Everybody Does It

Everybody does it in America.

Jamie Lee Curtis,
in A Fish Called Wanda

Clinton, Winnick, Stewart…and now Bush. Are we the only ones in America without the benefit of insider connections, dear reader? Are we the only ones left with our virtue intact, even if it is only because we lack the necessary ambition and opportunity?

"The hyperactive stock market of the late 1990s encouraged looser ethics – speculative trading, the overuse of stock options, misleading accounting," writes Paul Samuelson in the Washington Post. "While the market rose, hardly anyone cared. Capital gains created their own ethics. With losses, people are now infuriated by ethical lapses."

The ethical breakdown doesn’t explain falling stock prices. It works the other way around. Falling stock prices encourage question marks. Question marks draw out answers, but not necessarily the right ones.

Hillary Clinton and George W. Bush had ethical lapses long before America had a stock market bubble. Heck, in politics, corruption is so common that an ethical "lapse" might be fairly described as an incident in which the politicissimo does the right thing.

When the Enron scandal broke, Chuck Lewis, an insufferable meddler at the Center for Public Integrity, noted that president Bush "has more familiarity with troubled energy companies and accounting irregularities than probably any previous chief executive."

Familiarity? We don’t know, but it appears the nation’s CEO spent enough time cooking corporate books to earn at least a couple stars from Michelin. Paul Krugman, writing for the New York Times, reminds us of the Harken Oil story (as reported in the Wall Street Journal):

"In 1989 Bush was on the board of directors and audit committee of Harken. He acquired that position, along with a lot of company stock, when Harken paid $2 million for Spectrum 7, a tiny, money-losing energy company with large debts of which Bush was chief executive. (Explaining what it was buying, Harken’s founder said, ‘His name is George Bush.’)"

Harken was not a money-maker either. But the boys on the board turned on the oven and managed to tart up the figures. According to the Krugman account, they borrowed from Harken to buy a subsidiary, Aloha Petroleum, from Harken. This so improved the look of the income statement that Bush was able to sell 2/3rds of his stake in Harken for $848,000…just before the SEC forced the company to restate earnings and brought the share price down. Bush then forgot to mention the insider sale to the SEC until more than 6 months later.

Isn’t it remarkable, dear reader? Not that sin is within us, or that it is so widespread, but that it came upon us so unexpectedly? Newspaper editorial pages rail against moral weakness as if they just discovered it yesterday.

Lame columnists and TV evangelists flail away at ethical "lapses" as if they had thought Bernie Ebbers was the Dr. Schweitzer of telecom and George Bush was a republican archangel. Investors must have thought they were buying companies run by saints. Imagine their surprise when they discover the devilry that went on behind closed doors…a bit like finding out that the pastor of your church was hosting wild booze and free sex parties in the parsonage.

Wouldn’t you be indignant too, dear reader?

We would, but especially so if we hadn’t been invited. For there is the rub. Americans are happy to look the other way while their heroes warm up the numbers a little – everybody does it in America – but only so long as they feel they will get a slice of the pie.

But in a bear market, the pie shrivels up, and people turn from noble detachment to squabbling over crumbs.

People get what they’ve got coming – but many do not take it gracefully.

Your editor, checking his mail for an invitation…

Bill Bonner
July 5, 2002

Why are stocks still falling?

If we’re right, more and more investors are asking themselves that question. That is one of the nice things about a bear market: it encourages question marks. People who never troubled themselves to wonder about how they would finance their retirements…or why stocks go up or down…or how the American miracle economy actually worked…or why the miracle seemed so hard for the Japanese to grasp…are now beginning to have their doubts.

And that’s the nice thing about a national holiday – it gives people time to put their question marks out on the lawn…in broad daylight…where they can get a good look at them. Most people, of course, will be too busy with their beer and hotdogs to spend much time gazing at the interrogatories at their feet. But a few will pull up the lawn chairs, ponder the issues…and some might come to believe that they are better off with their money in something other than stocks…at least until the next bull market comes along.

Then, we’ll be ready for Phase III of the Great Bear Market – when people finally give up. When the patsies begin selling out of their mutual funds…then, stocks can sink down to levels where even we might be tempted to buy them. But that, it appears, is still a long way off.

So, Eric…what’s the latest?

******

Eric Fry in New York…

– U.S. investors took a well-deserved day off yesterday. Thankfully, none of last night’s Fourth of July fireworks displays included any "dirty bombs." And amazingly, 24 hours passed without any accounting dirty bombs exploding on Wall Street.

– The Fourth of July was a relatively ordinary holiday…But the bears don’t seem to be taking any time off at all. For the week so far, the Dow has slipped more than 2%, while the Nasdaq has tumbled another 5.5%.

– "Has the economic system outgrown the Fed’s ability to manage it?" wonders Michael Lewitt, a hedge-fund manager with a contrarian streak. For example, "How is the setting of policy altered by the knowledge that there are $69.2 trillion of interest rate swaps and options and currency swaps outstanding? Or that in less than one year the outstanding amount of credit default swaps has increased by 45% to almost $1 trillion?"

– Good question, Michael. But we suspect that no matter how much power the Greenspan Fed pretends to wield, it has never really been able to "manage" the economy at all.

– Greenspan’s special interest rate – the Fed funds rate – doesn’t actually affect much of anything…unless the nation of investors believes that it does. For more than one decade, investors have trusted in the power of Greenspan and his special interest rate. They have believed in Greenspan’s omnipotence and his omniscience and all the rest of his putative "omni-" virtues. Because they have believed, they have behaved confidently – by investing in overpriced stocks and by buying things they don’t need with money they don’t have.

– The truth is, the Greenspan economy does not respond slavishly to one little interest rate; it operates on the "confidence standard." Greenspan uses his special interest rate – along with his Delphic Congressional testimonies – to bolster confidence, which in turn influences investor behavior.

– The stock market, the dollar and consumer spending all key off of the confidence standard. Throughout the 1990s, confidence soared ever higher and therefore, so did US financial asset prices. But now, confidence wavers, and with it the stock market, the dollar and yes, even consumer spending.

– Recent polls show that investors are starting to second-guess their misplaced confidence in overpriced tech stocks. (Who could have known that paying 100 times earnings for a share of Cisco Systems would be a bad idea?) And the ultimate polling booth – the stock market – weighs in with a clear vote of "no confidence." The market’s southeasterly sloping price chart is the unmistakable trajectory of uncertainty and fear.

– Ominously, observes Barron’s Jonathan R. Laing, "the stock-market funk has seemed impervious to all the usual remedies. The Federal Reserve has administered repeated adrenaline jolts of monetary easing since January of 2001 and yet the S&P today is more than 20% lower than it was when the Fed began lowering interest rates." For whatever reason, Greenspan’s special interest rate isn’t working this time.

– The Consumer Confidence Index drooped to 106.4 in June from 110.3 in May. "Weak labor market conditions, generally soft business conditions and waning public confidence in questionable business practices have helped erode consumer confidence," notes Lynn Franco, Director of The Conference Board’s Consumer Research Center.

– Because the problems Franco itemizes are very real and very much unresolved, the consumer’s growing insecurity seems like a rational response.

– "I’ve said it from the start," insists Morgan Stanley Strategist Stephen Roach (it’s true; he did), "the American Consumer holds the key to any double dip [recession]. The double dips of the past – and, yes, five of the last six recessions have been of the multiple-dip variety – have all been triggered by a relapse in consumer demand."

– Despite a sluggish economy late last year and rising joblessness, the consumer managed to hang tough. He continued to spend, even as job losses mounted. He continued to spend because he "knew" that the stock market would quickly rebound and that the job market would revive…However, he did not know that many folks in high places were not playing fair. Now that he does, his confidence is slipping.

– It hardly instills confidence, for example, to learn that you couldn’t trust some American CEOs to watch your bicycle while you went into a market to buy a soda. Greenspan’s special interest rate might be able to accomplish many things, but it can’t cause investors to entrust their hard-earned savings to unethical corporate managements.

– Say farewell to the confidence standard.

******

Back in Paris…

*** Overseas Americans were warned to stay away from Americans on the 4th of July. We’re not making this up. Right there on page one of the International Herald Tribune came the advice: "The State Department has warned Americans traveling abroad to avoid clubs, restaurants, schools, or outdoor sporting events where fellow Americans gather because terrorists could choose them as targets."

*** The Mogambo Guru thinks he sees really bad times coming: "The history of the world is essentially one of disenfranchised proletariat rising up in anger at being victims of government-caused misery…The French Revolution, the American Revolution, the Russian Revolution, etc., were all violent reactions against the economic idiocies of their respective governments. When the full impact of the avalanche of bankruptcies, starvation and abject poverty reaches some critical mass, there will be upheavals such as the world has never seen. And these trans-national complicities, cronyism and sheer monumental stupidities left almost no corner of the globe untouched; the anger will seep into every corner of the globe."

*** "A good day…for October," said someone in the office this morning. The skies are gray over Paris. The weather is cool. Maria and I have spent the week in the city, while the rest of the family is out in the country enjoying the summer holiday.

"Isn’t this fun, Daddy," Maria said yesterday evening. We do not want to cook, for just the two of us. So, each night, we go out…exploring different neighborhoods. Last night, we stopped into a Chinese restaurant on the rue St. Honore. While eating our duck shellacked with honey, we overheard the following conversation:

Customer: "I think there is a bug or something in my soup."

Chinese waiter, smiling: "No worry…we no charge extra for that. That chef’s special."

Customer: "Have you been in Paris for a long time?"

Waiter: "Only for a few month. I come to make money. But it hard to make money in Paris. I go back to China."

Customer: "Have you thought of working for the government?"