The Palm Beach Story

Six years ago, an old friend of mine, Grover Norquist worked with Newt Gingrich and other Republicans to fashion a new strategy for the GOP. The idea was to commit the party to make real changes in the way America was governed. They called it “the Contract with America,” a specific list of actions that Republicans pledged to take to reduce the size and scope of the federal government. Like sinners at a tent revival, Republican politicians stood up and took the pledge. Largely on the strength and specificity of the contract, the GOP won control of Congress in that election year.

Since then, reports Ed Crane of the Cato Institute, “the Republican-controlled Congress has approved discretionary spending that exceeded Bill Clinton’s request by more than $30 billion. The party that in 1994 would abolish the Department of Education now brags in response to Clinton’s 2000 State of the Union address that it is outspending the White House when it comes to education.”

The contract called for the abolition of 95 major federal programs. But Cato found that “the combined budgets of the programs that the Contract with America promised to eliminate have increased by 13%.”

If politics were not a farce – that is, if politicians were forced to keep promises the way everyone else must – voters could hold Republican office holders responsible for breach of contract. The politicians would be thrown out of office for non-performance and dereliction of duty. The contract itself would be terminated – with prejudice.

Instead, nearly half of those voting last week seem to have cast their ballots for Republican candidates – knowing full well that they can’t be trusted to keep a promise. Thus they voted for people who just cheated them 6 years ago and to whom they would be reluctant to lend $20.

In a real fight, these Republican politicians are the sort of men and women whom you might have serving soup…or maybe starching the general’s tunic. You could never count on them to protect your flanks.

The Romans…or even Marshal Zhukov, in charge of Soviet defenses at Stalingrad…had a way of dealing with such men: They were lined up…and every tenth man was put to death.

Admittedly, that seems a bit extreme. But politics is a brutal and nasty business. That is what separates it from the rest of life – the readiness to use force when it is called for.

Republicans are protected from the fate they so richly deserve by their opponents. By tacit collusion, in all the gabbing and calumniating prior to the vote, the Contract was scarcely mentioned. For Democrats have their own frauds and broken promises to forget…and are probably at least as untrustworthy as Republicans. About the only thing that can be said for them is that they are not Republicans, they tend to drink more and their daughters are more liberal with their kisses.

(I make that later observation based on a very small sample a very long time ago…)

And yet, one of these parties will soon celebrate the election of its main man as president. Champagne, aged longer than expected, will finally be uncorked on the one side…and tears will flow on the other. The quadrennial farce will be over.

Ah, but who will be the winner? There’s the hitch. Because the paradox of this election is likely to be that the real winner will be the loser. It is the economy, stupid. Voters expect politicians to disappoint them. But not the economy. They will put up with lies and larceny…until there is a cyclical downturn.

“George W. Hoover vs. Al Carter,” is how Gary North describes the presidential contest. “The party of whichever man wins the Presidency,” he continues, ” will suffer Congressional and Senate losses in 2002, and will probably lose the Presidency in 2004.”


“The inverted yield curve has reappeared,” explains Dr. North. “It’s a good forecasting tool of recession. The [new] president will get blamed.”

William Rees-Mogg recently described the business cycle, quoting Dr. Hyde-Clarke from 1847: “We have just gone through a time of busy industry, and are come upon sorrow and ill-fortune; but the same things have befallen upon us often within the knowledge of those now living… A period of bustle, or of gambling, cut short in a trice and turned into a period of suffering and loss, is a phenomenon so often recorded, that what is most to be noticed is that it should excite any wonder.”

Cycles of prosperity and poverty have been around since civilization began. In the Old Testament, Joseph interpreted pharoah’s dream as economic cycle of ‘seven fat years followed by seven lean years.’

But the lean years still excite wonder and surprise. At the height of the bustle, people refuse to believe that there will be a downturn. And when it finally does occur, they don’t know what to make of it.

Thus, instead of tracing the recession of 2001 and the bear market to its source – the excessive credit, spending, and bullishness during the Clinton years – voters will blame whoever is president at the time, as they blamed Hoover for the Great Depression and Carter for the recession of the early 70s.

Recessions and bear markets are cyclical. They are unpredictable in terms both of magnitude and timing. And yet, continues Lord Rees-Mogg, “in the last century, we have seen an approximate 10-year business cycle…[with recessions in] 1921, 1931, 1951, 1960, 1973, 1982, 1992…The evidence for this sequence extends back to the early 18th century.”

Some downturns are mild. Some are severe. “Every once in a while,” writes Lord Rees-Mogg, “perhaps every fourth, fifth or sixth time, the burden of speculation has to be purged in a bigger way.”

Dr. Kurt Richebacher believes this downturn has already begun…and that it will be a big one. “In past letters,” he writes, “we have repeatedly warned that people will be shocked at how quickly the U.S. economy’s strength will simply disappear once the bull market ends. If it had not been for a burst both in government spending and inventory building, U.S. real GDP growth in the 2nd quarter would have been just 2.8% at an annual rate, and if not for another burst in inventory accumulation, it would have been barely 1% in the 3rd quarter. Automobile promotions and other temporary factors boosted consumer spending from its sharp downturn in the 2nd quarter. Growth in business capital spending has drastically slowed to 2.9% and 16% in the 1st quarter and 11% in the 2nd quarter. Residential building shows an abrupt decline. All signs point to deepening weakness in the economy…”

“The man who gets elected president,” concludes Gary North, “will get a nice, fat recession for his trouble…The treausury’s surplus will do a disappearing act reminiscent of Walter Mondale’s. If Bush gets elected, he will face the normal mid-term fall-off of a newly elected president’s party in Congress, coupled with well-orchestrated “we told you so” responses from Gephardt and other Old Econony Democrats. I can hear it now: ‘Elect a Bush and get a recession!'”

Advice to George W. Bush: If the final vote leaves you in charge, demand a recount.

Your political reporter…watching the Palm Beach Story with amusement…

Bill Bonner

Paris, France November 14, 2000

P.S. Tomorrow – Value Investing vs. Trend Following…and some more Darned Cheap Stocks.

*** The Nasdaq opened below 3,000 yesterday. Then, it fell, at one time dropping nearly 5%. But it bounced in the afternoon and ended down 62 points, that is, about 2%, at 2,966.

*** The Dow dropped too – 85 points.

*** The day’s losses were blamed on two things: an announcement from Hewlett Packard that profits fell nearly 20% short of expectations…and the continuing uncertainty of the U.S. presidential elections.

*** HP stock lost 13% yesterday. It is down 50% over the last 3 months.

*** There were 1202 stocks advancing on the NYSE yesterday; 1653 declined. 42 issues hit new highs; 104 hit new lows.

*** The U.S. presidential election is still headline news all over the world, though a few papers have suggested they would move it to the comics page if the story remains unresolved. In the meantime, the Election provides Mr. Bear with a camouflage the world over. “This sort of market can reverse very quickly if things clear up in the US,” Francois Xavier Chauchat, an economist with the Paris firm Chevreaux de Virieu, is quoted as saying in the IHT. Meaning, Mr. Bear can take stocks down without panicking investors – who are sure that everything will come right as soon as the final results are announced. The post-election rally, on hold since last Wednesday, is now scheduled for next Monday – following the last day for tallying overseas ballots on the 17th.

*** Though the markets rarely stick to such neat programs, Mr. Bear is a cagey fellow. What better way to keep investors pumping money into stocks than to allow them to think that only an event as rare as this closely-contested presidential election might knock them down?

*** Oil rose 45 cents yesterday. Expected cold weather before Thanksgiving and very tight U.S. heating old stocks seem to be about to drive the price of oil over $35/bl. Even in this Information Age, news that the weather turns colder in winter seems to have come as a surprise. And no one seems to have checked the nation’s oil tanks until winter was practically upon us.

*** “The world oil market is very different from what it was 30 years ago,” writes Lord Rees-Mogg. “Still prices have risen, both on normal market grounds and because of OPEC restraints. Even apart from events in Israel, the prospect for this winter is worrying. The global oil system is ‘strained and running hard just to keep even’. Look for oil to rise in the next six months.”

*** But the most peculiar bit of news from the financial markets yesterday was that the euro did not rise. Despite falling U.S. equity prices, disappointing earnings, record debt, negligible savings rates, the largest current account deficit in history, and a presidential election that is a joke in the eyes of much of the world…the euro fails to rise against the dollar.

*** “The fact that the euro is not rising in the midst of all this,” said Kit Juckes of the Royal Bank of Scotland, “speaks volumes for it.”

*** It may speak volumes, but what does it say? That the euro is going to disappear? That the dollar is invincible? I don’t know. But I guess we’ll find out eventually.

*** While stock prices are falling, so are many commodity prices. Lumber and copper both fell yesterday…with copper down from 94 cents/lb. in September to 81 cents/lb. today. The Dow Jones Basic Materials Index was 143 in April; it’s below 120 today. Meanwhile, bonds are rising.

*** What would make commodities go down and bonds go up? Approaching recession. More on that below…

*** In “bubble economies,” writes Doug Noland in the Credit Bubble Bulletin, “the great inflation is not in consumer goods prices, but instead in stocks, bonds, homes, office buildings, sports franchises, media properties, vintage automobiles, yachts, collectables, and a myriad of other assets. Tangible wealth for the average individual is not created.” But, “asset inflation begets only more inflation,” Noland continues, “…and provides for even greater borrowing and spending – creating a self-feeding bubble.

*** Also, the decline in stock prices has not been confined to the U.S. markets. Stocks are going down almost everywhere. South Korea’s over-the-counter market, for example, is down nearly 70% for the year. Taiwan is nearly 50% below last February’s peak. Hong Kong’s answer to the Nasdaq, the Growth Enterprise Market (GEM), has also fallen nearly 70% since it opened on March 20th.

*** Europe, Asia, America – the story is little different. A worldwide slowdown is underway. “The Dow Jones World Stock Index,” writes Richard Russell, “has formed a huge top… This suggests to me that a world economic slowdown is on the horizon…The next US president is not going to have a picnic.” How much will things slow down? To be determined…

*** Even the most successful new technology companies offer little shelter form a major bear market. “It took Radio Corporation of America (RCA) 40 years,” Ray DeVoe reminded readers recently, “to match its price in 1928.”

*** Harry Dent made a name for himself in the investment world with a series of books of almost unbounded optimism. “Dow 35,000” made the case that Baby Boomers would pile into the stock market and drive prices to previously unimaginable levels. Of course, that has already happened…though few Baby Boomers could match Dent’s imagination.

*** Interviewed in Barron’s recently, Dent says the Nasdaq could fall to 2300. But not to worry. Because “that would end up creating a tremendous buying opportunity and give the market momentum of the last two years a tremendous boost.”

*** What that last phrase means is anyone’s guess, but Richard Russell describes analysts such as Dent as “imposters.” “Since the public doesn’t know the difference between sincere, authentic market analysis and utter nonsense, this kind of ‘analyst’ writes nonsense books or lands on some TV or radio program, and presto, we have the professional fakir, the great ‘stock market soothsayer’.”

*** Fortune Magazine says 77 dot.coms have died since January. “At this rate,” says Fortune, “the Death Watch will clear 100 by the end of the year.”

*** The rapper, Run, from Run DMC, turns 36 today. Addison says Run is a “seminal” performer in the hip-hop world.

*** Paris has turned cold and wintry. The skies are gray and the streets are wet with mist. It happens every year. But like a bear market, 3 months ago it was almost unimaginable.