The Great O'Neill

“Rise from bed – 6:00AM

Dumbbell exercise and wall-scaling – 6:15-6:30

Study electricity, etc. – 7:15-8:15

Work – 8:30-4:30PM

Baseball and sports – 4:30-5:00

Practice elocution, poise – 5:00-6:00

Study needed inventions – 7:00-9:00″

The Great Gatsby

by F. Scott Fitzgerald

“I came across this book by accident,” said the old man. “It just shows you, don’t it?”

“It just shows you.”

“Jimmy was bound to get ahead. He always had some resolves like this or something. Do you notice what he’s got about improving his mind? He was always great for that.”

I picked up Fitzgerald’s 1925 novel out of curiosity. I wanted to recall how the story ends. What happens to these thoroughly American self-improvers…these Gatsbys, Babbitts and Citizen Kanes?

The question arose as I read the latest issue of Grant’s Interest Rate Observer. A profile of the “nation’s CFO,” Paul O’Neill, triggered an emotion. I could not tell whether it was pity, envy or an irritating irony. Or it was perhaps the sense of delicious dread you have just before a pompous man makes a great fool of himself.

“If your organization is not striving to be the best in the world at everything you do,” said the Great O’Neill to the Economic Club of New York in April, “then you are unlikely to be truly excellent as an organization.”

Paul O’Neill is the type of character who exists only in America. He is a straight talker, and an optimist by avocation as well as vocation. He believes that all problems can be solved by direct assault – making lists and applying oneself to the tasks at hand.

“None of you will be surprised to learn that I have brought my devotion to the idea of excellence to my new pursuits in the government,” he announced to no one’s surprise.

“Excellence, to O’Neill,” opines Jim Grant, “is a quality to be achieved through discipline and management. There is no place in his worldview for sub- optimal outcomes, including recessions, bear markets, debt liquidations, currency crises and hedge-fund implosions. Listening to the secretary, one gets the sense that there is no such thing as an unmanageable event. Excellence overcomes everything.”

But a man who speaks of excellence so freely cannot really understand it…or know how to get it. He tosses the word out as though he were giving fashion advice. For O’Neill, excellence is merely a suit of clothes – you choose to wear it or not as you might choose to put on a fedora one day and a baseball cap the next. In O’Neill’s mind, those who are not excellent are merely too lazy or too contrary to go to a decent haberdasher. He does not seem to realize that that “excellence” – like so many other things in life – depends on the situation. A hat that may look good on one man, may make another look like a clown. And a style that looked smart on a man 10 years ago, may make him look like a hopeless dork today.

And so I arrive at today’s modest insight: fashions change.

“Even when I play a game of pure chance, like slot machines…” said a friend at dinner last night, “when I have a winning streak, I begin to think I’m a genius.”

Paul H. O’Neill has been having a winning streak. A self-made man, he earned his degree in economics from neither Harvard nor Yale, but from Fresno State College. He went to work for the U.S. Veterans Administration in 1961 as a computer-systems analyst. In 1977, he joined International Paper Co. and rose to become president of the firm in 1985. Hired away by Alcoa in 1987, he had such success, Grant’s tells us, that he was made the subject of a Harvard Business School case study.

Now, he has brought his can-do winning ways, including his pursuit of excellence to Washington, as Secretary of the Treasury.

But O’Neill takes on the job at a difficult moment. All the excellent work done by previous Treasury secretaries – aided and abetted by the excellent policies of the still-sitting head of the Federal Reserve System – have brought the nation to such a peak of excellence that the entire world should hold its breath in envy.

Instead, it holds its breath in anticipation. America has been on a winning streak paralleling that of its Treasury Secretary. Indeed, looking more closely, one might guess that both winning streaks came from the same splatter of chance. Rather than O’Neill’s genius for excellence…or America’s genius for hard work and innovation…the real grease of the U.S. economic miracle may be nothing more than its genius for credit creation.

And now, approaching the threshold of the Post-Credit Bubble Economy…and carrying bags of debt like a man brings home his Christmas shopping – America seems more likely to stumble upon it than to stride across it.

“The American economy, O’Neill told the National Association of Business Economists, “will remain the great engine of prosperity for the world because innovation thrives here. If you have a good idea, this will always be the best place to make it happen…

“…the U.S. has recaptured the lead and we are not ever going to back down again. We are determined to lead the world. That is how we have actually gotten the huge tax surpluses we have in Washington today. They’ve come from hardworking Americans making things, creating jobs, improving productivity and achieving higher wages.”

Twelve years ago, almost all of these things might have been said by a shorter man about a smaller, but – at the time – no less dynamic economy: Japan. Then, it was the Japanese who were on a winning streak. It was they who seemed to have a genius for hard work and management.

But even ardent self-improvers stumble. And fashions change.

More tomorrow…

Bill Bonner
July 26, 2001

Dow Jones CEO, Peter Kann: “We have no reason to expect an advertising turnaround in the third quarter, and we have certainly not seen one so far in July.” Earnings at Dow Jones fell by more than half on 18% lower revenues in the second quarter.

Kodak: “we have yet to see signs of economic recovery.” Dana Corp: “we’re less optimistic today about the rate of recovery in the North American OE markets than we were at the outset of the year.”

From almost every industry, the reports are the same. On Tuesday, Amazon was hit for a 25% loss…after investors figured out what ‘pro forma’ meant. Yesterday, Compaq reminded them, again, that the real world of creative destruction is a dangerous place. Compaq’s profits fell 81% in the second quarter. GM’s dropped 74%…

Siemens reported losses of a billion dollars this week; Dupont lost $213 million in the second quarter and announced significant job cuts. Lucent – having gotten whacked in the market for a 16% loss on Tuesday – announced that 20,000 jobs are on the block…

The only thing new about the “news” these days seems to be the names of the companies announcing missed estimates and layoffs…

What else? Well, Eric is on vacation today…and Addison is keeping an eye on Wall Street in his absence. Addison, what’s going on?

*****

Addison Wiggin, writing from Paris:

– “There is no economic theory that I ever heard of,” sez the Mogumbo Guru, “that espouses continual, accelerating debt…as a magic-bullet method of achieving prosperity.”

– Still…Greenspan, speaking before Congress on Tuesday, said: “should conditions warrant, [the Fed] may need to ease further.” Of course, it should be no surprise to DR readers…we ask simply, even naively: if six cuts ain’t enough… what will seven do?

– “The situation is bigger than any one man, government or entity,” an analyst told the Industry Standard yesterday… “[Greenspan] has to have more than a band- aid to fix this. He has to have a tourniquet.”

– “When will the recovery will begin?” asks Mogumbo, “The answer is simplicity itself; when some big group of people get the financial wherewithal to buy a deluge of global output. The Americans are just about tapped out, bless their greedy little hearts. If Greenspan were the hotshot that people think he is, he would be pushing for Visa and MasterCard to send unsolicited credit cards to the Chinese, Russians and Indians. When that huge group of debt-free people starts consuming, THEN the global recovery will begin.”

– The Dow rallied big yesterday – up 164 to close 10,405 – reversing the 335 point slide it had coming out of Monday and Tuesday. The S&P 500 and Nasdaq rose more modestly – 18 to 1,190 for the former, 25 to 1,984 the latter.

– Still, the Dow is off more than 3 percent for the year, the S&P down nearly 10 percent and the Nasdaq has fallen close to 20 percent.

– Americans are nothing, if not optimistic… the Dismal Scientist reports: most consumers recently surveyed believe that “business conditions will improve six months hence and 92% expect job availability to be the same or better than it is today.”

– And they are refinancing their homes in order to keep spending. According to the WSJ, half of GDP growth in the first quarter came from home refinancing. The typical homeowner took $20,000 to $40,000 out of his equity…a total of nearly half a billion dollars in the first half of the year. One of the people profiled in the WSJ used the money to pay off credit card debt and buy a home theatre system. Another bought a vacation home, which he considered an “investment.” Another, an airline stewardess, said she “just didn’t want to let $70,000 sit in my home.”

– People are treating home equity as though they were “savings accounts,” says the WSJ. What kind of saving account is it that you have to make a mortgage payment on every month…or you lose your home? In 1945, American homeowners owned 86% of the value of the houses. Now, they own only 55% – losing 10 percentage points in the last decade alone.

– Gold traded evenly – as always, it seems – at $267. The dollar fell again… down to almost 88 cents per euro.

– “What if the market decides it no longer believes in the dollar as a safe haven?” asks the Prudent Bear’s Marshall Auerback… “What if views on the dollar shift as rapidly as they did in respect of the Korean won or Thai baht in 1997?” One thing is for sure…my cheaper- than-water liter of red wine begins to get a lot more expensive.

– “The retreat in the oil price – bothersome as it is,” says our energy man John Myers, “is not entirely unexpected, given a couple of very important factors: the slowdown in the U.S. economy and the previous sharp runup in prices. But fret not; the long-term trend towards higher prices is as powerful as ever.”

****

Back to Bill in Baltimore…

*** “The world is aghast at the admission of Treasury chief O’Neill that there are no assets in the Social Security Fund!,” writes Richard Daughty. “Well, duh! Congress has been taking the money and putting in IOU’s for decades, and suddenly this is news!”

*** There seems to have been some doubt as to what was actually in the Social Security system’s vaults. So, a presidential commission headed by former senator Patrick Moynihan was appointed to have a look. Sure enough, when they peeked into the nation’s retirement hidey hole, what they find? Nothing!

*** The system works like all government programs – by robbing Paul in order to pay Peter. The trouble is, there will be a lot more retiring Peters in the years ahead.

*** “The only question,” says a comment from the Independent Institute, “is whether the government will shore up the system by 1) enacting huge tax increases (the recent tax cut was one-tenth the size of the $12 trillion current Social Security shortfall); 2) cutting Social Security benefits significantly; 3) cutting other government spending; or 4) increasing public debt (i.e. delaying a tax increase). Like the old Midas Muffler TV commercials that said, ‘You can pay me now or you can pay me later.’

*** And, last but not least, a comment on Henry’s career choice from a DR reader – “My wife, married 21 years, is a physician, as is her father and brother. I’ve got lots of doctors as friends. The next time Henry says he can make lots of money as a doctor, you, as his father, should tell him to…RUN, not walk. Seriously, as you probably already know, he can make lots of money as a doc, but the ‘hourly’ wage is a heck of a lot less than most people realize.”