"The political significance of the scandals of greed – Enron, Adelphia, Tyco, Global Crossing, etc. – is that the rich have yielded to avarice. May not the poor then give in to envy?"
– James Grant
What next? Do we not wait, like Voltaire, for the mob to cut our throats? Or have your editors merely had too many cups of coffee before going to bed?
Can I confide in you, dear reader? We come to work never quite knowing what we will write. We toss and turn all night long, dreaming on your behalf. Not of superwomen with unlimited bar tabs…but of GDP/capita…bear markets…and essentialism. The next day, the words tumble out like the contents of someone else’s lunch bucket…We’re as surprised as you are by what we find. And like you, sometimes we are delighted…and sometimes appalled.
At issue is the way the world works…we try to figure it out. But it is like a virgin trying to imagine sex: neither words nor pictures fully describe it. Still, the words tumble out…let’s see what shapes they take today:
Since the French Revolution and the advent of popular democracy, the mob feels entitled to do whatever it wants. If they are unhappy with their lot in life – the yokelry no longer accepts their fate as God given. Instead, the patsies get out their knives and ballot boxes. Soon, a new group of fools fills public offices…and a new myth comforts the masses.
In our view, the big change – since the Middle Ages – is neither the internal combustion engine nor the pocket telephone; it is that the social order is no longer determined by God, but by politics and economics. Marxism is dead. But we are all Marxists now…for who doesn’t agree with Marx’s famous quote, "the mode of production determines the social order"? People have come to believe that it is not the moral order of things that matters – it is the economic order. Doing good has been replaced by doing well.
Marx’s economic utopia – realized as faithfully as possible by the Cubans, Russians, Chinese, Cambodians and other naifs – has proven as grand a failure as ever amused the gods. Still everyone has come to believe Marx was right on the money; it’s material progress and how it is made that really counts.
Envy created…and then destroyed…the Soviet Union, we recall writing last Friday. Communists coveted their neighbors’ property so much they decided to "redistribute" it to themselves. Then, after many decades had passed…they couldn’t help but notice that people in the West had more of everything. Communism was doomed.
But envy is not confined to Communists. Just as the stray dog covets the life of the rich man’s pet, what politician doesn’t envy the business tycoon? And what economist doesn’t envy the politician? And here the new creed and the new market offers them an opportunity not just to observe, but to get even.
Gone, for example, is that humble breed of Smiths, Turgots and Fergusons, who tried to figure out God’s Own Plan. Watching what humans actually did…studying them as though they were bees or ants…the "moral philosophers" of the 18th century thought they saw the "invisible hand" of God at work. Now, they have been shoved aside by Keynes and Greenspans, who don’t mind putting their own hands on the knobs of power.
Are the people suffering from joblessness, slow growth, or bear markets? Give a yank on the credit lever… that’ll do the trick!
In America, doing well was always popular. "He who dies with the most toys wins," is a common expression. A friend of mine would always respond to criticism – "I’ll match my bank account against his any day," a notion so gauche, so vulgar – only an American would say such a thing.
And yet, there is something so democratic, simple and unpretentious about it – the idea is as loveably, comfortably American as Land’s End khakis. What other way is there to measure success – except in dollars? "Money is just a way of keeping score in life," said Bunker Hunt when he was in the chips.
Lusting after spiff is what America is all about. The country never had dukes nor earls…no class order was ever imposed upon it – neither by God nor by economics. Every scullery maid in East L.A. thinks she is as good as Madonna…and that all she needs is a shot at the next all-girl band and she’ll be as rich and famous as Jennifer Lopez.
Immigrants tended to regard the "working class" as a temporary condition, like first-generation Koreans running ghetto convenience stores while their sons and daughter worked their way through medical school. America’s proletariat was hard to organize into a political group…because few people expected to remain proles for very long. Better not put taxes on the rich too high, thought the assembly line worker, ’cause I want to be one some day.
But ideas, like stock prices, have their ups and downs. Spiff looked easy to come by when Worldcom was at $60. Back then, the modern economists at the Fed had twisted the knobs so far…the cash and credit swirled around at a feverish pace. The average American did not regard his betters with eyes of corrosive envy; instead his peepers gleamed with the twinkle of admiration. He would start his own dot.com, said the burger-flipper to himself, as he sneezed upon the grill. And if not, he’d take up day trading!
Keeping score in dollars, in the late ’90s, was fun; there were so many of them. Americans were winning!
Consumption was not only materially satisfying, it was also patriotic…it was America’s big secret, one that other nations never seemed to get: the more you spend the richer you get. And so they borrowed…and spent… and set themselves up for destruction.
At the end of the boom that ran until the mid-60s, Robert Prechter points out in his new book, Conquer the Crash, total debt stood at 150% of GDP. Then, in the following downturn…debt fell. But, in the next big boom, which he marks as beginning in 1975, debt soared to the point where it reached more than 250% of GDP by the end of the ’90s.
What will happen when spiff gets harder to come by… and the debts are harder to pay? People who keep score in dollars could be looking at a losing season.
Would it be such a surprise if the fans turned a little mean?
Your correspondent, tossing and turning…
July 1, 2002
It was the worst half year on Wall Street since 1970, says the L.A. Times.
The "gang of five", as Stephen Roach calls them – Worldcom, Tyco, Qwest, Enron and Computer Associates – dropped $460 billion in market cap. And the S&P has lost 25% of its value in the last 18 months.
Oh la la…the euro is almost equal to the dollar this morning. And now comes news that the stalwart Atlas – the American consumer – is at last beginning to shrug off the burden of carrying the entire world economy on his back. In April, he seems to have stood up, wiped his brow, and…instead of buying something he didn’t need with money he didn’t have…he decided to slack off. In this great economy, everything from soup to cash comes to him on a "just in time" basis. Still, he thought it might be nice to have a few bucks laid aside, "just in case." Savings rates rose to 3.1%.
Despite the bad news…analysts and consumers alike are remarkably upbeat. "Today’s big drops are signs of a capitulation," said an analyst interviewed by Le Figaro, "which usually comes at the end of a down cycle. A recovery in the stock market in the second half of the year, based on better corporate results, seems likely."
Le Figaro also surveyed the leading investment houses in Europe and discovered that of the 15 big banks and brokerage firms, not a single one expects the year to end with lower prices – neither on the Paris Bourse, the Japanese stock market, nor on Wall Street. Many expect the S&P 500 to rise by as much as 30% by the end of the year.
"Based on our model," said Abby Cohen with a straight face, "we think the S&P 500 is more than 20% undervalued."
And even Stephen Roach, though much less optimistic about share prices, thinks all the bad news about the U.S. economy is overdone. "I would argue that our free enterprise system has never been more vibrant and effective," he writes. Isn’t it wonderful the way these big companies get quickly smacked by the market, he continues…allowing the rest of the economy to pick itself up and get on with its business.
And so, the bear market still has a long way to go, we would guess – until it finally reaches a level where analysts are embarrassed to make bullish predictions… and where the U.S. free enterprise system is regarded with revulsion, not admiration.
Eric, more details from the Street of Dreams, please…
Eric Fry, in New York:
– Last Friday, the stock market limped feebly into the close of a very dismal second quarter. The Dow slipped 27 points to 9,243, after rising as much as 93 points earlier in the day. The Nasdaq Composite eked out a 4- point gain to 1,463.
– The stock market’s less-than-stellar performance failed to light a fire under gold. The yellow metal slid $5.70 to $313.90 an ounce…Go figure.
– Meanwhile, the dollar dropped AGAIN, despite Central Bank intervention. The U.S. unit fell very close to parity with the euro at 99.90 cents per euro. At that point, however, the European Central Bank and Fed bought dollars and sold yen – supposedly to weaken the Japanese currency. But the fact that their efforts also strengthened the dollar was probably not an accident.
– Even after the central bank buying, the dollar still dropped nearly half a percent against the euro, with the European currency finishing the week at 99.17 cents.
– Earlier this year, Wall Street’s overpaid pundits assured us that the U.S. stock market would not – indeed COULD not – fall for a third consecutive year. After all, that hadn’t happened since the 1930s…and surely, 2002 bore no resemblance whatsoever to 1932, or ’33, or ’34, or any other Depression-era year.
– Didn’t we Americans stride triumphantly into 2002, having just scored the first of many inevitable victories in the war against terrorism? Weren’t corporate profits clearly rebounding? And hadn’t we just about finished mopping up the Enron debacle – a fiasco that everyone knew to be an aberrational, one-of-a-kind corporate fraud…and not the least bit representative of our squeaky-clean financial system? And wasn’t the stock market, therefore, a terrific buy?
– Unfortunately, things haven’t turned out quite as well as hoped. Despite being an improbability bordering on an impossibility, the stock market is hurtling toward its third straight losing year.
– "The end of the second quarter closed out a devastating first half of the year for investors," CBS MarketWatch reports, "with more than $1.4 trillion in wealth wiped out and the S&P 500 turning in its worst performance in more than three decades. The S&P’s percentage losses for both the second quarter and first six months of 2002 were the steepest since 1970."
– The midyear tally looks like this: The Dow is down 11.2% year-to-date, the S&P 500 has fallen 13.8% and the Nasdaq leads the Hall of Shame with a 20.7% drop year- to-date.
– The trillion-dollar question now becomes: What next? The response from Wall Street is predictable: "The worst is behind us," say the overpaid strategists. One after another, Wall Street seers predict that the profit recovery they confidently predicted for the first half of 2002 will instead materialize in the second half (and if not then, we should expect a recovery no later than the first half of 2003…or perhaps in the second half of ’03, at the very outside).
– The Wall Street experts also trust that the worst of the corporate scandals is behind us. Maybe so. But the stock market remains a minefield of corrupt accounting and other nefarious corporate practices. And it is highly unlikely that investors will cross this minefield without suffering further casualties…The mines have been set and they will detonate…sooner or later.
– The "global revulsion trade" may well continue to plague both the dollar and the stock market in the second half of 2002. Even if the economy improves, foreign investors may avoid the US to avoid being victimized by the next as-yet-unknown accounting scandal. "Enough already!" seems to be the approximate attitude of most foreign investors.
– They have already been bloodied by the twin terrors of a falling dollar and falling stock market. "The mark-to- market losses for foreigners are monumental," says research and money management firm Bridgewater Associates. So the exodus of foreign capital is well underway and it will not be easily reversed. Bridgewater believes foreigners will shy away from U.S. assets for a very long time.
– So does John Mauldin. As he notes, "(Foreign investment) has been drying up at an alarming rate in the past few months. It is almost as if Europeans smell blood and realize they will be able to get U.S. assets cheaper in the future as the dollar drops…the longer this stock market goes sideways, the less enthusiastic the world will be with U.S. equities."
– In fact, Americans are getting into the act as well. Liquidity TrimTabs estimates that equity funds saw outflows of $9.2 billion in the week through Wednesday. In response to the market volatility last week, Prudential Securities imposed a 24-hour gag order on its analysts. The move prompts two questions: 1) Why just 24 hours?… 2) Why didn’t Prudential think of this a few years ago?
Back in Paris…
*** Paul O’Neill warned last week that the Federal government would soon "hit the wall", unless Congress took action. We were looking forward to it. Alas, both the wall and the government are still intact, after Congress blinked and increased the debt ceiling on Thursday.
*** Members of Congress are thoroughly enjoying the spectacle of Enron, Tyco, Worldcom and the rest. The fact that certain businessmen earned more money than they did…and got better press, too…must have stuck in their crawls. And now that the tycoons are laying prostrate in the dust, who can blame the politicissimos for wanting to give them a good, solid kick?
*** Of course, the biggest accounting legerdemain of all takes place in Washington. Forbes’ estimate of the amount of money in the federal budget lost each year to error, fraud, and inefficiency is $100 billion. But who’s going to audit the feds?
*** Over the weekend, George Bush promised to send Wall Street crooks to jail. And Senator Sarbanes promised legislation that would cure the problem in the usual way – by putting more people on the federal payroll.
*** And in an article in the appropriately-titled Red Herring, Jason Pontin argues that the whole problem should be laid at – get this – Newt Gingrich’s door step. According to Pontin, it was the "republican revolutionaries" of 1994 and their "anti-government" programs that opened the door to corporate accounting scandals.
*** So there you are, dear reader. Whatever preposterous idea you may have…someone always comes along with one that is even more absurd.