Escape From New York

The Daily Reckoning

Weekend Edition

October 20-21, 2001

Paris, France

By Addison Wiggin

MARKET REVIEW: Escape From New York

“I heard an NYSE floor trader claim this week that ‘the market wants to go up, but this anthrax stuff is holding it back’,” says the Prudent Bear’s Lance Lewis. “That’s just silly.”

By the end of a less-than-stellar week, the Dow had closed 140 points lower – down 1.5% for the week. The S&P and Nasdaq also lost ground, down nearly 2% apiece.

Lewis: “Investors are not selling because of an anthrax case or because they’re worried terrorists are going to overrun the US government and destroy US society leaving it looking like a continental version of Escape from New York. The fact is, they’re selling these stocks because they are now on the other side of a bubble.”

Growth – even after we’ve reached the much heralded “bottom” – isn’t going to be anything like it was when the market was in bubble mode. Stocks took 25 years, for example, to regain their ’29 bubble-peak heights. Index investors during that time would have achieved negative-to-zero returns until 1954.

Still, according to Dr. Richebacher, “new paradigm” illusions about the U.S. economy prevail. The consensus forecasts for the year as a whole presently call for a 2.6% real GDP growth. “The big interest rate and tax cuts have miserably failed to even slow down the U.S. economy’s contraction,” writes the good doctor, “and with it the rest of the world’s economy.”

Companies on the Nasdaq and S&P alike are still trading at bubble-like valuations. More below…

THIS WEEK in THE DAILY RECKONING
By Bill Bonner

10/19/01 DUBLIN TO WATERFORD

“…Maybe investors ought to carry around a financial version of ‘memento mori’…little souvenirs of the mistakes one can make on the market…’Never again will I buy when prices are this high,’ for example, or ‘Pay no attention to shills, analysts and central bankers’…”

10/18/01 TIMBER

“…In surveying the investment landscape of the last hundred years, Jeremy Grantham has noticed that only one investment – trees – has provided fairly consistent healthy yields throughout booms and busts, bulls and bears, inflation and deflation. What about war?…We’re not positive, but we presume that, even during wartime, trees – like children – still grow…”

10/17/01 THE WAY WE WERE

Guest Essay by The Mogambo Guru

“…So, here we are. Debt up to our eyeballs for toys that are mostly broken and old. Debt up to the government’s eyeballs. Debt up to the state’s eyeballs. A fiat currency. A gargantuan government. A huge trade deficit and a huge current account deficit…a nation of retail clerks and hairdressers…”

10/16/01 NATURAL BORN KILLERS

“…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, be it war, disease, or a crashing stock market…”

10/15/01 THE WILD, DARK NIGHT

“…Sophisticated, prosperous economies require high levels of mutual trust. You can work in a skyscraper only so long as you are confident that someone is not going to blow it up. Likewise, in a period at the bottom of the economic cycle, a war might trigger a boom. But at the top, it is likely to have the opposite effect. People become less trusting..”

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HEADLINE, NEWS And INSIGHT: ‘Psycho-drama’ plays out in the markets…Can Terrorists be reformed?…Subtle signs of recovery – in Japan?!… the REAL truth behind the economic bust…

Economic Whiplash
by Harry Schultz

The psychological effect of the “Nasdaq Shock” was to make a lot of people say to themselves: Maybe I don’t need the new model car I want to buy. Maybe I should delay buying that boat, or bigger/better located house. Maybe take a less extensive vacation, one closer to home. Maybe this/that. Everyplace I go I ask people (after “How are U?”): How’s business? They all say: not great.

A Brief History Of Terror
by Doug Casey

Could men such as Sadaam and Osama bin Laden be rehabilitated? It seems most unlikely, but it wouldn’t be the first time. These things change, and it’s a cliché that history is written by the victors. One problem with today’s media-saturated world is that judgments are rushed. I’m more sympathetic with the view of Chou En-Lai who, when asked what he thought of the consequences of the French Revolution, said: “It’s too early to tell.”

Darkest Before Less Dark
by Andrew Kashdan

“…When it comes to Japan, a contrarian instinct can quickly lead to financial ruin, but a few hopeful signs are worth watching. Housing starts and vehicle sales are recovering, as are corporate earnings, albeit from depressed levels…”

FLOTSAM AND JETSAM: Root Causes Of The Bust

– From The Richebacher Letter

“…We identified three chief causes of this disastrous economic environment:

first, exorbitant money and credit creation; second, the shareholder value follies emphasizing quick expansion at the expense of capital investment into new production capacity; and third, a profitless new technology involving too little capital spending.

Over the past year and a half, the U.S. economy has suffered severe economic disappointments and financial reversals.

The recovery, generally predicted for this year’s second half, has failed to materialize. But this is causing little worry. The consensus sees nothing worse than a postponement of the recovery until 2002.

Yet, it’s clear the economic slowdown in the United States has been in full motion for almost a year. The horrific events of Sept. 11 have probably triggered an acceleration of the ongoing downturn. However, they are definitely not its underlying cause.

The recognition that the U.S. economy is in the grips of a prolonged systemic economic/financial crisis has barely started. The worst part of the stock market’s crash and the economy’s downturn will only begin when people begin to realize the dangerous, systemic nature of this crisis…”

Hope you’ll enjoy your weekend while you can…

Addison Wiggin