The Daily Reckoning
August 3-4, 2002
By Addison Wiggin
Goldman Sachs announced Friday they expect the Fed to slash rates another 75 basis points by year-end. We here at the Daily Reckoning HQ ask simply: so what!?
Following the Fed’s history making run last year – eleven consecutive cuts in the funds rate – it is already at a four-decade low of 1.75%. It’s hard for us to believe anyone with even a casual interest in economics – let alone the geniuses at the Fed – really thinks that goosing the system with even more easy money will help the corporate profit picture.
The major indexes didn’t appear to think so, either… the Dow dropped 193 on Friday to end the week at 8,313. Over Thursday and Friday the Dow losses combined for more than 400 points – wiping out all but a few of Monday’s wild rally gains. Nor did the Nasdaq or the S&P 500 fare any better. They shed 32 and 20 respectively on Friday…
A Goldman representative told USAToday that “the Fed would want to take out insurance against the risk of a double-dip recession following a string of weak reports this week on the state of the U.S. economy.”
Over the course of the week the economic data being spewed forth by the ream looked pretty dismal. And the dismal prospect of a “double-dip” back into recession appears to be pretty well on track. On Wednesday, the Commerce Department reported that GDP grew at an annual rate of 1.1% in the second quarter… a mite slower than the “revised” 5% quoted for the first quarter – and half the 2.2% expected.
US consumer spending – the great savior of the world’s future – appears to be slowing; and therefore, is to blame. And while unemployment held steady at 5.9% in July, the Institute for Supply Management showed it’s “gauge of national business activity” rested at just over 50 during the month July – short of the 55 reading analysts were anticipating. The figure indicates barely any growth for the month.
As we noted in yesterday’s Daily Reckoning, Morgan Stanley’s Stephen Roach is placing his readers on double-dip alert. “While the past is not always prologue for what lies ahead,” says Roach, “the lessons of history should not be forgotten. Double dips have been the rule, not the exception, in business cycles of the past. Five of the past six recessions over the past 45 years have, in fact, contained a double dip — the rare single dip occurred in the early 1990s. Moreover, in two instances — the mid-1970s and the early 1980s — there were actually triple dips.”
“Double dips happen,” Roach continues, “because demand relapses invariably occur at just the time when businesses are lifting production in order to rebuild inventories. With the current production upswing well advanced – industrial production has risen for six consecutive months – a demand relapse would come at a most inopportune time. Yet with the US economy now back to its stall speed, that’s precisely the risk.”
So the question is: Will additional Fed rate cuts put an end to the business cycle? We don’t know the answer, but we’re reasonably sure we’ll find out. Tune in Monday… as the Daily Reckoning continues.
The Daily Reckoning
August 3, 2002
p.s. What happens when the world’s largest economies collapse? You’ll find some historical lessons for Norteamaricanos compliments of Argentina and The Daily Reckoning’s erstwhile ami Doug Casey… in Flotsam $ Jestsam below…
p.p.s. Also, might I suggest a book for you to read while you take the time out to enjoy the late summer weather in August? Allow me to introduce a new feature of the Weekend Edition (with compliments to our friends at Laissez Faire Books):
* * * * The Daily Reckoning’s Book of the Week * * * *
The Making of Modern Economics
by Mark Skousen
Here is a bold, new, controversial history of economics, a “tell all” story of the lives and ideas of the greatest economic thinkers – Adam Smith, Karl Marx, Keynes, Friedman, plus two chapters on the Austrians Mises, Hayek, Schumpeter, Menger, et al. Fully illustrated, including over 100 charts, portraits, and photos.
Finally, economics is brought to life based on exciting new biographies and the author’s original research, an amazing tale of idle dreamers, academic scribblers, occasional quacks and madmen in authority. All major economic ideas are clearly explained and logically dissected. Ideal for both economists and laymen wanting to know the real story of economics. It even tells the story of three economists – Ricardo, Fisher, and Keynes – who became multi-millionaires.
“Lively and accurate, a sure bestseller!”
– Milton Friedman
“Both fascinating and infuriating.”
– Foreign Affairs
To Order “The Making Of Modern Economics,” Click Here…
* * * * * * * * * * * * * * * * * * * * * * * * * * *
THIS WEEK in THE DAILY RECKONING
08/02/02 UNKNOWN UNKNOWNS
“…Even here on Earth, strange things still occur. Uruguay closed its banks on Wednesday after the currency fell for 5 days in a row. In Colombia, the peso has fallen for the last 6 days. and in Brazil, the real has fallen for 9 days in a row. It has lost 30% of its value so far this year as Brazil edges towards default on $297 billion in foreign obligations. Brazil’s bonds, for readers with a sense of adventure, now trade at 50 cents on thedollar…”
08/01/02 A MYTH EXPOSED
Guest Essay by Robert Prechter
“…The ‘New Era’ of the 1920s ended in a bust. The ‘Japanese Miracle’ of the 1980s ended in a bust. What do you suppose will happen to today’s ‘NewEconomy’?…”
07/31/02 THE EUROPEANS
“…The European thought he had placed his money in the strongest, most flexible, and most dynamic economy on the globe…and then he discovered that the U.S. companies he bought had cooked their books and went bankrupt…and that the U.S. federal budget surpluses that were supposed to be “as far as the eye can see” disappeared overnight…and that G.W.B. had gone a little mad in his War AgainstTerror…”
07/30/02 ADVENTURES IN THE “ONLY MAJOR ASSET CLASS”
Guest Essay by Lief Simon
“…if you restrict yourself to US real estate, you’ll miss out on the fastest growing economies in the world. U.S. real estate markets are highly developed and efficient. It’s not easy to find a real steal. This is not the case in foreign markets…”
07/29/02 THE BIG SCHLEP
“…Here we offer an old explanation for why corporate earnings have collapsed…and why personal earnings have stagnated…and why Americans have to work longer and longer just to maintain their standard ofliving…”
* * * * * * * * * * * * * * * * * * * * * * * * * * * *
HEADLINE, NEWS And INSIGHT: New High Tech and the Death of Profits on Wall Street… What To Do When There Are No Buyers For Your Stocks Anymore… Empire Building And Its Side Effects… Plus, Historical Lessons From Argentina’s Collapse…
Productivity Without Profits
by Dr. Kurt Richebacher
“…The worst profit numbers by far have been coming from the one sector for which Wall Street was trumpeting unprecedented miracles of profit and productivity growth: the new hightech…”
Bear Market Strategies
by Lynn Carpenter
“…A stock with a strong dividend history is usually worth holding through bad times, even if the price drops, as long as the business remains on track. Such stocks rebound well and typically make up that slump quickly when the recovery comes. And it pays something in themeantime…”
The Curse of Empires
by Dr. Marc Faber
“…Empire is an impressive notion but an ill-fated ambition of most large countries. Sooner or later it becomes a huge liability…”
FLOTSAM AND JETSAM: Historical Lessons On Financial Collapse For Norteamaricanos… Compliments Of Argentina And The Daily Reckoning’s Erstwhile Ami: Doug Casey.
– Doug Casey
“…Joseph Schumpeter certainly wasn’t the first to observe that success tends to carry the seeds of its own destruction, but he was the first (in the late 1930s) to argue that capitalism’s very success guaranteed it would be replaced by some form of collectivism. As you know, I’m the eternal optimist, believing that mankind will eventually shed most of its flaws and vices as knowledge accumulates, and we advance towards the stars.
Unfortunately, however, that viewpoint isn’t terribly relevant in terms of anyone living today, or likely for hundreds of years to come. Still, it’s nice to keep a happy thought. History, since Schumpeter’s death in 1954, would indicate he’s probably right. Institutions, families, systems and states– like individuals– tend to degenerate as they age. It sometimes seems as if the whole world is fated to someday look and act like the Kennedy family.
It certainly happened to Argentina. As soon as it reached its apogee, just before World War I, it began a process of decline. Gradual at first, since it had so much accumulated capital it could live off of. And its people had learned good habits, which also took time to become corrupted. It also avoided some bad luck; when the rest of the world nearly bankrupted itself with two world wars, Argentina stood aside and sold as much as it could to all combatants.
Things really started to come unglued for Argentina in the 1930s. Of course that was true everywhere. Hitler in Germany, Stalin in Russia, Mussolini in Italy, Roosevelt in the US, Franco in Spain– the whole world went crazy in the 30s as the world economy collapsed (as it seems about to do again). Since Argentina was full of Spaniards, Italians and Germans, and heavily influenced by the Roosevelt regime in the US, it went fascist in a big way, including its first military coup in Sept 1930.
Massive corruption and perpetual election fraud became Argentine traditions, with the poor (known as descamisados, or “shirtless ones,” being promised loot stolen from the rich. The most opportunistic people got into politics to steal from everybody, while the middle class was squeezed. The collapse of commodity prices in the 30s depression was especially bad for Argentina. Stupidly, but predictably, the government responded by setting up a Central Bank, which proceeded to destroy the currency.
Massive regulatory agencies and “marketing boards” for corn, wheat, cotton, wine and you-name it, pretty much aped Roosevelt and Mussolini. The Argentine government burned wheat, the Brazilians dumped coffee in the sea, the Americans poured milk in the gutter. Then most of the world engaged in an orgy of mass slaughter in the 40s.
But the 40s actually provided a respite for Argentina. Many countries became net debtors from purchases of food. Though the war was good for agricultural exporters, it made it very hard to import machinery. So small industries sprang up to meet demand, which seemed like yet another benefit of the war. In fact it was another disaster in the making, since they were all inefficient, and all wanted protection after the war. Then, of course, came Peron, a military man, elected by labor and the Church in 1946. It was like a conjunction of the planets the astrologers talk about: the three most reactionary and backward elements of society got their political “Dream Team” with Juan Domingo and his wife, Evita. It was as if Bonnie and Clyde were appointed Chairmen of the Federal Reserve.
Or, perhaps, as if Bill and Hillary Clinton were elected President for another two terms.
Soon, practically all industry was nationalized, which not only evaporated the county’s reserves of gold and dollars built up over decades, but destroyed the industries they bought for decades to come. The railroads, strangled in regulation and denied capital, became uneconomic and unreliable. The government bought up all the radio stations, making them, at once, into money losers and instruments of state propaganda. They started state newspapers. They impeached and replaced Supreme Court justices.
You might think that Argentina would have gone into a disastrous collapse immediately. Actually, however, most people loved these two miscreants, for the same reason people love anybody that throws a wild party: It’s a lot of fun to drink a whole bottle of Johnnie Walker Blue in one night, or blow a lifetime’s savings in a few years, even if it’s not very smart. Living off of capital made him popular…”
Editor’s Note: The Original “International Speculator” Doug Casey has been seeking and finding incredible opportunities around the world for 25 years… generally in and around crisis. If you’re interested, you can take advantage of profitable opportunities unearthed by Casey.