"We are connoisseurs of absurdity," we wrote on Friday. And in Mr. Greenspan’s recent public mumbles – both in Wyoming and Washington – we found a particularly good vintage.
But today, we will not pick on the Fed chairman…for we feel sure Mr. Greenspan will get what he deserves without any help from us. The maestro gave the nation what it seemed to want. He struck up the bank…and the wind section puffed up the biggest bubble in world history. Today, we write with a simple recommendation: what to own when the music stops…
Coming right to the point, we’ve come to believe that Mr. Greenspan’s fame and fortune seem to vary inversely with the price of gold. On November 14th, 2000, Bob Woodward put his insipid hagiography of Greenspan, "Maestro", on the bookshelves. Mr. Greenspan’s reputation was never greater than on that day. Who could have guessed that it had just entered a bear market? On that same day, an ounce of gold could be bought for just $264. Who knew that gold was about to begin a major bull market? Gold dipped down below $260 in February and again in April of 2001. Since then, it has been rising, closing at $315 on Friday.
At least one reader saw an unkind remark in our comments about Mr. Greenspan. He thought we wished the chairman ill, or even wanted the poor man to have a heart attack. Not at all! Here at the Daily Reckoning, dear reader, we love all frauds and humbugs, not the least Mr. Alan Greenspan. We look to them, as we do to the market itself, for entertainment and moral instruction. No, we do not begrudge his increase of the money supply. What are central bankers for if not to debauch the currency?
Nor do we care that he failed to prick the bubble on Wall Street. Heck, he warned investors in ’96. And besides, what are markets for if not to help fools part company with their money? And when does more money take leave of its owners than in the tumult of a collapsing bubble?
And we rather admire the way he talked up the bubble – with his blather about the New Era and the productivity miracle – even when he knew, or should have known, it was nonsense. It was refreshing to see such charlatanism so clearly displayed in public, a helpful reminder of what civil servants are meant to do.
Not only did he help inflate the bubble and fail to prick it, he rushed to supply additional air pressure whenever it began deflating on its own. A lot of people might let themselves get ticked off about this…because here he was no longer merely luring rich investors into blowing themselves up. By knocking 475 basis points off short term rates, the Fed chairman enticed millions of innocent consumers deeper into debt – urging them to buy new SUVs and refinance their homes as if the fate of the nation depended on it.
Both the republic and its consumers would have been better off if they had ignored him. Instead, they borrowed and spent as if they were congressmen. Money can be borrowed to increase future production and make people richer. But if it is spent on consumption, the borrowers end up poorer.
Still, the chairman’s reputation depended on keeping the bubble economy filled out with credit. For when consumers finally realize that they do themselves no favor by taking on bigger mortgages and auto loans, then Mr. Greenspan may begin to look less like the world’s savior and more like the ambitious rascal he is. For that is when the music stops…
Millions will suffer. Bankruptcies – already at record levels – will go even higher. Retirement dreams will be suspended. New pools…vacations…will have to wait. Christmas toys…sniff, sniff…will go unbought.
Mr. Greenspan betrayed his own beliefs too, mongering more paper money than all the other Fed chiefs and Treasury secretaries combined. But we take no offense. Instead, we look to the future and wonder; what next?
Which brings us back to the subject of today’s letter. We look for symmetry, poetry and absurdity in all things. In the career of Alan Greenspan, we find them all in abundance. When gold flew high – back in the late ’70s – Greenspan’s fame and fortune were at such a nadir he had to make do with Ayn Rand and a gabby band of objectivist libertarians for admiration. Then, after he turned his back on his old friends, gold tumbled and Alan Greenspan’s stock rose. By the mid-nineties, Rand had died, gold had fallen below $300 and Greenspan was standing next to Hilary Clinton at her husband’s State of the Union address. Those trends remained with us until the beginning of the 21st century, but have now reversed. Now gold rises and Greenspan falls; we think they will continue to do so.
In a previous letter, we remarked that, like Elvis, a cardiac arrest might be a good career move for Mr. Greenspan. What better for a maestro than to be carried out just after the cymbals crash…and before the economy does? But we do not wish it on him. We would rather have him stick around…and suffer the consequences of his own misdeeds, along with the rest of the nation.
September 16, 2002
P.S. Is this the best time to buy gold? Can gold really go up in a deflationary slump? Isn’t the gold market being manipulated to hold the price down? These and all your other gold-related questions answered…as the Daily Reckoning continues..
Not much interesting news today.
The big item was that the 10-year Treasury note ended the week yielding 3.91% – the first time it has closed this low since 1963. The Fed and all the world’s other central banks may be inflating their currencies as fast as they can – but the bond market tells us not to worry about it. Consumer price inflation has been falling for 20 years. Bond investors seem to think the trend will continue.
We think so too.
The only thing that is still inflating in a major way is the real estate market. In real terms (that is, adjusted for consumer price inflation), houses have risen 30% since ’95…or 3 times faster than rents. In some areas – such as San Diego – prices have been exploding upward at 20% per year.
Is it a bubble?
Well, of a sort.
Will it burst?
Well, after a fashion.
Well, who can tell.
But for the time being, consumers are still taking out bigger mortgages in the belief that debt levels don’t matter and that the inflated value of their homes represents a form of miracle savings, the kind that requires no sacrifice or self-discipline. If we’re right – that the world is slouching towards deflation – adding debt now will turn out to be a big mistake. The boom in house prices will come to an end…and then reverse. Consumers will find it impossible to extract equity – because there will be no equity to extract. With their miracle "savings" gone, but their debt still very much with them, consumers will find they need to cut back on spending in order to pay down their debts.
That will be when the real trouble starts.
Eric, what’s the latest?
Eric Fry, on Wall Street:
– Like Santiago, from "The Old Man and the Sea," the stock market remains beset by "salao – the worst kind of unlucky." Almost nothing seems to be going right. For the third week in a row, the Dow Jones Industrial Average cast its line in the sea and pulled up a minus sign. For the week, the blue chips fell 114 points to 8,312, while the Nasdaq slipped 4 points to 1,291. All of which means that September is holding true to form as one of the worst months of the year for the stock market. So far this month, the S&P 500 has declined 2.9%, bringing its total losses for the year to more than 22%.
– Investors do not lack for reasons to sell stocks. An imminent invasion of Iraq is but one of several un- bullish factors hanging over the stock market. But even if the conflict with Iraq amounts to nothing more than a war of words, US stocks, as a group, aren’t wowing anyone with their investment appeal. That’s because valuations are high and earnings growth prospects are low.
– Three sentences from the Fed’s Beige Book, released last Wednesday, tell us just about everything we need to know about the economy: "District reports suggest that the growth of economic activity has slowed in recent weeks. Most districts indicated slow and uneven economic growth…Most districts reported little or no gain in employment in July and August."
– The economy is, in a word, comatose. And Doug Cliggott, the former J.P. Morgan strategist, does not expect the US economy to awaken from its coma any time soon. "Our view is that the economy and earnings won’t be doing much better next year than this year," says the bearish strategist. "It seems to me that the best-case scenario a year from now is that equity prices remain where they are, with the S&P at about 900, and we could easily see the S&P with a six in front of it."
– Cliggott is no "bear nouveau." Rather, in a sharp departure from his bullish peers on Wall Street, Cliggott predicted late in 2001 that the S&P would fall to 950 and that the Dow Jones Industrial Average would decline to 8,500. Part of Cliggott’s cautious stance stems from the fact that he bases his forecast on actual corporate profits, not one of the many definitions of "operating earnings" that the bullish strategists tend to use.
– In contrast to Abby Joseph Cohen, for example, who expects the S&P 500’s "operating earnings" to be $47 in 2003, Cliggot predicts actual earnings of only $40. By his reckoning, therefore, the S&P ought to sell for about 640, or 16 times earnings of $40. By our reckoning (and we do it daily), 640 is about 28% LOWER than where the S&P 500 now stands.
– Bill Gross, managing director of PIMCO, seconds Cliggott’s grim outlook. "Just remember this," Gross writes, "the market needs to yield close to 3.5% before it approaches fair value, and that means DOW 5,000." But all hope is not lost. Various market historians and technicians have been parading out a bullish case for the stock market based on "seasonal" and "cyclical" factors.
– "Beleaguered investors take note," writes Sandra Ward of Barron’s, "At this time of the year, and at this particular point in the four-year presidential-election cycle, history is on your side. Reams of historical data suggest that market returns in 2003 – a pre-election year – will not only be positive but could register in respectable double-digit territory…The data are remarkable in their consistency," Ward writes. "During the postwar period beginning in 1950, when stocks began to show their promise and deliver meaningful returns, the Dow Jones Industrial Average has gained 18%, on average, in each of the years preceding a presidential election…"
– "Don’t hang your hat on these…but a couple of important time lines are coming into play." Ms. Ward proceeds to explain that, since 1956, one of the best times to have purchased stocks was during the summer of a non-presidential election year.
– Secondly, as Investech Research editor James Stack observes, "[Investing during] the six months from November 1 through April 30 [is] far more profitable than [investing during] the other six months of the year." How much more profitable, you ask? Stack calculates that an investor starting with $10,000 in 1960 would have seen his investment grow to more than $18,000 if he invested in the S&P 500 every May 1st and sold every Halloween. However, that same investor’s $10,000 would today be worth a stunning $271,603 if he had done the exact opposite – purchasing the S&P 500 every year on November 1st and selling on April 30th.
– Seasonal and cyclical factors are fun to consider. But, as Ward says, "Don’t hang your hat on these."
Back in Paris…
*** The U.S. is in a bear market that could last a few more years and take share prices down another 30% to 50%. The world economy seems to be cooling off, with recessions and deflation in major nations. What should you have in your investment portfolio, dear reader?
The choices are few. Long bonds have done well and will probably continue to do well. Consumer price inflation has been in decline for 20 years already. Most likely, the U.S. will sink into outright deflation before the trend runs its course.
But the dollar is vulnerable. Protect yourself with long euro-bonds…and gold. (More on gold, below…)
What else? Perhaps a few Really Cheap Stocks…
*** "The UK isn’t America," said an analyst in London. "Stock prices never got as wild and crazy as they did in the U.S. But they’ve been pulled down with Wall Street. So what we’re seeing here are some pretty good opportunities.
"The FTSE [the UK equivalent of the Dow] May Blindly Follow the Dow," begins the headline of our own London- based Fleet Street Letter, "But UK Shares Still Offer You Great Value."
"The London markets represent better value than their U.S. counterparts," writes editor Brian Durrant. "Jump in now, while share prices are still cheap."
Among the bargains Durrant recommends are a few that look like Really Cheap Stocks. The primary rule for stock market investors is Buy Low/Sell High; at least with these companies you will get the first part of the formula right:
There is Forminster, for example, a tiny retailer with a market cap of only $12 million. You can buy the shares for about 30 cents each and get a yield of 7%.
Then, there’s another retailer, Homestyle, with a $300 million market cap, a $10 stock price and also yielding 7%.
Clarkson is a tiny transport business with a market capitalization of only about $40 million. The stock trades for less than 2 pounds – at only 5 times earnings and a yield of 7.8%.
*** Elizabeth invited some neighbors over for a barbecue on Saturday night. After the lamb was eaten, we sat outside as the evening and the conversation cooled off.
After 11 PM, your editor has never heard a remark worth recalling. But in France guests feel it is impolite to leave before midnight. So, we all sat around in the cold…each hoping that the other would be brave enough to stand up and leave.
We might have said, "It’s okay…you can leave now…no offense taken." But that would have been like belching or breaking wind…it might have made us feel more comfortable, but it would have been a humiliating breach of etiquette.
And so we endured…with a few people carrying the entire weight of conversation as the others sat and shivered, hoping one of the chatty ones would choke on an olive so we could all go home.