The Ominous Trend Continues

MARKET REVIEW: The Ominous Trend Continues

The U.S. economy, which, according to the NBER, slipped into recession in March, shrunk at an annual rate of over 1% in the 3rd quarter. The Conference Board announced revised figures Friday for July-September revealing the economy’s weakest showing since 1991…and an ominous trend well-established prior to September 11th.

How did Wall Street take the news? Apparently as a contrarian indicator…the Dow popped up 22 to 9851. The Dow is now almost 20% above its low of 8235 on Sept. 21 following the terror attacks. The Nasdaq dropped a hair to 1930 – but ended the week 27 in the black.

Greenspan was back on his hobby horse yesterday…claiming productivity gains were the primary source of U.S. dollar strength over the Euro. According to USA Today, the Fed chairman expects that the ability of entrepreneurs to operate more freely in America will keep the dollar aloft even as the European community puts their unprecedented Esperanto currency to use.

Stating what Daily Reckoning readers would undoubtedly label the obvious, Greenspan told a group of Washington suits that “The steady flow of capital from Europe to the United States in recent years is, presumably, the consequence of Europeans finding many investments in the United States persistently more attractive than those at home.” (duh…)

As the good Dr. Richebacher suggests below, entrepreneurship is all well and good, but where are the profits? And of course, the bubble years of 1998-2000 were not the first time Europeans speculated en masse in the New World…more below…

THIS WEEK in THE DAILY RECKONING By Bill Bonner

11/30/01 INVESTORS’ LONG AND WINDING ROAD

“…People who follow our advice – to stay away from expensive shares – may curse us for the next two weeks or the next two years. We don’t have a clue what will happen in the short or long run…But the world’s greatest investor – Warren Buffett – thinks ‘it is very easy to see what is likely to happen over the long term’…”

11/29/01 A NIGHT AT THE OPERA

“…There is low culture and there is high culture, dear reader…on Monday night, Elizabeth took me to see Amour de Loin, an opera of such high culture I almost got a nosebleed…”

11/28/01 THE HEIGHT OF IDIOCY Guest Essay by Doug Casey

“…The meltdown of the bubble economy; the dissipation of perhaps trillions in the busted tech boom; the negative wealth effect from the collapse of stocks; now real estate, and next the dollar…and now a war that could go on for many years add up to a truly deadly combination. I don’t believe we’re looking at just another cyclical downturn this time…”

11/27/01 WHEN THE CHIPS ARE DOWN

“…Today, in neither the War on Terrorism nor in the Battle of the Bubble, are the chips down. Instead, they are dangerously high. People are as confident as they have ever been, believing that the war will end well and the economy will soon rebound…in 2001, Americans may open their mail with rubber gloves and cross themselves before boarding an airplane, but they take no precautions before buying stocks at 50 and 100 times earnings…”

11/26/01 WHEN THE CHIPS ARE UP

“…Today we are told that patriotism is no longer a matter of self-sacrifice, but self-indulgence. Serving your country is as easy as buying a luxury new car or putting an expensive bedroom in your house. Or, if you’re feeling especially patriotic, you can max out all your credit cards, refinance your home at 100% of equity…”

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HEADLINE, NEWS And INSIGHT : The good doctor on the “entrepreneurship thesis” of American strength…

Bursting With Strength And Dynamism, But Where Are The Profits? by Dr. Kurt Richebacher

Underlying recovery forecasts for 2002 is a deeply embedded conviction that the U.S. economy, at bottom, is bursting with economic strength and dynamism. The idea that America might follow Japan into a prolonged period of economic stagnation is emphatically discarded with the argument that the U.S. economy is in a much healthier state than Japan was at the start of the 1990s.

Are The Wildly Bullish Out Of Step With Reality? by Dr. Marc Faber

The perception around the world is that “blood in the streets” as a result of September 11 has provided a great buying opportunity, since most crises and wars in the past have led, after an initial period of weakness, to strong rallies. But this market is in a unique – and precarious – situation in history: earnings are falling faster than share prices. Look out below!

Rising Money, Falling Economy by John Myers

Liquidity – or “reflation” – seems to be the tool of choice during crisis. But, while an increase in the money supply may create short-term benefits, but it is not likely to overcome the recession or the bear market. In fact, it could stoke inflation in the years to come…

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FLOTSAM AND JETSAM : Paris Of The New World

This weekend The Daily Reckoning comes to you from the Crescent City…New Orleans…site of the “World’s Greatest Investment Conference.” Tonight we play host to some of the more interesting investment advisors you’ll ever meet: Doug Casey, Jim Davidson, Mark Skousen, Martin Weiss, Porter Stansberry and a slew of luminaries…John Stossel, Barbara Bush and Chris Matthews (of “Hardball” fame)…

Yesterday we were honored to be present as Milton and Rose Friedman received the James U. Blanchard III Freedom award. It’s been quite a show…

But more on the conference later…first an interesting historical tidbit about New Orleans. Founded in 1718 by a guy named Jean Baptiste La Moyne, Sieur de Bienville, New Orleans was meant to be the “Paris of the New World” – capital of Louisiana and a fortress to control the wealth of the North America for the French.

Interestingly enough, de Bienville’s boss was a “brilliant” young financier by the name of John Law…a Scotsman, gambler, and financial advisor to the Duc d’Orleans, who was regent for Louis XV. Law had instructed de Bienville to build a great city on the Mississippi in an effort to lure Frenchmen over to the colonies to support his scheme to sell land there…

…a plot that went down in history as “The Mississippi Bubble”…

The rest comes from “A History of New Orleans” by Donald McNabb & Lee Madere: “…Le Duc d’Orleans, a rake and a gambler himself, was struggling as regent to meet the huge debts that were the legacy of Louis XIV’s numerous wars and extravagant palaces.

Orleans eagerly agreed to Law’s scheme that the Mississippi Company be formed to assume the French Crown’s debt in return for a charter to operate Louisiana as a colony.

Law’s ingenious proposal called for the proceeds from the sale of shares in the Mississippi Company to the French public to be used to back the Crown’s debt and currency. Shareholders would receive dividends on the profits the Mississippi Company would reap from the riches to be found in Louisiana.

Law launched one of the first modern public relations campaigns to convince thousands of Frenchmen of the fortunes to be made in a Louisiana rich in gold and fertile land. For two years, frenzied speculation shot the value of Mississippi Company stock upwards as Frenchmen of all persuasions rushed to invest their savings. But, by 1720, when no bonanza of dividends had been forthcoming, the “Mississippi Bubble” burst. The company collapsed when thousands of Frenchmen rushed to unload their shares, and Law fled France just ahead of an irate mob.

Law had few problems financing his company, but he had great difficulty in developing Louisiana. The colony had no gold, and although there was much fertile land, the people, technology, and infrastructure to develop agriculture were lacking. Law tried various schemes to attract settlers for Louisiana and New Orleans, but his efforts were undone by rumors of the excessive heat, mosquitoes, humidity, and disease, and by the natural reluctance of Frenchmen to emigrate. Law did settle some 2,000 Germans from France’s eastern border on the Mississippi just north of New Orleans, where they began farming and also soon “gallicized” their names. But, his attempt to import prisoners from French jails failed since, once loose in Louisiana, they simply resumed their antisocial behavior.

In the end, nothing could save Law’s company. The collapse of the Mississippi Company in 1720 ruined thousands of middle-upper class Frenchmen and destabilized the French currency. Most importantly, France, from the King’s court to the King’s kitchen, was left traumatized by the very idea of stock companies and Louisiana. The Crown resumed control of Louisiana, but for the remaining years of its rule, France did little to develop the colony. New Orleans grew slowly, starved of both necessary capital and labor…”

Today, of course, New Orleans is renowned for its French Quarter and Mardi Gras…and John Law is but a historical footnote, long forgotten…

Cheers,

Addison Wiggin,

The Daily Reckoning

P.S. The story of the founding of New Orleans, John Law and the great Mississippi land bubble is eerily appropriate given where we sit in the collapse of our own Tech, Net & Telecom collapse. Goes to show…there’s nothing new under the sun…and what you DO know can help you in difficult financial times.