A Christmas Letter

We enjoyed a very quiet, and unseasonably warm, Christmas here in Poitou. The festivities began with a party for the English speakers in the area. We invited the five or six families we know – English, South African, Scottish…and, of course, our own American bunch. Among them was a doctor and her husband…and a farmer whose wife is named Looney. I am not making this up – just reporting it to you. Looney is an avid horsewoman, like my wife, Elizabeth. Eventually, every serious rider is kicked in the head, trampled, or thrown from his horse onto his head. So, I assume that the name is descriptive…or perhaps predictive.

Kurt, meanwhile, does underwater construction work. It is a difficult career, but he seems to enjoy it. He is leaving today for 6 weeks in Iraq – where I presume he is working on oil equipment. Richard manages a local Bed-and-Breakfast, frequented by English tourists. And Kim is restoring a chateau in an even more remote little hamlet.

Of course, there is no reason why you should be interested in our Christmas – especially, since nothing out of the ordinary happened. But the Daily Reckoning is a free service, and I feel entitled to bore you from time to time. Plus, it is the day after Christmas and I am not ready to address trivial matters.

Not that I haven’t been thinking about stocks and the economy. Not in my waking hours, of course – when I have had had more important things to think about. But I woke up this morning with an unsettling thought on my mind: What if the developing downturn included not merely a bear market and a recession – but an historic breakdown of the entire world’s financial system?

Never before has the world economy relied so heavily on a single currency – the dollar. And never before has a currency been so heavily freighted with debt. And never before have the debts been so goulashed up – by securitization, derivatization and globalization (to coin a catchy phrase).

The embers of my nocturnal unease were fanned this morning by Doug Noland of the Prudentbear.com: “At this point, the overriding issue comes right down to the solvency of the entire U.S. financial sector, and the Federal Reserve and the leveraged speculating community are playing with fire. Or, stating it differently, they are “betting the ranch” by perpetuating absolutely reckless financial sector leveraging and an historic accumulation of foreign liabilities, especially in the face of mounting credit and economic problems. To be candid, I see this as nothing less than the absolute worst-case scenario developing – the unrelenting self-destruction of our financial system.”

Rest assured, I think about these things too. So you will not have to do so. And tomorrow, I will take them up as economically as possible – beginning at the end! I will look at what could be the best way to protect your money and your sleep.

But let me leave you in suspense today…and return to my Christmas tale…

The purpose of our get-together at the house was to sing Christmas carols in English. Caroling has been a family tradition for many years – it is something we miss out here in the French countryside.

The tradition began in Baltimore more than 15 years ago. We lived in a formerly Jewish neighborhood, of elegant houses built in the last century. But the Jews had moved out…all that is left is the synagogue on Eutaw Street – which is still in use. By the time we arrived, in the mid-80s…it looked as though the area might be ready for an urban renaissance. So we bought a house for $27,000 – and joined a small group of white homesteaders in a predominately black ghetto.

It was an uphill battle, and ultimately, a complete defeat for the forces of gentrification. But it had its comic moments. Among them was our futile attempt to bring American bourgeois culture to the ghetto. One effort was the annual caroling – in which a little band of earnest homeowners would parade up and down the inner city sidewalks singing Christmas carols.

The spectacle was almost as foreign and absurd to the local drug dealers and welfare addicts as though aliens had landed in front of the corner liquor store. But at least one woman tried to make sense of it:

“What’s this?” she asked the carolers, rolling one white tradition in with another, “Chantikah?”

After giving up on the city, we moved out to the country, near Annapolis. There, our caroling took on a new dimension. Along with other members of the church group, we would drive around to `shut-ins.’ It was fun for the carolers, but the shut-ins were – in some cases – so tightly shut-in, and deaf to boot, that they didn’t hear a note or a word…and actually slept right through the whole show while we shivered in their front yards.

But here we were on this Christmas Eve, drawn up around the fire…a small outpost of Anglo-Saxon Christendom in remote Poitou.

Elizabeth had made fruitcake, cookies and homemade eggnogg – to which we added rum or whiskey depending upon our tastes. The eggnog was so frothy that by the time we began singing, we all had traces of white mustaches. Now, it turned out that while we all knew the same carols, the English had different melodies. That is the way with the English…they can never quite get in tune with the rest of the English- speaking world. But it didn’t seem to matter anyway. After a few rounds of eggnog, we were surprised at how good we sounded.

The party ended in the early evening. But there was more singing ahead. Elizabeth, Maria and I rushed over to the church – where we had been welcomed onto the choir in the spirit with which a fat girl might be invited to enter a beauty pageant…it is always nice to have someone around to whom you can feel superior.

The little church at Bourg Archambault was packed on Christmas eve. We were late getting there, but fortunately Pierre has saved a seat for me and had begun to worry that I wouldn’t show up. We are the only two basso profundo voices in the choir. We don’t sing very well, but when we feel sure of ourselves we really belt it out and chuckle to ourselves after the fact. But we drown out the rest of the choir on these occasions…and Pierre’s two daughters – Anne Sophie and Elisabeth – turn around and frown at us. My own daughter, meanwhile, took a seat on the other side of the church. At 14, she fears embarrassment more than death. And I’m afraid I give her plenty of cause for mortification.

But Anne Sophie and Elisabeth are both in their early 20s – and beautifully turned out. Pierre seems to find it a pleasure to catch their eyes, as I do – even if it is to draw a look of disapproval.

Then, after church – at about 11 PM – we returned home and gathered around the fire again, partly for intimacy…but largely just for heat. The fireplace is the only source of heat out in that wing of the of the house. The children were soon sent off to bed so that Mr. And Mrs. Santa could fill the stockings hung by the chimney with care…and finish wrapping a few presents. Actually, Mrs. Santa did the work…while Mr. Santa helped himself to what remained of the eggnog and put on a CD of holiday music.

And so, our Christmas eve came to a close much as it began…with carols. I dozed in my chair in front of the fire…perhaps dreaming of the Depression of 2001…as Tammy Wynnette sang `Silent Night’.

In the holiday spirit,

Bill Bonner Ouzilly, France December 26, 2000

*** Christmas is over…but not the Christmas season…and probably not the Santa Claus rally that began at the end of last week.

*** I had been expecting Mr. Bear to take a little break during the holidays. Finally, on Friday, he bade Merry Christmas to all and gave out his good tidings.

*** Both the Dow and the Nasdaq rose. The former by 148 points; the latter by 176 points. 2035 stocks advanced on the NYSE; only 891 declined. And more than twice as many hit new highs as hit new lows.

*** Even Amazon rose on Friday – up 3/8th, but still below $16.

*** The Wall Street Journal presented what is sure to become the standard interpretation of market’s late autumnal performance. The problem, said the distinguished financial daily, was a combination of bad news all at once: poor earnings, the tech bust, the election hang-up, and Greenspan’s rate hikes finally catching up to the market.

*** And yes, there did seem to be a lot of bad news in the last 8 weeks. But the real cause of the market’s weakness is something else. After years of very loose credit…money is becoming very expensive. Remember, the real, net cost of borrowed funds depends on what you can do with the money. If you just stuck it in growth stocks – in any year of the 1990s – you would have gotten about a 20% return. Subtract your interest costs, say, about 8%, and the real, net cost of the money is a plus 12%. In effect, it paid to borrow.

*** This, of course, encouraged people to borrow recklessly, for which they needed little encouragement in any case. The result was a huge buildup of debt – a load so heavy that it has become hard to carry.

*** While most of the tech world bounced on Friday, Lucent went down. The company announced a 20% decline, year-to- year, in revenues…and a larger-than-expected loss in the 4th quarter. Lucent’s balance sheet shows $20 billion in liabilities.

*** Xerox has even greater liabilities – $24 billion. Xerox is now being forced to sell assets to raise money – it has exhausted its lines of credit. Bloomberg reports that Chase/JP Morgan is the biggest creditor – with $375 million on the line.

*** The situation among the automakers is not much different. The WSJ reports that GM is cutting 15,000 jobs in North America. GM has 265 billion in liabilities. Ford has only slightly less – $263 billion. And a Bloomberg report tells us that “DaimlerChryler May Run Short of Cash.”

*** “We have been borrowing an average of $1 million per hour,” says Gordon Smith, President of Pacific Gas & Electric, “to pay for the power we deliver to Californians. No company can continue to operate under such conditions.” PG&E is threatening to go bankrupt unless it is allowed to pass along power costs to consumers.

*** Speaking of consumers, it is any wonder that those at the bottom of the economic food chain are hurting too? Thanks to the good graces of the credit industry – notably credit card and mortgage companies, especially Fannie Mae and Freddie Mac – they too partook of the great feast of free credit during the `90s. They gorged themselves as though at Christmas dinner everyday – refinancing their homes at 125% of their value to keep the cash coming in. But now it’s diet time. The cost of borrowed funds this year has been nearly 30% – interest plus stock losses. If you had invested exclusively in Nasdaq stocks, it would have been closer to 60%.

*** The Consumer Sentiment Index dropped from 107.6 in November to 98.4 in December. “I’m going to watch my dollars next year,” said a typical consumer quoted by the WSJ, “and play it month by month to see what’s going on.”

*** Most likely, he’s going to watch his dollar fall. The euro rose again on Friday, to over 92 cents, and ended the week up 3%. March futures contracts have the euro at 95 cents. And I will let you in on a little secret – the euro is headed back above $1. The dollar is doomed.

*** Richard Russell had a good recommendation. Ask your broker to buy some euro-denominated bonds from Freddie Mac. Freddie Mac’s stock is almost sure to decline in the months ahead – a victim of declining credit quality. But as a Government Sponsored Agency, it is unlikely to default on its bonds.

*** Bonds have run up nicely as investors expect lower rates. Ten-year T bond yields fell 54 basis points in the last 3 weeks.

*** The Dow rose 2% in the week before Christmas. The S&P 500 fell 1%. And the Nasdaq dropped 4%. TheStreet’s dot.com index sank 16% for the week. But gold stocks rose 6%. More on that tomorrow.

The Daily Reckoning