Funds Of Stupidity

“There must certainly be a vast Fund of Stupidity in Human Nature, else Men would not be caught as they are, a thousand times over, by the same Snare; and while they yet remember their past Misfortunes, go on to court and encourage the Causes to which they were owing, and which will again produce them.”

Cato’s Letters, January 1721

Yesterday, when we took our leave, Mr. Greenspan was still in the privacy of his bath…amid his bubbles.

He has become the most powerful person on the federal payroll, and perhaps the only one whom people trust. Were he to make a mistake, the entire world economy could be plunged into recession and even depression. Incomes from Borneo to the Baltic could decline…living standards could fall…dreams for retirements, vacations, new homes…and even life itself, will be called into question.

Many of the world’s people still live at the margin…with barely enough calories to sustain life. A fall in world’s growth rate is not just a statistic to them, but a matter of life and death.

“The U.S. economy is what is driving wealth in the rest of the world,” said Fred Palmer, President of the Western Fuels Association, “We’re the biggest economy on earth. We’re $9 trillion out of $27 trillion, the United States economy is. For us to say that we are going to cut back, or for them to tell us to cut back, means we will consume less. If we consume less, they export less. If they export less to us-we’re the biggest market-their wealth goes down, their well-being goes down, their joblessness comes up. And the impact on the Third World, where two billion people already don’t have any electricity, would be devastating.”

Each morning, I alight from the metro at the Hotel de Ville. There, photos on the wall of the subway station show the progress of the area over the centuries. Without even reading the inscriptions, the history of France is revealed: struggles, wars, destruction, rebuilding. One drawing shows a gallows in the square with bodies hanging from it. Another shows barricades set up, behind which revolutionaries fire at advancing soldiers. A plaque on the wall commemorates the people who died when Paris rose up against the German occupation troops in WWII.

All of this upheaval and suffering in the past, we are meant to see, leaves us with the peace and perfection of Paris as it is today. The Nation State, France, has emerged triumphant, with Paris at its center – stable, peaceful, beautiful, and as it should be.

Similarly, the prevailing view of the world financial system is that it represents the accumulated wisdom from centuries of mistakes. Panics, depressions, crashes…they have all been endured so that the present system could be perfected.

One of the first major experiments with today’s financial system occurred in France – in the early 18th century. Janet Gleeson’s book, Millionaire, tells the story of John Law who, on the run after killing a man in a duel, came to Paris. “Like most states,” says Forbes’ review of Ms. Gleeson’s book, “France was perpetually short of cash. Instead of having gold and silver be the coins of the realm, Law reasoned, why not print money? Law naively thought political authorities would soberly control the printing presses.” They did not. Law’s inflation wiped out much of the monarchy’s debt, but it practically ruined the nation’s economy.

But now we have wiser managers – of whom Mr. Greenspan is thought to be the wisest – and a flexible system of managed money that provides these officials with the tools they need to destroy their currencies at an dignified pace.

How lucky we are, dear reader, to be living in this Age of Perfection! The mistakes of the past have finally been corrected, once and for all. De Gaulle was called in during the Algerian war to replace the 4th republic with the 5th in 1958. And Sir Isaac Newton’s gold standard was finally dismantled when Nixon ‘closed the gold window’ in 1972. Now, instead of Richelieu, Napoleon or Pflimlin…we have Jospin and Chirac in France…

…and more importantly, we have Alan Greenspan in Washington.

But could it be, gentle reader…I will put the question to you merely as a possibility…that Mr. Greenspan’s system represents no real improvement – but that it is just another twist of cyclical imbecility? The question must even occur to Mr. Greenspan himself, in reflective moments.

Does it cause him to worry about poor Dayaks or starving Somali tribesmen? Does it bother him that their well-being might depend on the continued willingness of Americans to spend money they haven’t earned…and of foreigners to accept worthless pieces of paper in return for valuable goods and services?

“Wobbly consumers threaten growth,” said a headline from Reuters recently. The article quotes the number 2 man at the Fed, Roger Ferguson. If consumers were to suddenly decide to act responsibly, he said, it “would put the economy at risk of unacceptably low growth.”

“If the consumer is truly stretched,” adds David Tice, “he might actually start to save.” And what a calamity that would be!

“Today,” writes Janet Gleeson in Millionaire, “if John Law or his critics could witness commerce conducted in any mall with credit cards, banknotes, and checks – not a gold or silver coin in sight – they would see, incontrovertibly, his vision achieved, but recognize also the same inherent weakness. The survival of any credit-based financial system still hinges on public confidence in a way that one based on gold does not. Spectacular financial breakdowns have peppered history ever since the advent of paper credit.”

When Americans can no longer spend, the U.S. economy will go into a recession of unknown depth and severity. And just as the 1st Republic yielded to the 2nd, which yielded to the 3rd, which in turn yield to the 4th, which finally stepped out of the way in 1958 to make room for the 5th, the world financial system of the late 20th century, will also eventually give way too.

Gold may not play a greater role in the next system than it does in the current one…but it is bound to be popular during the transition.

Bill Bonner, Paris, France March 2, 2001

Your correspondent, living under the 5th Republic, in the shadow of the Hotel de Ville…

*** A worrisome day yesterday on Wall Street, as the slump on moves into a new stage. All three major indices hit their lowest levels in 6 months. Then, late-session buying redeemed them…more or less.

*** The Nasdaq fell to within 71 points of 2000…and then bounced to close up 31 points. Amazon fell below $10. Cisco dropped below $23. Gateway lost 8% to close around $15. Palm – which was at $165 a share a year ago – could be bought for only $16.

*** The Big Techs keep taking casualties – Lucent’s 12- month high was $70; you can buy it today for under $12. Nortel, recently $89, is now available for $17.

*** But it is not just the techs that are taking losses. Morgan Stanley Dean Witter shares were for sale yesterday for $60 – almost half-off the price a year ago.

*** GE lost 1% yesterday.

*** “Has the great bull market of the 1990s finally given way to a bear market?” asks a front-page article in today’s International Herald Tribune. “So glum is Wall Street,” the paper reports, “that many market strategists now warn that lower interest rates – the Federal Reserve Board is expected to cut them again soon – may only temporarily bolster stock prices, because of skepticism that rate cuts can revive corporate profits quickly.”

*** So much for the fabled second half recovery… “Between now and June,” John Myers reports, “companies in the tech sector will enjoy their first ‘profit recession’ in 10 years – meaning that their profits will shrink for two straight quarters. According to First Call, overall profits in the sector could drop more than 18%. That’s far more severe than the 2.7% S&P 500 companies expect to shed. And the next quarter looks just as bad.”

*** We have been through our Autumn of Anxiety…and are now suffering a Winter of Woe. Investors are realizing that bear markets exist…and that stocks can go down as well as up. What remains to be discovered is how far they can go down…and for how long.

*** “What would happen if stocks fell back to their average share of GDP at just over 50%?” Dan Denning asked earlier this month. “The total ‘market cap’ of the stock market had skyrocketed in the last 10 years to $16.5 trillion… Current GDP is just over $10 trillion. So for stocks to fall from that height to their historical average of GDP, they’d have to fall by over $10 trillion. To put that in perspective, that would mean a 66% decline in stock indexes. You’d have Dow 3,640 and Nasdaq 961.” (see: Reality Bites Bears and Bulls )

*** The ‘group feel’ of the marketplace is resignation… but not yet fear and loathing. These sentiments are still ahead.

*** This is not like ’98. The Dow has now lost 10% from its January peak. The Nasdaq is down 13% for the year – down almost 30% from its January peak. Investors are not making money…they’re losing it.

*** But consumers are continuing to spend. In January, personal incomes rose 0.6%. But spending rose even faster – 0.7%, it’s fastest pace in 4 months. Savings are at their lowest level ever.

*** “We’re living in an investor’s Twilight Zone,” writes Doug Casey. “It makes no sense to talk about buying common stocks, even good ones that are reasonably priced (although they’re a pretty rare commodity) because if we’re in the kind of bear market I think we are, they’ll only get cheaper.”

*** Will Greenspan save this market? “I believe we’ll see a total reversal of the current god-like status for Greenspan,” Richard Russell wrote yesterday. A Daily Reckoning reader put it differently (on the website): Greenspan “is shaping up as the biggest economic putz in history.”

*** “If Greenspan continues to cut rates,” writes Marc Faber in Forbes, “stocks may bounce back, but only briefly. In the U.S. deflation may be reflected not in the domestic price level but in a massive collapse of the dollar.”

*** The dollar fell yesterday…with the euro rising over 93 cents.

*** “The U.S. runs a rather large current account deficit,” writes Kevin Klombies. “In order for the dollar to stay even – or rise – an equivalent amount of capital has to flow into the U.S. to compensate for trade imbalances. For the dollar to have risen as strongly as it has since late 1999 a tremendous amount of money must have flowed into US markets. Most of that money fed the boom in the Nasdaq. For that reason, there is a direct correlation between the Nasdaq and the dollar index. Movements in the Nasdaq appear to lead the dollar by one quarter. In other words, the dollar is not only in a downtrend…but should continue a downtrend, AFTER the Nasdaq bottoms, for another quarter.” When that bottom will arrive for the Nasdaq, we do not know…

*** John Williamson, economist at the Institute for Int’l Economics, believes the euro will rise to above $1.30. “That day will come,” he says.

*** Initial jobless claims rose more than expected.

*** The Wall Street Journal raised prices by 33%.

*** Gold fell $1.60, but gold shares – including Newmont and Homestake – rose.

*** Mr. D.P. Marchessini was so annoyed at Warren Buffett that he took out a quarter-page ad in the IHT. “It is difficult to imagine anything more outrageous or more hypocritical,” writes Mr. Marchessini, “than a group of men, whose own wealth is obscene, trying to dictate how much money other people should be allowed to have.” What cheesed Mr. Marchessini off was the public opposition to repeal of the inheritance tax by Buffett, David Rockefeller, Bill Gates’ father and others.

*** Dayak update: The French newspaper, Liberation, has a photo of decapitated bodies lying on the ground. But the Dayaks’ anti-immigration policies seem to have strong support among DR readers. “At least they’re Christians,” said one. “Who can blame them?” said another, adding, “How dare you call them ‘savages!’ But “the kindest thing you can say about the Dayaks,” replied another reader, “is that they are savages.”

*** The Dayaks are, after all, cutting off heads like uncivilized barbarians. What’s wrong with them, anyway? Why don’t they just shoot people in a civilized way? If they did so, they’d barely make news. The confirmed death toll to date is only 469 – scarcely more than a year of murders in Baltimore. (See: “Love Them Dayaks” on the discussion board)

*** Paris is having a late winter. The last few days have been cold, with occasional snowflakes falling. But oh la la – things are hot on the metro! A billboard ad for a new gym shows a stark naked woman, in superb condition. What a town! You’d have to pay good money to see pictures like that in the U.S.

The Daily Reckoning