Immaculate Misconceptions

Big Al Greenspan, who John McCain suggested appointing to head the Fed not only for life…but for the afterlife, too…testified before Congress yesterday. Greenspan may not be able to walk on water, but it is widely believed that he can multiply the loaves and fishes.

And yet, since Mr. Greenspan has been in charge of the world’s most powerful banking cartel, the loaves and fishes have multiplied at a rate no different than before he was born. This suggests to me that perhaps his conception and subsequent birth were achieved in the old fashioned way. It is still the same old story, in other words. A kiss is still a kiss.

Dr. Kurt Richebacher recalls a conversation from the early `70s in which Greenspan told a friend how he would deal with a cyclical economic slowdown. He expected one to occur at the end of the `80s when the Kondratief cycle was due to turn down, and he hoped that he would be Fed chief at the time. “He was sure,” reports Dr. Richebacher, “that he could overcome the deflationary impact of the cycle by injecting sufficient credit into the system.”

Faced with the Asian meltdown…the collapse of LTCM…and then the threat of Y2K…to say nothing of the bottom of the Kondratief cycle 10 years ago…Mr. Greenspan has had plenty of opportunities to test his ideas in the real world. Credit has grown since 1996 at four times the rate of the economy as a whole. That is to say, the loaves and the fishes are about 25% more abundant than they were in 1996. But there is twice as much credit.

Greenspan said yesterday that his goal was monetary expansion in line with GDP growth. The target for M3 was 2-6%. But over the last 13 weeks, M3 has gone up by over 12%. And in the last months of 1999, M3 shot up at 18.5% — the fastest pace of monetary expansion in a decade.

Federal Reserve credit rose 63.7% in the latest three months annualized, the amount of currency in circulation rose 58.6% and the U.S. Monetary Base gained 27%.

Not coincidentally, the stock market’s incredible performance since 1996 has been in line with credit creation. In 1995, a typical baker or fisherman had to work about 35 hours to buy a share of the S&P 500. Now he has to work about 110 hours — about three times as much. The loaves and the fishes have gone up modestly, but the capital values of the firms that produce them have skyrocketed. That is the effect, I might point out, not of one who walks on water, but of one who walks on land — and gooses up the supply of money and credit.

The real excitement has been in the shares of companies who have never produced a single fish nor loaf. The biotech firms, for example, think they can get the little fishes to grow faster and reproduce themselves more rapidly. There are also the Internet and other high tech companies vain enough to think that by reducing the cost of disseminating information they will boost the productivity of bakers and fishmongers by quantum leaps.

The Nasdaq, where these promises of superhuman productivity and growth tend to be marketed, has risen 1,000% since 1995. In the last quarter of ’99, the Nasdaq chart went vertical — prices seemed to go straight up. Too much leavening has turned a small loaf into an immense confection which is alarmingly tall and unstable.

“The U.S. speculative bubble should gradually top out during the first quarter of 2000,” writes Strategic Investment’s Michael Belkin, “as the Fed attempts to engineer a soft landing.”

Greenspan’s reputation depends on this soft landing. If he pulls it off, in the minds of many people, he will remain divine. If he fails, he will be a bum.

But yesterday demonstrated how difficult it will be. The markets are not cooperating. Greenspan has issued warnings and threats. Interest rates have been hiked three times. Now he tells us that there will be more. His warnings now produce perverse results — record prices in the most speculative parts of the markets. He threatens higher interest rates, and bonds go up, not down. He may soon be forced to take more resolute action. Or else he will be blamed for doing nothing to prevent the coming crash, bear market and recession. Even worse, he’ll be blamed for causing it.

The stakes are high. There was more to Greenspan’s conversation in the `70s. “Greenspan ended the conversation,” writes Dr. Richebacher, “by saying that should he fail to achieve his objective, there was a chance that when the cycle did end, the resulting Depression would be by far the biggest the world has ever known.”

Whatever happens, it will be interesting. Regards,

Bill Bonner

Ouzilly, France February 18, 2000

*** “Greenspan warns of further rises in interest rates,” said the headline in today’s “Financial Times.” “Nasdaq rallies”…”U.S. Treasuries Unfazed…”

*** Hmmm…looks like the markets are not taking Alan Greenspan very seriously. The Nasdaq actually rose while Greenspan was speaking. It went up 121 points to a record high — on record volume.

*** “Hooray!” was the comment on, reflecting the attitude of those very much in the bull, rather than beyond it. Greenspan’s small rate hikes are now regarded contemptuously by Bubble traders.

*** And by the more savvy bond traders, too. Effective interest rates have actually gone down, not up, because of Greenspan’s timid approach to Bubble pricking.

*** The bond market is anticipating a business slowdown. The stock market seems to be hinting at the same thing. Retailers are getting hit pretty hard. Walmart, the world’s biggest retailer, fell $3.81 yesterday. It has fallen nearly a third in the last four months. Sears is down 58%.

*** The Dow itself fell 46 points yesterday. It is in a clear bear trend, below its 200-day moving average.

*** But the Nasdaq Rocket Chips appear unstoppable. I guess Nasdaq investors don’t read “USA Today.” They seem unaware that the moment of truth has arrived. Heck, it arrived and then pulled out of the station, leaving these guys standing on the platform. There were 359 new highs on the Nasdaq yesterday, against only 94 new lows. Biotechs rose a spectacular 8.65%. Biotechs are the latest and greatest of the New Era fads.

*** I’m still mourning for poor old Bruno, the 16th century crank who was burned at the stake. I think of him when I get letters from Internet zealots — breathlessly telling me about the New World which the Web makes possible. They are so sure that they have the TRUTH…I think they would burn me at the stake if they could.

*** Why did voters in Zimbabwe say “No” to Mugabe after 20 years of misrule? Looks like they just got fed up. Inflation is running at 55%. There are shortages of all kinds. Exports are down 70%. Phones don’t work.

*** Zimbabwe is the same country that grew at 5% a year from ’65 to ’79 when Ian Smith was running the place. In the politics of racism and anti-imperialism that dominated the period, Smith’s white-led Rhodesia was a leper nation, isolated from the rest of the world. Then Mugabe took over with the world’s blessing and billions of dollars from the international community. Since then the standard of living has declined by 80%. And politicians who posed a threat to Mugabe had a curious tendency to die in auto collisions — usually with Army trucks.

*** Santa Clara County, CA, the heart of Silicon Valley, suffered a loss of population for the first time in five years. New Era entrepreneurs say the place has gotten too expensive for start-ups.

*** Romance is not dead. Several people have called my attention to a TV show that aired a couple of days ago: “Who Wants to Marry a Millionaire?” The answer: apparently a lot of people. Vulgarity and Festive silliness reached a new high as life’s most sublime and sacred partnership was turned into a circus for 22 million viewers. Coming Soon: The Wedding Night, rated XXX. And then — Divorce Court, inappropriate for children. A warning: people who marry for money get what they bargain for.

*** A DR reader explained yet another way in which the Information Age is a fraud. A sales rep reports that computer technology allows her employers to micro-manage her activities. Instead of being free to handle her territory as she sees fit, based on personal contacts with her clients, every move is now controlled by a remote, central computer. The Information Age was supposed to liberate people by providing them access to key information. In this case, it has enslaved them.

*** Agence France-Presse reports that “An extreme right- wing Chinese group has declared cyberwar on Japanese web sites in a bid to force Japan’s `mad dogs’ to face up to wartime atrocities committed in China.” The group claims to have attacked 30 Japanese sites in the last three weeks.

*** Another DR reader sends this: “What a hip town! Is this true? Of the 27 candidates who entered Baltimore’s Democratic mayoral primary, six turned out to have arrest records, and three had filed for bankruptcy. One was arrested for burglary after a policeman recognized her during a TV appearance, and another has been convicted of larceny, shoplifting and impersonating a police officer. One former city councilman falsely claimed to have a college degree, while the sitting council president had his car repossessed and was sued by unpaid creditors. When the primary was eventually won by one of the candidates not under some cloud, the `Washington Post’s’ headline read, “White Man Gets Mayoral Nomination in Baltimore.”

*** Yes, it’s true. Baltimore is a hip town. And racism still sells newspapers.

The Daily Reckoning