Anno 2001, R.I.P.
Forgive me for getting personal, dear reader, but how did you do last year? If you did badly, financially, you
can’t blame it entirely on us.
Each year, with the enthusiasm of a man going for his annual checkup, we look back at our predictions from the preceding January. We doubt that we are going to enjoy the experience and are a little worried about what we might discover.
But this year’s exam passed without too much embarrassment. I have already ‘fessed up to being wrong about the dollar. “The U.S. dollar will continue to decline against the euro,” we said last year, just as we
had the year before. And “gold will rise in price…,” we continued, ritually.
At the end of the year, however, the dollar was higher against the euro…and gold had risen, but only
slightly. Overall, a reader would have been about even – barely.
You will recall that at the beginning of the year, stocks were off and the economy was looking a little squishy. It was a different world back then. TVs in hairdressing salons were still tuned to CNBC and the Fed
Funds rate was still at 6.75%. Almost no one doubted that all it would take would be a few quick cuts from
the maestro and things would be booming again.
Back then, the Fed chairman was still said to have the “Greenspan put” which guaranteed that the economy would not fall into recession and stocks would not tumble too far or for too long.
Investors widely believed that another year of stock market losses was practically impossible. “Not since the ’70s did stock prices fall 2 years in a row,” they assured one another. And even if the first cut did not do the job, as Ed Yardeni pointed out, there were still “600 basis points between here and zero.” Thus were economists almost unanimous in predicting that the U.S. would continue growing in 2001.
Here at the Daily Reckoning, though, we had little doubt that the Fed could cut rates – what else could it do?
But we figured it would take more than 600 basis points to correct the biggest bubble economy of all time. The economy, we reckoned, suffered from too much credit already. Consumers and businesses had reduced savings to negligible levels and added trillions in debt. Now they were losing jobs, sales and contracts…We did not see how lending them more money would make things better.
“The Greenspan Put will prove worthless,” we predicted. “Greenspan will cut rates. And he will increase the
money supply…the Fed Funds rate will come down. But the real return on borrowed money will remain
“Despite the rate cuts,” we continued, almost recklessly, “recession will begin before the end of the
year and will be worse than expected and more widespread.”
As predicted, Greenspan did cut rates once, twice, three times…and still the downturn got worse. By the end of the year he had reduced the key lending rate by 425 basis points. And the money supply soared. M-3, its
broadest measure, increased at a 13.2% over the last year. MZM, a measure of ready cash, went up at more than 20% per annum…
Has all this easy credit and new money done any good? Well, we don’t know. Maybe. A recession officially began in March. If it followed the pattern of the average recession since the ’50s, it would be ending now. Maybe it is. There are some signs of economic resurgence. Then again, these could be a “head fake,” designed to separate the greedy and the gullible from even more of their money. (More on this subject, Thursday, when we provide our predictions for 2002…)
Economists were optimists at this time last year; investors were bullish. They had not been able to imagine the losses suffered in 2000. In January 2001 they could not imagine that those losses would continue. They felt they had suffered enough. The worst was over, they said. The bottom had already come, they believed.
Those were the days when you could still talk about the forecasts of Abby Cohen, Henry Blodget or Jack Grubman without smirking.
Alan Abelson, in Barron’s, gives an example of one of the most flamboyantly imbecilic of the genre:
“This particular strategist…called for the market to climb 20%-plus in 2001 and proclaimed this neat advance would be paced by ‘technology, telecom and financials.’ His top five picks…would have returned a MINUS 57%, and his worth choice ‘just missed entering the 99% club.'”
When on January 3rd the Fed Chairman cut rates, investors were sure that it was only a matter of time before the lower rates worked their magic. Prices ebbed and flowed. The tide seemed to turn in April, floating the Dow up almost 2,000 points. But then the washout began again…taking stocks down to a interim low on September 21 from which they’ve been rallying ever since.
Even with the final quarter rally, stocks ended the year lower than they began it. But nowhere near as low as
your Daily Reckoning editor imagined. “The Dow should sooner or later sink below 6,000,” he predicted. Well, not in 2001…but there’s always next year.
We mentioned that we thought “overpriced blue chips” were particularly dangerous. “GE will fall sharply,” we
predicted. GE did fall sharply, from 43.75 down to a low of 30.37. But it has recovered most of the loss and is currently trading at $39.36.
We also warned, cryptically, that there would be some “big bankruptcies…expect major surprises from major players.” We might have been describing Enron. Of course, at the beginning of the year, we didn’t know the
status of Enron’s finances any better than its CFO. But we guessed that a decade of debt and speculation was bound to produce some big accidents. And, we doubt we have seen the last of them.
Finally, we expected investors to be more “cautious in the year ahead,” and consumers, we thought, would
“reduce their debt levels and begin saving.” Maybe we were too early with these predictions. Maybe we were
We will see. 2001 is gone. R.I.P. But 2002 is a new year, offering plenty of opportunities to make fools of
January 08, 2002
The recovery is practically a done deal, as far as most people are concerned. We don’t doubt that a recovery is coming. One always does. But when? How?
Stephen Roach argues that a recovery might be followed by a relapse. “Of the six full blown recessions since the late ’50s,” he writes, “five have included double dips.” That is, each time, when it looked like the economy was back in gear, it stalled.
For example, in the recession of ’57-’58, GDP declined at a 0.9% annual rate in the first quarter of ’57. Then, in the 2nd quarter it looked as though the recession was over. GDP grew at a 4% rate. But then, in the 3rd and 4th quarters, the economy dipped back into recession – falling at a 4% rate in the former and then a 10% rate in the last quarter of the year.
Economists, analysts, and investors – all the people who had no clue a year ago – are sure that the recession they failed to anticipate is nearly over.
Maybe it is, but more and more people seem to be getting used to it. “Americans, gradually, feel grip of
the recession,” says the New York Times. It is “intruding on peoples’ lives.” Last summer, only 10%
felt that the slump affected them personally; now the figure is 17%, “deepening the downturn as people are
drawn to spend less.”
It would be a shame for the recession to end, just when it is making people uncomfortable. What’s a
recession for, anyway? Like a bear market, it is supposed to make people suffer a bit, and cause them to
wonder about things:
“I wonder if it is really a good idea to own a profitless tech company priced at 10 times sales?” they
might ask themselves.
“I wonder if I shouldn’t pay down my mortgage… and lighten up on credit card debt?”
“I wonder if I really need a new car?”
“I wonder if it wouldn’t be a good idea to have a few dollars – or maybe even a few euros – in the bank…just in case?”
If a recession doesn’t at least make people wonder…why bother to have one?
Eric…over to you:
(Don’t forget…you can catch Eric on TV every day this week, as he hosts CNNMoney from 9:30am to 11:30am…)
Eric Fry from New York…
– While gazing at the stars yesterday, Mr. Market fell into a ditch. After such a splendid rally from the
September lows, he was no doubt imaging how swell life would be once he gets back to Nasdaq 5,000 then,
whoops!…down he went.
– The Dow fell 63 points to 10,197, while the Nasdaq slipped about 1% to 2,037.
– Some sectors fared well, however. The “economic- salvation-through-shopping” trade continues to shine, as electronics retailers Circuit City and Best Buy each reached fresh 52-week highs. At least these two companies are ringing the register.
– Many other retailing shares are flying high, even while their operations are nose-diving. Even shares of
the beleaguered Gap Stores have rebounded briskly from their mid-December lows.
– Like so many other red-hot stocks in the current market, the retailing issues are bounding ahead on hopes
for a strong recovery – a recovery that almost everyone assumes will be led by the indebted American consumer.
– But he might not be up to the task this time.
– “As of the third quarter of last year, household liabilities were 17% of household assets, a record high
in the post-World War II era,” observes Northern Trust economist Paul Kasriel.
– “The household balance sheet debt ‘imbalance’ does not yet seem to be addressed,” says Kasriel. “Rather
Greenspan’s easy-money policy of 2001 has encouraged households to go deeper in debt.”
– “The biggest reason for optimism, according to what we read, is the surprising resilience of the consumer,” says Dr. Richebacher. But if there is anything surprising about the consumer, it is that his spending has not been particularly resilient, given all the extraordinary stimuli that are coursing through the economy.
– “Mortgage refinancing, falling energy prices and the government’s tax rebate program combined to pump more than $300 billion into household buying power last year,” Richebacher observes.
– The obvious implication is that when these various economic stimuli exhaust themselves, consumer spending will go kaput.
– “Unfortunately for consumer spending,” says Moody’s John Lonski, “the demand for labor is unlikely to soon grow by what is necessary for a marked quickening of wages and salaries. Neither profitability nor planned capital spending has expanded by enough to signal the nearness of a major upturn in hiring activity.”
– Too few jobs and too much debt doesn’t sound like the ideal recipe for a consumer spending boom.
– Richebacher concludes: “Looking only at the most obvious and the most spectacular, unsustainable
imbalances is more than shocking, it is frightening: grossly overvalued equities, near-zero personal savings,
the monstrous trade deficit, steeply rising trillions of foreign debts, a hugely overvalued dollar, badly
weakened corporate balance sheets, the lowest corporate profitability in the whole postwar period, and a
financial system that is founded on the most fantastic leverage. This is a virtual Pandora’s box of
interrelated and interdependent bubbles, and the one thing that is keeping all these bubbles afloat is the
illusion of an imminent V-shaped recovery and blind faith in the magic of Mr. Greenspan.”
– So tell us, Dr. Kurt, what do you REALLY think?
– “All That Easy Credit Haunts Detroit Now,” a Sunday New York Times headline read. In what is rapidly becoming both a foreshadowing and a parable for the economy at large, the Times story details how the easy credit so amply provided by the auto manufacturers over the last few years might now be coming back to bite them in the…ah…axle.
– Easy credit is very good at producing two things: profitless sales and loan defaults, neither one of which
produces earnings. JP Morgan Chase might know a thing or two about easy credit.
– “New York’s biggest banks, already struggling with bad debt left behind by troubled energy and telecom
companies, could be facing about $3 billion in defaults this year,” Crain’s reports. “J.P. Morgan Chase, Citigroup and The Bank of New York are scrambling to cope with the mounting problem, selling some troubled loans and reducing the amount of their new lending.”
– But it looks like the rising-defaults cake has already been baked – even if J.P. Morgan doesn’t make another loan all year. To review, J.P. Morgan is on the hook for about $2.6 billion to Enron. Additionally the big money- center bank has loaned about $900 million to Argentina. Add in a few heaping tablespoons of mortgages, credit card receivables and derivatives. Blend ingredients over low heat and voila, “Money-Center Flambe.”
– Hope and liquidity are driving this market…Hope and liquidity.
Back in Paris…
*** The Dow ended the year down 6% last year. Most investors must have lost money. But I wondered how our friends made out.
*** “Our stock picks were up 8.7% for 2001,” Lynn Carpenter of the Fleet Street Letter(U.S.) happily reports. “This was on top of a 23.6% gain in 2000. These two years combined for a total gain of 34.4% (or 15.9%
*** “Now (drum roll, please), for the even better news…I combined the FSL core portfolio, the 10-for-10
and the High Yield portfolio all into one…then I crunched the numbers on all equity picks from these portfolios. This total portfolio was up 12.9% for 2001. The numbers for 2000 were an even stronger 34.2%. The combined return for the two years was 51.6% (or 23.1% annualized).
*** Over the same period, the S&P lost nearly 22% of its value. The Nasdaq was cut in half.
*** But I wonder how our Daily Reckoning readers might have done. We don’t give investment advice in the Daily Reckoning. But we give enough hints and opinions that a reader could still lose a lot of money…or make it. How might a reader have done last year? More below…