Getting Smarter

“Ja, we Europeans have it rough,” Kurt Richebacher said to me on Saturday, with a slight smile on his face. “We have to work 35 hours per week, with only 6 weeks off.”

Americans may not work harder than other people, but they undoubtedly work longer. The latest numbers from the Labor Department show that Americans put in more hours than any other group. Since the beginning of the last great bull market, U.S. workers added an entire workweek to their annual total. They now work 499 more hours per year — or about 12 additional weeks – more than Germans

Compared to America, Dr. Richebacher might have added, the Old World enjoys lower crime rates, often better roads, better schools, more extensive public transportation, far higher savings, a positive balance of trade, little debt, and GDP and productivity growth rates equal to or better than the current rates in the U.S.

Despite the comparison, American economists cannot seem to resist criticizing Europeans and giving them bad advice. The European Central Bank, for example, has been chastised for being too cautious. Unlike our rapid rate cutter, Alan Greenspan, for example, Wim Duisenberg, head of the ECB, seems hesitant – as if he was actually concerned with protecting the value of the euro rather than destroying it. The poor Europeans have gotten only one, small ¬ of a percent of interest rate cut, while Americans have gotten 7.

Seven rate cuts are not necessarily better than one, of course. (Here at the Daily Reckoning we have no idea what interest rates should be and would be perfectly happy to let Mr. Market find out for itself.) But we have a hunch that Americans have benefited nor more from rate cuts than they have from longer hours and greater debt.

Readers with short attention spans may want to reduce today’s letter to a simple question: Who’s dumber… Americans or Europeans? In response to that question, we offer both an answer and another guess about the future.

“Ja, the Europeans are stupid,” Dr. Richebacher explained. “They are so stupid they actually believe the American economic myths more than the Americans themselves.”

Dr. Richebacher’s evidence is the U.S. current account balance…or, lack of balance. Europeans’ faith in the U.S. dollar and the U.S. economy is so strong that they are willing to finance them both – with no guarantees. Not even a ‘thank you.’

Instead, Republican economic advisor Lawrence Kudlow appeared on TV and called the European currency a ‘europeso” and suggested that the European Union shouldbe disbanded.

“These foreign fools seed us $155 billion in the preceding quarter and we not only have no gratitude,” writes Edmund McCarthy of Financial Risk Management Advisors, “(and outside certain arcane circles, no idea) and we take then to task for thinking that they have rights on what our biggest borrowers should be able to do in their alleged countries!”

Thanks to the foreigners, Americans can spend money they don’t have.

“They [Americans] have been doing something that’s probably irrational from the point of view of the individual consumer,” commented Dallas Fed governor, Robert McTeer, over the weekend, speaking of the trend he and other Fed governors helped put in motion, “because they all need to be saving more: saving for retirement, saving for college and all that. But we’d be in bad trouble if they started doing that rational thing all of a sudden. We’re happy they’re spending. We wish that they didn’t run up a lot of debt to do it.”

While Americans spend money, Europeans save it. Big U.S. borrowers – notably Fannie Mae and Freddie Mac who, along with the other government-backed debt monger, the Federal Home Loan Agency – sell bonds to gullible Europeans and then use the money to buy American mortgages. Doing so, they have run up debt equal to one- third of America’s GDP.

“We barely even know what credit cards are here in Europe,” continued Dr. Richebacher. “Everyone has plastic bank cards, but there are no lines of credit. They take the money out of your bank account as soon as you spend it.”

American economists consider this lack of credit an economic handicap. Dr. Richebacher considers it a blessing. “This emphasis that Americans place on consumer confidence and consumer spending is a big mistake,” he commented.

Big mistakes have bad consequences. The American economy rests on levels of consumer spending that could only be achieved by increasing levels of debt…enabled by European investors. Any hesitation on either side is bad news for the economy, foretelling collapsing share prices, a falling dollar, further drops in corporate profits, layoffs, and recession..

And thus we come to our forecast:

“At some point in the second half of the year, it is going to become clear that the American consumer is cutting back,” predicted Barton Biggs in June. Perhaps it is becoming clear already. The latest numbers show the growth of consumer spending declining rapidly (though still positive….barely). Savings rates just hit a two-year high…and are rising.

Meanwhile, Europeans seem to have begun hedging against the dollar. The euro has gained more than 10% against the dollar.

Americans and Europeans may both be dumbbells. But they are getting smarter.

Bill Bonner,
London, England
September 6, 2001

on the scene and on the ball…in Europe…

I’m taking the train up to London this morning. As I write, the train is halted at the entrance to the channel tunnel. A half dozen men are walking around outside the train. Dressed in bright yellow safety vests and carrying walky-talkies, they appear to be inspecting the undercarriage of the train – looking for illegal immigrants to Britain.

The operation took about 15 minutes – a waste of time, in my opinion. Anyone who’s so eager to get to London that they’re willing to hang from the bottom of a high-speed train to get it would be an asset to the gene pool.


Well, Ol’ Ferdinand has done it again. He was in the North section of the field yesterday morning….and stock prices went north. The Dow ended up 36 points.

Even so, Cisco closed below $15. Yahoo is now under $11. And Amazon! You can buy all you want for less than $8 a share.

Little by little, day by day, investors seem to be catching on to what a debacle the technology sector really is. And not just the dot.coms. Let’s check in with Eric. Eric, ca va?


Eric Fry reporting from the Paris office:

– I’m in Paris today, fresh from visiting Bill in Ouzilly. His chateau rests in story-book picturesque French countryside – a spot that one would not easily confuse with Manhattan. There are some similarities, however.

– For example, Mr. Deshais, Bill’s gardener at Ouzilly, plucks the ducks clean. Wall Street investment bankers pluck investors clean.

– At Ouzilly, the ducks live well, if not for very long. (The Canard a L’orange was excellent!) But on average investors in America live longer. That may be good thing from an investment standpoint. If Bill’s right, the folks who purchased Nasdaq stocks last year might need another 17 years to see a positive return. (One down – only 16 to go!)

– Microsoft’s exhilarating pronouncement that its business outlook is no worse than previously forecast, rescued the stock market yesterday. The Dow, which had ventured far into negative territory early on, finished the day up 36 points to 10,033.

– The Nasdaq did not quite make it to the plus side – finishing down 12 points. The tech-heavy index now sits less than 120 points above its April lows.

– A few months back, when consumers were buying almost everything in sight, the “do without” list included just a few select items: routers, servers and venture capital investments.

– But today, the list has grown rapidly to include Dow stocks, Nasdaq stocks, cars, cell phones, and hotel rooms.

– During the month of August new cars languished on dealer lots from Los Angeles to New York. Industry-wide, sales fell about 5%.

– Cell phones aren’t selling any better. It seems that even though most of us have two ears, we only need one cellphone, and we’ve got it already. Ericsson, Motorola and Nokia keep taking turns telling everyone how awful business has become.

– Kurt Hellstrom, Ericsson’s CEO confessed to the Financial Times: “We would like to say we saw positive signs, but we don’t. No one can tell when we will see the end of the downturn.”

– Hotel room demand is collapsing, as well. Falling business travel budgets are weighing on room rates, which have dropped to their lowest levels in over 10 years.

– The soft demand for everything from cellphones to Cisco shares seems to begin and end with the sliding consumer confidence. The year over year change in the Conference Board’s Consumer Confidence Index turned negative in November of 2000 and hasn’t looked back since.

– Add it all up and its no wonder investors are having such a tough time finding companies with rising profits. Without profits the stock market forecast is stormy, indeed.

– September is typically a beautiful month almost everywhere in the World. A few years back I started to notice that no matter where I traveled and no matter how awful the weather might actually be in that location, a local resident would be quick to note, “But you should see it here in September. It’s beautiful.”

– Wall Street denizens can make no such claim. October is infamous for its crashes, but September is the cruelest month of all for stocks. According to Ned Davis research, since 1900 stocks on average fall about 1% during the month. By comparison, stocks break even in October.

– “No two markets will ever repeat in exact symmetry,” observes, “but equating the Nasdaq top to the top in the Nikkei reveals that the Nasdaq has already plummeted to the equivalent of the first post crash bottom of the Nikkei.”

– Problem is, the first post-crash bottom was not the last. If the Nasdaq continues its eerily similar trajectory, it has much farther to fall.


Bill in London:

*** An article in the Financial Times tells us how business is picking up in East London at a company called Shields Environmental. The company dismantles, recycles and destroys unwanted technological garbage.

*** Lately, it’s been cleaning up the unsold inventories of telecoms – as one telecom operator has gone bust, on average, every six days throughout the last six months. So far, nearly $4 trillion of capital value has been wiped out in the telecom sector worldwide….and more than $1 trillion of bank loans and junk bonds are in jeopardy.

*** This must be what has caused Dallas Fed government Robert McTeer to change his tune. Early this year, McTeer urged consumers to “buy an SUV” to keep the economy humming. Now he urges people to “use their cell phones more and upgrade.”

*** More below…

The Daily Reckoning