Epiphany

“Today marks the day when the three wise men visited Bethlehem where the bright star in the East had directed them and saw for themselves what the scriptures had foretold…that a savior had been born.

“The three kings told King Herod that they would report back to him. But they suspected Herod was up to no good…and so they took another route home to avoid him. That’s why they were called wise men.”

Father Marchand
From Sunday’s sermon

“Tomorrow I am switching religions,” Paul announced. “In France, we have the right to take all our religious holidays off from work,” Paul told us. “So I switch religions every 6 weeks. I have been a Christian for the last 6 weeks…to get in Christmas and Epiphany. But tomorrow I am becoming Hindu…or maybe Confuscian. I have to check my calendar.”

We sat around the big dining room table on Saturday night – 12 of us at a dinner party Elizabeth had organized.

“With the new 35-hour work week, and all my religious holidays,” Paul explained, “I may never have to work again.”

Paul is a middle-aged raconteur and provocateur. “I used to love the Voice of America radio,” he announced. “It is what turned me into a Liberal.” Liberal, outside of America, means free-market conservative. I wanted to ask how the VOA had done such a thing. It could only have been an accident – since the Voice of America was a government-sponsored propaganda outlet. But the conversation quickly moved on.

Annick, a small woman with a bird-like face and the movements of a sparrow, was seated to my right. I may have already mentioned her to you. This was not the first time she has been my dinner companion. She is a financial analyst with a big Paris bank. People who plan dinners try to seat their guests near others whose conversation they might find interesting. Elizabeth thought we would have something to talk about. Unfortunately, when she spoke, she talked faster than I could listen. I caught the beginnings of her sentences and the ends – and had to guess about what lay in the middle.

To my left, however, was seated an even smaller woman with dark hair. While she knew nothing about investments, economics, or anything else that I labor over, she was prettier, and spoke more slowly. My head more often turned to the left than the right.

“The nice thing about the VOA,” her husband continued, “was that you knew it was propaganda. It told you so. So you could take that into account when listening to it. But they shut it down a few years ago; maybe the American taxpayers got tired of paying for it.”

“Journalism used to be completely different. Le Monde, for example,” Paul cited France’s leading newspaper, “used to describe itself as a ‘journal of opinion’. Even the news items were referred to as the ‘opinions’ of the reporter – not actual fact.”

“But in the 60s, I think,” he went on, “they dropped the ‘opinion’ word from the news pages. Now, it is pure propaganda.”

Montmorillon’s mayor was less cynical. He is accustomed to giving long uplifting speeches in praise of municipal sewage treatment systems or the new fire brigade hoses. He came readily to the defense of Le Monde and modern journalism.

“There is a place for opinion,” he said, “on the opinion page. But reporters are not supposed to be giving opinions. They’re supposed to be reporting the facts.”

“Facts?” Paul shot back. “They report the ‘facts’ as they see them…and then, only the ‘facts’ that serve their purpose. People are not like video cameras merely recording what happens in front of them. Everything is subject to interpretation. At least in the old days they admitted that they were interpreting events, not merely recording them. And there were dozens of papers – each with its own bias – from which you could choose.”

“Well, you have a good point,” conceded the politician, to whom all points are good ones.

“Thank you,” was Paul’s reply, “I would vote for you…but I am a resident of Paris, not Montmorillon.”

“In that case, vote twice. But seriously, I think people understand that the reporter has his own point of view. You know, they do these polls, asking people how they rate the credibility of the media. People always say they don’t believe a word of it. They are very capable of understanding a point of view…and decrypting the messages they receive.”

At this point, Paul’s wife added a comment that triggered a series of thoughts. We had already upended several bottles of wine by this time…and Anne, with the glow of the candlelight on her delicate features, was becoming ever more profound and entertaining:

“Yes, they say they don’t believe…but in fact, it is all they believe. They have nothing else to believe. They say they don’t believe because it is fashionable to say that. No one wants to admit that he does not think for himself. But that is the case. What people read in the papers and see on television is all there is.”

At the heart of the New Era discussion was the idea that information – delivered in bulk at low prices – would make people more productive, richer…and even happier.

James Tobin, creator of the q ratio, which compares the price of a stock to the cost of the assets behind it, even came to think that his indicator had lost its validity. In the digital age, he thought, new technology and new communications greatly increased companies’ ‘intellectual capital’ – which didn’t show up on their balance sheets.

More tomorrow…on why James Tobin was right about q and wrong about ‘intellectual capital’…

Your correspondent…

Bill Bonner
Paris, France
January 8, 2001

*** What a week it was! Stocks began the week falling and ended it the same way. The Dow dropped 250 points on Friday. The Nasdaq went down 156 points.

*** But between the beginning of the week and its end, Alan Greenspan, the main man of the Committee to Save the World, called his group to action. The Fed cut the Fed Funds rate by 50 basis points, which produced (in case you missed it) the most spectacular bear market rally in history.

*** It was also one of the shortest. The very next day, stocks began to slip again, and fell so far on Friday that many stocks had given up all they had gained from the Green Team’s efforts.

*** Friday, Wall Street grappled with the same fears we discussed on Wednesday. “Does the fact that the Fed acted outside its normal timetable indicate that it knows something awful,” asked the Financial Times. “Is there a financial crisis about to break…?”

*** Rumors flew at the end of the week that the Banc of America was in trouble. Of course, the bank denied it, but investors still took 7% off the stock price – worried that the bank had a huge derivative problem about to explode.

*** JP Morgan, the “Derivative King” of Wall Street, also suffered at investors’ hands – losing 6% of its value.

*** “Derivativization,” I recall myself writing, may soon take its place alongside securitization and globalization as a cause of the first major disaster of the 21st century – just as militarization, nationalization, and mobilization were blamed for the 20th century’s first and decisive disaster, WWI.

*** “Derivatives,” writes Prudent Bear, Doug Noland, “have been the key to what has been basically unlimited credit availability that has financed the leverage behind the great bull markets, as well as this protracted economic boom. As we have said before, the proliferation of derivatives has created truly frightening risk, not reduced it.”

*** “I remember back in the fall of 1998,” Noland reminisces, “when two finance companies filed for bankruptcy without ever missing a Wall Street earnings estimate. An excellent recent example can be found with the troubled California utilities. Yesterday’s Wall Street Journal ran a fine piece on PG&E by Rebecca Smith and John R. Emshwiller. The article began, ‘In August, Bruce R. Worthington did something no PG&E Corp. executive had done in the utility’s nearly 150-year history: He hired lawyers to prepare it for possible bankruptcy protection.’ Well, isn’t that interesting. PG&E reported Operating Earnings for the third-quarter of $629 million and Net Income of $225 million. Earnings per share were 68 cents, a 26% year- over-year increase. Immediately after the earnings release, the bulls were in force. Merrill Lynch titled their research report ‘Smooth Sailing…,’ First Boston ‘Strong Growth Continues…’ and UBS Warburg ‘Bullseye!…’ All of this despite the fact that PG&E’s ‘uncollected deficit’ had surpassed $2.2 billion by August 31st. Looking at the balance sheet, we see that liabilities jumped almost $2.7 billion during the third-quarter. All the same, a consortium led by Bank of America provided a $1 billion line of credit.”

*** PG&E and Edison International had their ratings cut last week. Edison’s stock split, the hard way, from Wednesday to Friday – giving it a market value of $2 billion, down from $6.5 billion in July.

*** Another explanation for the hasty rate cut was offered in the NYTimes. “Greenspan Determined to Avoid Repeating the Mistakes of 1990″ says the headline. The article maintains that Greenspan is eager to avoid the criticism he took in the early 90s – for not acting quickly or aggressively enough to counter a business slowdown.

*** “Importantly,” Doug Noland continues, “lower interest rates from the Federal Reserve will only exacerbate financial and economic distortions. We certainly see the possibility of catastrophic consequences in the interest rate and currency derivatives marketplace to lower interest rates. In the past, leading bulls have referred to the ‘Supertanker U.S. Economy.’ Well, there is some truth to this analogy, but it’s the Exxon Valdez heading for the rocks. Granted, in the past the Fed was able to ‘reliquefy’ and give new life to the bubble, but it won’t work this time around.” (see: 50 Basis Points To Sustain The Unsustainable)

*** Why won’t it work? Because this time, it’s not just a financial problem. It’s an economic one. Years of loose credit caused people to borrow, spend and invest as imprudently as the Bank of America. These loans have to be written off. Companies have to go through ‘chapter’. The workout specialists, bankruptcy courts, and vulture investors have to have an opportunity to ply their trades. In short, this time – It’s the Economy, Stupid. The economic messes have to be cleaned up before lower interest rates can produce the desired effects.

*** After making 30% per year on gold in the 12 years running up to 1980 – gold investors couldn’t believe that an entirely new cycle was running its course. Every financial crisis was a cause for hope. And every hope was crushed by the 20-year bear market.

*** Will technology investors be any different. I don’t know. But they are getting crushed. The Nasdaq 100 lost 3% of its value last week – even with the biggest one-day rally in history. On Friday, the Big Techs were clearly back in ‘sell’ mode, with Cisco -12%, JDS Uniphase -12.8% and Oracle -7.3%.

*** “…after the 1845 bubble burst [in railroad stocks] share prices did not recover for decades,” writes the Fleet Street Letter’s Robert Miller. “The same is true of earnings. Fierce competition between the major companies meant that earnings took a very long time to recover. All this suggests strongly that the Internet and telecom stocks are still probably significantly over-valued and that the earnings expectations of even the best well-established companies are over-optimistic.”

*** Labor costs are mounting. The latest figures show an average hourly increase of 4.2% for 2,000, compared with 3.5% for ’99.

*** And in California, at least, housing costs are still going up. The LA Times reports that the percentage of people who can afford a median-priced home is falling – to 23% in San Diego county…and only 10% in SF.

*** Oil fell slightly on Friday. Gold rose 60 cents. And the dollar continued to fall. The euro is now about 96 cents – and climbing. You might want to think again about buying euro bonds. U.S. Treasury bonds have done very well – but they are vulnerable to the falling dollar.

*** GE fell 2% on Friday. My advice: get out of GE while you can.

*** Of the 70+ world markets covered by Morgan Stanley in the year 2000, here are the top 12… brought to my attention by Steve Sjuggerud:

Country and Gain (US$)

Ecuador – 158.39%

Ukraine – 74.26%

Jamaica – 45.17%

Latvia – 41.19%

Bangladesh – 30.42%

Israel – 24.75%

Croatia – 10.90%

Trinidad & Tobago – 8.53%

Lithuania – 5.17%

Switzerland – 4.88%

Tunisia – 4.84%

Estonia – 4.47%

Great Britain and the U.S. ranked 22 and 23, respectively.