Getting And Spending

“The World is too much with us; late and soon,

Getting and spending, we lay waste our powers;

Little we see in Nature that is ours;

We have given our hearts away, a sordid boon!”

William Wordsworth

“The attack IS a great blow to an already vulnerable economy,” writes my friend Martin Weiss. “As I have been telling you for many months, the world economy was ALREADY teetering on the brink even BEFORE yesterday’s attack.”

On Tuesday, it got a shove.

Everything changed. But everything remained as it already was. Martin explains:

“Even as the hijacked airlines flew mercilessly toward their targets, a flood of red ink had wiped out over six years of TOTAL accumulated profits of ALL companies listed on the Nasdaq exchange (see last issue of Safe Money).

“Even as the upper floors of the World Trade Center burst into flames, America’s largest money center banks had the greatest exposure ever to derivatives – high risk bets that are notoriously vulnerable to unexpected events (according to the latest reports by U.S. General Accounting Office).

“Even as the 110-story twin towers imploded into a great cloud of dust and debris, the world’s stock markets had already been tumbling for 18 months or more. The Nasdaq had lost about two-thirds of its peak value, with over $5 trillion in wealth destroyed. The German Neuer Markt, the equivalent of our Nasdaq, had lost roughly NINE TENTHS of its value. The German DAX, the counterpart of our Dow Jones Industrials, was down about 45%, the Nikkei down close to 75%.”

But now, for the first time, the fragility and vulnerability of the U.S. has been exposed to the entire world.

People will say all sorts of mad things…that stocks will go up because it is their patriotic duty…or that they’ll go up because wars always make stocks go up…or that the economy was ready to turnaround anyway. And who knows…maybe they will be right.

But is it not likely. For the economic picture remains nearly the same as it was before, with one important exception: consumers have suddenly grown cautious.

Americans may proclaim their faith in the system. They will stand with moist eyes, waving the flag and reciting their newfound sense of national unity. They will affirm their belief in American capitalism and their commitment to buy-and-hold investing.

But they will not buy new cars. Nor take luxury vacations. Amid the images of the dead and dying…of bodies falling 100 stories…and mass destruction at the very heart of American capitalism…

…getting and spending, at the margin, suddenly seems less important.

Consumers will wonder if all their frantic efforts to build wealth during the boom years was worth it. They may recall an article in last week’s U.S. News & World Report. The article said that people are ten times more likely to be depressed today than people born two generations ago. “Though the quality of life is much improved since WWII,” the authors elaborated, “the number of people who consider themselves happy remains flat.”

What makes people happy? “Strong marriages, family ties, and friendships…” say the authors.

Rather than spend an extra 15 minutes working at the office…people may decide to spend the time with their families. Rather than upgrade their home computers… they may make do with the one they have until they are feeling more confident.

Consumers are becoming hesitant. Not because they believe the economy is sinking…but just because spending money has suddenly gone out of fashion. Something big has happened that is beyond reason… striking at the deep, dark “rag and bone shop” of the human heart.

Alan Greenspan blamed the economic downturn on what he called a “breach of confidence.” For him and many economists, the challenge in America was merely to maintain consumer spending. As long as consumers continued to spend, they reasoned, the economy would continue to grow.

The real problem was not a lack of consumer confidence, but a surfeit of it. Consumers developed, as Dr. Richebacher put it, “an unrealistic and unsustainable excess of expectations in future prosperity…built up in the past boom years.”

The more the economy boomed, the more confident they became, and the more money they borrowed and spent. But even as they felt more and more confident, debt loads piled up like skyscrapers, leaving them more and more vulnerable to shocks. Now that they’ve felt the earth shake…can there be any doubt that they will turn more cautious?

“This is NOT the end of the world,” writes Martin Weiss. But it feels like the end of an era.

Bill Bonner
September 13, 2001

The stock market is closed again today. Never in the last 50 years has the market been closed for two days in a row. Nor in the last half century has America faced a similar financial situation.

But what will come of it? Boom or bust?

“Horror struck investors seek havens of gold and bonds,” reports the Financial Times.

“Struggle to stay out of recession grows tougher,” says the Houston Chronicle. “Shock waves rattle the economy,” says another paper.

“I feel like there is so much human tragedy, you do not want to be thinking analytically or rationally about this,” the NY Times quoted James Glassman, chief domestic economist for J.P. Morgan Chase. “But we know that soon we are going to have to think about the economy.”

Composing himself, Mr. Glassman ventured a guess: “This is going to make America, and the civilized world, be defiant…People are going to see this as a threat to the civilized world, and good things are going to come out of it.”

Perhaps he guessed wrong. More below. Over to you, Eric:


Eric Fry writing from New York:

– “We are not only going to rebuild,” said New York mayor Rudolph Giuliani, “we’re going to come out of this crisis stronger than ever before – emotionally stronger, politically stronger and in particular, economically stronger.”

– The Mayor may well be right, but the price of this future strength is steep indeed.

– Many people that I know had relatives, friends, or friends of friends who worked in the World Trade Center and remain unaccounted for.

– The brother of a friend of mine placed a call Tuesday morning from one of the uppermost floors of the World Trade Center to say that he was trapped. No one has heard from him since.

– Another friend of mine said that his son-in-law of only two months called shortly after the initial explosions to report that there was smoke everywhere and that he was lying on the floor to avoid it. No one has heard from him since.

– Each account of a life prematurely snuffed out is gut- wrenchingly tragic.

– Suddenly, $80,000 Porsches and $1,000 Vuitton purses seem embarrassingly frivolous. Even buying Starbucks cappuccinos seems an almost perverse extravagance.

– A decade of uninterrupted prosperity may have made us a little too fat and happy. Conspicuous consumption may well take a breather while we focus on more pressing national priorities, like making sure our citizens never again find themselves having to chose between jumping from a 100-story building or burning to death.

– Addison Wiggin e-mailed me Tuesday to say, “This [attack] couldn’t have come at a worse time for the economy, for the market or for America as the remaining global power.”

– Addison may be correct, at least for the near term. But this tragedy may have occurred at exactly the right time…if there is such a thing.

– “Crisis mobilizes the commitment of human energy,” writes’s Donald Luskin. “If America’s leadership and the American people respond constructively – as they always have the past – than from this crisis could emerge significant opportunities that could propel the economy and the markets into an important new growth phase.”

– Luskin continues: “Forgive me if this seems mercenary and light of Tuesday’s loss of lives, but history shows that cataclysmic events like this had always been reflected in powerful stock market moves.”

– The powerful move Luskin expects is up. He cites as historical precedent the stock market rallies that followed close on the heels of the Cuban missile crisis in 1962, the Kennedy assassination in 1963, and the Gulf War in 1991.

– Near term, anything could happen in the world’s financial markets. Indeed, everything could happen. In other words, volatility will increase throughout world markets.

– On Wednesday, for example, many Asian stock markets dropped precipitously. Hong Kong’s Hang Seng index fell more than 8%, while Japan’s Nikkei Index fell more than 6% to an 18-year low.

– But over in Europe, most markets rebounded from early morning losses to post modest gains. The German DAX Index rose nearly 1% and the U.K.’s FTSE 100 Index climbed 2.3%.

– Conversely, gold yielded much of the large gains it achieved on Tuesday. Somewhat surprisingly, most gold stocks closed below the price levels they held prior to Tuesday’s disaster.

– The lesson in all this is that volatile markets are a lousy place to try to make a dollar. Most investors would do well to stand aside for a couple of days. Yesterday, I telephoned Bill in Paris to exchange thoughts about what might happen next in the U.S. markets. After about twenty minutes, we concluded beyond a shadow of a doubt that when the U.S. market reopens it will either go up or down.

– But we also concluded that the near-term trading action probably matters very little. Rather, investors ought to focus on the financial market trends that already were unfolding prior to Tuesday’s attack. U.S. stocks, for example, have been floundering for more than a year. They will likely continue to flounder. The U.S. dollar has been falling since July. It will likely continue to fall.

– Conversely, bullish trends remain in place for oil,
natural gas, the euro, gold, and selective foreign
stocks like Gazprom.

– America will rebound, but not in one day. In the meantime, most of the best investment opportunities may not trade on the Nasdaq. DR Blue Investment Advisory has identified many such opportunities in the last few weeks. Stay tuned!


Back to Bill…

*** Christoph Amberger called me yesterday. He heads up Agora’s Taipan Group. He told me he’s organizing a drive to help those who are putting their lives on the line to save the victims of the Manhattan disaster. “Apart from our team members’ individual contributions,” says Christoph, “the Taipan Group is kicking in US$5,000 to get the ball rolling.”

*** There is a chance of panic selling on Wall Street when markets finally reopen. There is also a chance of panicky non-selling.

*** “If investors choose panic selling [when markets reopen]…[it] plays into the hands of terrorists and is exactly what they hope we’ll do…” writes Hokanson Capital Management, resisting a return to rational, analytic thought.

*** Besides, “savvy investors will recognize the opportunity created by such a panic, and great future wealth will be created – at the expense of today’s sellers. There is no greater message of strength, solidarity and resolve that we can send both terrorists and the world than to reflect those values in stable or higher financial markets when they reopen.”

*** What kind of investor would make his most important financial decisions this way…in an effort to send a message to unknown people in unknown places? It is madness, of course, but madness is what makes markets – at least for a while.

*** There is madness beyond the financial markets, too. The plate glass window of Baltimore’s only Afghan restaurant has been smashed. And there is surely more madness to come.

*** In markets people get what the deserve…not necessarily what the expect…

In politics people may get neither.

The Daily Reckoning