Indignation

In the eyes of the janitors who clean up on Wall Street, as well as those of wives and mothers-in-law at home, the geniuses of the bull market become fools and idiots when prices fall. But investors do not see themselves that way. Instead, they consider themselves victims.

In a bear market, the nature of the world changes. Things no longer come about as a result of investors’ deliberate choices – but as a consequence sinister and malignant forces beyond their control.

“Get ready for the Wall Street ‘Blame Game'” says a recent article by Marshall Auerback. “Reflate and recriminate” says a headline from James Grant.

The bull market in stocks may be over, but the bull market in scapegoating is just beginning.

A news story today tells us that the Japanese are pointing the finger at foreign banks as the source of the current weakness in the Nikkei Dow. Japanese banks have some $32 billion in bad loans, which have thus far avoided liquidation. But according to the Japanese press, it is the foreign banks that cause the problems. It is the foreign banks who deal most aggressively in derivatives – which are mysterious enough to be tagged as the source of any financial calamity.

Foreign banks and foreign speculators were also blamed for Malaysia’s financial crisis of 1998. Marc Faber wrote recently that he recalled the stony silence that greeted a speech he made in Kuala Lumpur at the time…in which he detailed the excesses of the Malaysian markets. Following his speech, a Malay economist spoke to the crowd, blaming the whole problem on foreigners – and was given a round of applause.

Few will recall that the Japanese press claimed that the crash of 1989 was the fault of an international “Jewish conspiracy.”

But today, the American media – with its heavily Jewish ownership – is returning the recrimination. “American market commentators [are] laying responsibility for the current financial malaise primarily at Japan’s doorstep,” writes Auerback. “A spate of recent headlines continues to imply that the traumas now being inflicted daily on the US capital markets can be largely ascribed to supposedly incompetent and feckless Japanese politicians and bureaucrats who, for over a decade, have allowed their own financial problems to fester to the extent that they now threaten the well-being of America’s virile, productive new economy (recall that a decade ago, these same figures were considered formidable long-term policymakers worthy of emulation in the West).” “White House Sees Threat to U.S. in Japan’s Woes,” cries the New York Times, and, “Japan is Shackled by Deflation, Blocking Its Hope for Recovery”.

“The tone of the latter piece,” Auerback continues, “implies a 1930s-style meltdown in Japan…” But Japan is not exactly a basket-case. Its economy grew by 0.8% in the last quarter of last year. And corporate profits are better than those in the U.S. Throughout the 1990s – supposedly Japan’s ‘Lost Decade’ – GDP still grew at an average rate of 1.8% per year. This was lower than in the U.S., but still higher than France and Switzerland.

But just as there is plenty of blame to go around, there are plenty of rogues upon whom it might be shared out.

“In 1933-34, Ferdinand Pecora led an inquisition by the Senate Banking and Currency Committee into the discredited financial practices of the 1920s,” writes Jim Grant. “‘Wall Street Under Oath,’ his record of those proceedings, may have shocked the sensibilities of a Depression-era public when it was published in 1939. However it will likely disappoint the connoisseur of scandal in 2001. Sin, like technology, has made immense strides in the past 70 years, and Pecora’s catalog of financial malfeasance is nothing that hasn’t been refined, enlarged upon and improved by contemporary practitioners.”

Surely, as the financial suffering deepens, modern inquisitors will find much to disapprove of as well, post facto of course. A by-no-means exhaustive list of things not to like might include: the treatment of stock options as a way of disguising the cost of labor, the way IPOs were priced and played out to the market, the cozy relationships between analysts and the investment bankers who employed them, the manipulation of earnings, the manipulation of the market itself at key moments, and the salaries paid to CEOs who ran down company balance sheets.

The press is already on the analyst story. “Buy! Was Cry, as Stock Bubble Burst,” said a New York Times article featuring Henry Blodget.

And “the Wall Street Journal has taken particular glee in exposing its old friend,” says Grant. Its headline for an article attacking Queen of the Internet, Mary Meeker: “For E-Business Booster Meeker, Fame is E-Phemeral.”

“But the Journal, like the mass of investors, finds it hard to sustain its new indignation without a clear understanding of what it is actually supposed to be indignant about.” Especially since it spent so much ink and energy during the boom years celebrating the very same celebrities it now takes to task.

But as misery and embarrassment deepens, indignation is likely to rise. So far, the press has only scratched at a few easy targets. No real blood has been drawn. Wall Street salaries, the handling of IPOs and options, conflicts of interest, and Mr. Greenspan’s stewardship – all these have been questioned. But the rack has not yet been wheeled out…the stakes have not yet been erected, and no fires have yet been lit.

That is all still ahead of us. Personal responsibility is fine enough when things are going well, but when they go badly Fate and Fault become more popular. Free Will, on the other hand, enters a bear market of its own.

Your essential fundamentalist, or fundamental essentialist…or tex-mexistentialist – on his way to lunch.

Bill Bonner Paris, France March 23, 2001

*** The Japanese market dropped 2% on Wednesday night. European markets got hammered down 4% on Thursday morning. And then, just when it looked like panic might overtake Wall Street – it wasn’t so bad. Was yesterday the big day…the final capitulation? The turnaround day? The bottom?

*** A lot of investors are hoping it was. Typical of the sentiment is today’s message from Money Daily:

“OK! OK! We’ve learned our lesson in fundamentals, too,” writes Leslie Haggin Geary. “Old-fashioned valuations count for something and the New Economy was a lot of smoke and mirrors.” But Ms. Geary’s next line suggests that she, like the majority of investors, has not yet abandoned her bullish existentialism in favor of the bearish fundamentals. “Now can we get on with it?” she asks.

*** Reuters reports on a man who is so eager to ‘get on with it,’ he “snatched the corpse of legendary Italian banker Enrico Cuccia and would only return it when the market boomed again.” This man apparently lost a fortune on the Milan stock exchange.

*** The Dow fell as much as 381 points – and then bounced, ending the day down only 97 points. The Dow has fallen in 7 of the last 10 trading sessions.

*** The Nasdaq actually managed to go up. It rose 67 points – as investors seemed to favor the big techs over old economy stocks.

*** “Today was supposed to be the big one,” said TheStreet.com analysis. “A day of supreme capitulation, of a market gone berserk, with all the telling signs that a bottom had finally been revealed.”

*** One of the telling signs was volume. 1.7 billion shares changed hands yesterday – the 3rd heaviest volume day in NYSE history.

*** So maybe today will be a better day. Maybe Ms. Geary will be able to ‘get on with it.’ And maybe the Cuccia family will be able to retrieve the desiccated flesh and bone of old Enrico.

*** I hope so. But I would not bet too much money on the proposition. Reuters also reports that a record $11.4 billion was withdrawn from stock funds in February. Experts expect the total to reach $17 billion in March. The only kind of funds that gained cash were the value funds – as more investors ‘got religion.’

*** Stock investors have already lost 4 times as much as they lost in the ’87 crash. There are far more investors today…with far more money to lose.

*** And yet – in October 1987, investors pulled 5% of their money out of mutual funds. In February, 2001, only 0.3% of the $4 trillion in equity funds was withdrawn. Implication: this bear market has a lot further to go.

*** Stocks yielded 5.9% in dividends from 1802 to 1900. In the following century, they yielded 4.9% (or roughly half the total return from stocks during this period.) But in the last half of the last decade of the 20th century – that is, from ’95 through ’99 – dividends only yielded 2.1%

*** The Dow would have to fall below 5,000 in order to get dividends back anywhere near these traditional levels. But there is no law that says they must be above 4%. Nor is there any law that says they can’t go higher. In 1974, for example, dividend yields climbed to 5.45%. Where would the Dow have to go in order to correct the entire bull market of 1975 to 2000? How does Dow 3500 sound?

*** ABC News reports $4 trillion has been “erased” from the stock market in just the past year – roughly equivalent to the combined GDP of Germany, Britain and Canada. “But all is not woe,” John Myers of Outstanding Investments points out. “Over the past year the Toronto Stock Exchange’s Oil & Gas Index has risen 42%.”

*** GE was down $1.30 yesterday. Many of the big techs, by contrast, gained ground. Investors may believe that – now that the bottom is in place – they may be able to recover their losses in the big techs. Sell the rally.

*** While stocks have lost nearly $5 trillion in value, the dollar has held up surprisingly well. It rose again yesterday, pushing the euro below 90 cents during the day. Why?

*** The only explanation anyone can come up with is that there is a ‘flight to quality,’ which leads foreign asset holders to take up the dollar. How long will the dollar be confused with quality? I don’t know, but not forever.

*** Gold lost 80 cents yesterday. HUI, an index of gold mining stocks, lost 1%.

*** “There’s no denying that we’re on the unhappy side of the business cycle,” says Lynn Carpenter of the Fleet Street Letter. “And there’s not one country in the world that’s big enough and strong enough to buy the United States out of a recession. There is only one economy nearly as large as ours… the 15 countries that make up the euro-zone. My apologies Euro-bashers, but you’re about to be proven wrong.”

*** “Europe’s strength is in its ‘internal’ economy,” Lynn continues. “Much of the euro countries’ trade is mainly among themselves and with nearby Europeans. Denmark sends just 5% of its exports to the US…Finland 8%, Germany 9%, France 7%. The United Kingdom, our largest trading partner in Europe, sends just 13% of its exports to us.” Look for strong competition from the Euro-zone.

*** I forgot to tell you that I locked Elizabeth out of our new apartment last week. Has she taken up with her riding master, you might ask? Has she abandoned her husband and children?

No, it was just a mistake. I was supposed to leave keys for her under the mat. But I left the wrong set of keys. Poor Elizabeth was wandering the streets of Paris, alone, after midnight – without a sou in her purse – ringing the doorbells of friends and neighbors, looking for someone who could take her in.

But I finally realized my mistake…and, calling around, found her at her friend Catherine’s apartment. I then stood waiting for her on the street – like Henry IV at Canossa – and was happy to be forgiven on the spot. Reunited, we went out for a drink.

*** “I’ve discovered a wonderful new philosophy,” writes a Daily Reckoning reader, treating my recent letters with the gravity they deserve. “It’s called Tex-Mexistentialism. It all started with the philosopher Juan-Paul Salsa, who wrote, “To Bean, or Nacho to Bean, that is the Queso.”