary’s pockets – until he had raised $20 billion.

“Like so many other telcos…” continues FORTUNE, “Global Crossing got carried away on the tide of easy money. It raised more capital than it needed and built a network with more capacity than the world demanded. By the time Global Crossing collapsed, its long-term debt had ballooned to $7.6 billion (total liabilities were $14 billion), and it simply didn’t have the cash to make its interest payments.”

There are few things, as Mae West observed, of which a man can have too much and suffer no harm. But too much money is a clear and present danger to a man…or even to an entire economy. Telecom was not the first, nor will it be the last industry to be ruined by an excess of good fortune.

What happened to the $20 billion Winnick raised? He spread the money around – acquiring other overpriced telecoms, giving Wall Street a way to earn massive fees by keeping the money coming his way. “From 1998 through 2001,” say the FORTUNE editors, “the top Wall Street firms earned more than $13 billion in telecom underwriting and investment-banking fees.”

And so both the spiff and hokum whirled around. Salomon’s Jack Grubman talked up the stock. Investors bought it for more than it was worth. Winnick bought other telecoms for more than they were worth. Everybody made money.

But it was an empty vanity. People don’t really get rich by spending money on things they can’t afford at prices that are too high. All they do is move money around… and waste much of it. In the telecom sector alone, far more dark fibers were put down than the world really wanted. And when the end of the bubble finally came – investors found that they were out $2.5 trillion, an amount equal to one quarter of America’s entire GDP.

Not all that money disappeared. By the time Global Crossing declared bankruptcy, Winnick had sold $735 million of stock…and received another $15.8 million in other spiffy emoluments. Winnick must have felt pretty smart – he had done what he set out to do; relieve the patsies of the burden of wealth.

Bill Bonner
Paris, France
June 24, 2002

The Dow fell 6.2% in 2000. It fell another 7% in 2001. After five weeks of losses, the Dow is now down 7.7%.from January.

“The danger for 2003 is that business investment still doesn’t take off, while household consumption shows more signs of weakness,” Eric Barden, of First Austin Capital, told a reporter from Le Figaro.

Why won’t businesses invest? Because there are no profits to lure them to the hook. Besides, managers still recall the last time they took the bait.

The disillusionment over corporate profitability is massive,” reports a Reuters article, “Fifty-one percent of 280 fund managers who oversee $711 billion in assets said in a Merrill Lynch survey that U.S. earnings are the worst in the world when it comes to predictability, volatility and transparency. Not seeing any improvement any time soon, the managers say the U.S. stock market is the one place where they most want to be underweight.”

The smart money is leaving the U.S., Wall Street and the dollar. Will the dumb money be far behind?

“It is now June and the public is finally getting scared, although not scared enough to sell,” says Jim Dines.

Perhaps not. But they’re starting to think about it, right, Eric?

******

Eric Fry, reporting from the city that never sleeps…

– Ugh!…Sleaze and crony capitalism continue to dog the stock market. The Dow skidded to its third straight triple-digit loss on Friday, as it fell 178 points to 9,254. The Nasdaq surrendered 24 points to 1,441. For the week, the Dow dropped 2.3%, the Nasdaq 4.3% and the S&P 500 1.8%. For those scoring at home, the Nasdaq’s latest losses plunge the hapless index down 26% for the year, and it now sits almost exactly where it did five years ago.

– Also troubling for the bulls, both the Nasdaq and the S&P 500 are just a stone’s throw from their post-Sept. 11 lows. Even the once-stalwart blue chips like IBM and Merck are looking a little blue around the gills. Both stocks slipped to fresh 52-week lows last week.

– There was plenty of action away from the stock market, as well. Defying legions of naysayers, gold refuses to retreat into oblivion. The yellow metal’s brief “correction” ended by rallying $5.50 during the week to $324.60 per ounce.

– And what is becoming of the once-strong dollar? “The Coca-Cola of monetary brands,” as Jim Grant calls it, seems to have lost some of its fizz. The U.S. currency plunged 2.7% last week against the euro, to 97.1 cents per euro, and reached its weakest level since April 2000. The dollar has fallen against the euro for five straight months…Next stop, $1 per euro?

– Predictably, as US financial assets slide ever lower, so does consumer confidence…Especially the confidence to “consume” expensive US stocks. According to a Bloomberg News poll, a shrinking number of Americans believe it is a good time to buy stocks. What happened to “Buy the dip?” Don’t these people watch CNBC? There’s a word for the kind of market in which investors dislike stocks more, the lower/farther they fall. Some of you may have heard of the term: Bear market. And bear markets are no help to consumer confidence.

– “Looking back over the past boom years,” observes Dr. Kurt Richebacher, “the consumer borrowing and spending spree clearly stands out as the U.S. economy’s central imbalance.” Consumer spending may appear vigorous, says Richebacher, but in reality it is “pathological and unsustainable.”

– “Directly related to the consumer borrowing and spending bubble,” he says, “[is] the collapse of the personal savings rate from 5.6% of disposable income in 1995 in 4.2% in 1997 to virtually zero in late 2001…Careful scrutiny of underlying economic and financial conditions tells us categorically the apparently still-prevailing optimism of the consumer is grossly misplaced and that very shocking economic and financial discipline is waiting for him.”

– For most people, the phrase “cutting edge” does not immediately conjure up images of Baltimore. But lest anyone forget, Baltimore begat Agora, which in turn begat The Daily Reckoning – a cutting-edge financial product if ever there were one.

– And now, once again, Baltimore – aka, “The City of Firsts” – finds itself at the avant-garde in the crusade against executive stock options. Although Baltimore, per se, may have little to do with the crusade, Bill Miller, the chief executive of Baltimore-based Legg Mason Funds, has been railing against stock options. Mr. Miller is not just some guy with an opinion. He happens to oversee a company that manages $11.3 billion. In other words, he’s a Wall Street “insider” – Baltimore-style. “I support the banning of stock options because anything that can be accomplished with options can be accomplished by giving stock directly,” says Miller. “And it has none of the downsides of options.”

– Most New York-based institutional investors have contributed nothing but silence to the debate over stock options. They seem to hope that the furor will die down and the status quo will endure.

– John Bogle, the outspoken founder of the Philadelphia- based Vanguard Group, sides with Miller. “The amount of option issuance is absurd,” says Bogle.

– Even more absurd, however, is the fact that – as long as stocks were going up every day – no one seemed to mind this institutionalized transfer of wealth from shareholders to managements.

– To be sure, the small, reviled fraternity of short- sellers used to gripe from time to time about the hidden cost of lavish option grants. But such complaints fell on deaf ears…until now…until well after the major damage has already been done.

******

Back in Paris…

*** “Once again, it all hinges on the ability of the once-proud American growth engine to save the world,” writes Stephen Roach after surveying the world’s economies.

*** From whence will the U.S. consumer get the purchasing power, we ask ourselves. With little or no wage growth, fewer jobs and no savings…we can’t help but wonder.

*** It will have to be borrowed, we reason. But from whom? Ah, there’s the rub…”That’s because the United States now has the ‘mother of all’ current account deficit problems,” Roach explains, ” – an external imbalance that will inhibit America’s ability to fuel global recovery of a still US-centric world. The just- released 1Q02 US current account data underscores this dilemma. The $112.5 billion deficit – or $1.25 billion per day – amounted to 4.3% of US GDP.”

*** The happy news from the financial world of ’99 has given way to regret and reproach. For example, so much money was pouring into government coffers in the late ’90s that hardly a jurisdiction in the country wasn’t predicting huge surpluses and drawing up plans to waste the loot. But now, they’re almost all running short. Washington, for example, posted a shortfall of $81 billion in May – 3 times the amount of a year ago.

*** And now the current account deficit is nearly twice what it was five years ago…with the dollar falling! The greenback is down, like the Dow, about 7% so far this year.

*** In the 3 years ending Dec. 2001, foreign investors slopped $1.3 trillion into U.S markets. They now own $8 trillion of dollar-based financial assets. And instead of adding to their holdings, as they did in the late ’90s, they’re lightening up.

*** What else is new? Well, DDGU as usual. The dollar fell to a 2-year low last week.

*** Thank God the boom is over! I refer to the one that began in 1982 and continued until 2000. Gene Epstein reports in Barron’s that “male full-time year-round workers earned 1.8% less in 1999 than in 1989…” Households earn more money – but only because people work longer hours and more women work.

*** “Maria was picked up a 7 am and taken to London,” I reported to friends last week, proudly. “She was chauffeured around town to a series of modeling jobs.”

*** “Are you kidding?” Maria asked the next day. “Yes, the agency car took me to the airport, but in London they didn’t even give me a subway ticket. Plus, I had to pay for my own flight.”

*** Being a model is not quite as glamorous or as rewarding as people think. Maria’s earnings are collected by her agent, her expenses are deducted, and she receives whatever remains. When her expenses are greater than her income, she owes the agency money. If she keeps going at the present rate, she’ll declare bankruptcy before she’s old enough to drive.