Is the Pain Over?

“We Christians love to celebrate the resurrection, but you cannot have a resurrection without a crucifixion.”

-Pere Marchand, in his Good Friday sermon

The ‘Winter of Woe’ is over. It is a new season. But is the pain of lower stock prices and a slowing economy really all behind us? Investors think so. Analysts say so. The financial press has announced the end of the non-recession and the resurrection of the bull market. Today’s letter takes a contrary view.

Since the vernal equinox, the stock market has shown signs of new life. The Dow actually hit its most recent ‘bottom’ on the last day of winter, March 21st. Since then, it is up 16%. The Nasdaq has risen 15%. The winter is over, investors tell themselves; get ready for the warm summer: sun, baseball and mosquitoes.

The weather may be hard to forecast, but the seasons are not. The earth’s movements relative to the sun are regular and cyclical. How nice it would be if the seasons of greed and fear, boom and bust, comedy and farce, were similarly predictable. You could mark your calendar – ‘buy’ in March, ‘sell’ in October.

Episodes of greed are followed by episodes of fear. But not as night follows day – regularly and predictable, on a 24 hour cycle. Instead, in the markets, one thing leads to another… as in love affairs and traffic accidents… but you can never be sure what will happen, or when.

The financial weather reports these last few weeks have been encouraging. Stocks have risen on the news that GDP is still positive, and consumers are still borrowing and spending.

The “‘new paradigm’ optimism about the U.S. economy remains very much intact,” writes Dr. Kurt Richebacher, “just as over-confidence in Mr. Greenspan’s ability to fine tune economic growth does. Nor do we see signs of outright fear in the marketplace. There is definitely no pessimism.”

But, “let us take a closer look at consumer spending,” Dr. Richebacher urges. “From September 2000 through January 2001, real disposable income of private households was just flat. Higher spending had to be met by running down savings – that went negative by about $70 billion.”

Investors and analysts are delighted that, so far, consumers have shown only a modest inclination to cut back on spending. As mentioned above, the savings rate rose only from minus 1% in February to minus 0.8% in March – an improvement of only 2/10ths of one percent. But Dr. Richebacher argues that “there has been far more consumer retrenchment than the aggregate figures seem to suggest.”

“Real income growth has turned abysmal,” he explains. “Consumer price inflation ran at 4.4% annual rate from December through February. Just to maintain his spending, the consumer has to borrow at the expense of saving.”

And as also mentioned above, consumers are borrowing more on credit cards – the most expensive form of credit – a trend that cannot be sustained. The consumer, Dr. Richebacher concludes, “appears close to bankruptcy.”

Dr. Richebacher compares the late ’90s to the late ’20s:

The two periods, he says, “share five unconventional features: (1) a craze about a new technology; (2)free rein by the Fed to uncontrolled credit growth; (3) inordinate capital gains in a booming stock market that encouraged and facilitated a rampant consumer borrowing and spending binge; (4) an effective, extraordinary surge in consumer spending; and (5) a sharply higher participation of the public in the booming stock market.”

Of these, consumer borrowing and spending was the most important element of the ’27 to ’29 bubble, Dr. Richebacher maintains: “The overriding source of growth since 1927 was consumer spending.” Installment sales began with automobiles and then spread throughout the entire consumer sector. “By 1930, installment credit financed the sales of 60- 80% of all consumer durables,” he says. “In short, it was the invention of consumer credit that made the boom of the 1920s so big.”

In terms of consumer credit and spending, however, the late ’20s were no match for the late ’90s. “The excesses and imbalances of the 1990s are in every respect many times worse than those in the 1920s. Two facts illustrate: in the 1920s, the U.S. economy had a sizable current account surplus, rather than a huge deficit as it has today. And the savings rate was not only a positive number, but a substantial one.”

Dr. Richebacher sees the future in Newtonian terms. Rather than cycles or seasons, he sees causes and effects:

“Logic and Austrian theory suggest that the severity of recessions is broadly proportionate to the magnitude of the excesses and maladjustment that developed during the boom.”

“Accordingly,” he perseveres, “the inevitable recoil will be inherently be a lot worse…. The U.S. economy is in the early stage of a recession that will prove unusually severe and long.”

Your correspondent,

Bill Bonner
Paris, France
May 7, 2001

*** Friday’s unemployment report came in worse than expected…again. But the stock market shrugged off the bad news…again. Employers trimmed 223,000 non- farm jobs from their payrolls in April, boosting the unemployment rate to 4.5%, from 4.3% in March.

*** Not the least bit troubled by the news, the Dow raced ahead 154 points, and the Nasdaq tacked on 45. For the week, the Nasdaq advanced 5.6%.

*** Precisely characterizing the new-and-improved mood on Wall Street lately,’s Igor Greenwald writes, “Unemployment on the rise? Maybe that just means folks will have more time to shop. Party on, dudes.”

*** When stocks get a hankerin’ to head higher, dear reader, they’re not about to let bad news – nay, not even horrible news – stand in the way.

*** But even if the stock market blithely dismisses such news for the time being, the economy may not be able to ignore it so easily. “The United States economy lost more jobs in April than it had at any time during the last 10 years,” writes the New York Times’ Gretchen Morgenson. “Equally ominous was the rate of employment growth as measured by a survey of households; for the first time in a decade, it fell into negative territory.”

*** Morgan Stanley Dean Witter chief economist Stephen S. Roach told Morgenson “In the face of rising joblessness, consumer confidence gets hit. That will take personal consumption growth well below the 3 percent pace we’ve been cruising at during the last couple of quarters.”

*** Investors seem to be living in a dream world. They expect rates of return that are very unlikely. And, they think unemployment can rise with no effect on consumer spending. When the great bull market of ’82-’00 began, consumer debt equaled 70% of disposable income. Now, it is more than 100%. Debt hasn’t been a problem – there were plenty of jobs for everyone in the boom years. But now that unemployment levels are headed up – people are finding it harder to keep up with their debt payments.

*** Mortgage delinquencies are at their highest level since ’92. Personal bankruptcies are up 17% over last year. And credit card debt is growing… even as more and more people fall behind on their payments.

*** Credit card debt is the most expensive credit available – why would people take on more of it, especially when unemployment is rising? Answer: because they have to. Consumers are using credit card debt to help make ends meet.

*** And they are also cutting back on spending. The savings rate rose from minus 1% in February to minus 0.8% in March. Not exactly Japanese-level. But it could be an important harbinger of things to come.

*** Chip stocks may be bouncing, but worldwide chip sales definitely are not. The Semiconductor Industry Association reported last Wednesday that chip sales in the month of March slipped once again, expanding the industry’s relentless slide. March chip sales totaled $14.4 billion, seven percent lower than the $15.4 billion recorded in February.

*** James Padinha is one of a growing throng of economic forecasters dusting off the “I” word: Inflation. It strikes Padinha as “odd” that in five months the Fed went from being concerned about “heightening” inflation risk to not being concerned at all. He writes, “Last month, we found out that average hourly earnings are growing at 4.3% year- over-year, the fastest pace since May 1998. We also discovered that the Cleveland Fed’s median CPI is rising at a 3.4% year-over-year rate – its fastest growth since February 1996. Now add the knowledge that the funds rate has dropped by two full percentage points in less than four months, that real short-term interest rates are lower than they have been at any point since the spring of 1994, that the M-2 measure of the money supply is already growing at 8.2% (on a year-over-year basis), and then answer me this: Should the Fed be (a) less concerned about inflation than it was in November, (b) just as concerned, or (c) more concerned? I’m coloring in the (c) oval on my answer sheet, and I can probably even talk myself into changing it to (b) if I see the smart girl in front of me picking it.”

*** Northern Trust chief economist, Paul L. Kasriel, concurs with Padinha, more or less. Concerning the latest slew of interest rate hikes, Kasriel writes, “Alan Greenspan is firing live ammunition now as opposed to the blanks he was shooting in the early 1990s…Rapid money growth today is going to push inflation higher, which ultimately will force Greenspan to reverse course and raise interest rates. That will be the economy’s coup de grace.”

*** Fifty-five e-companies went up in smoke during the month of April, the second-highest number ever, according to a report from

*** As only 44 such companies went out of business the month before, it seemed momentarily, as though the worst had passed. “Many people had decided that March was the end of the bad news,” says Tim Miller, president of Webmergers. “But with April’s skyrocketing numbers, you have to tell them: Not so fast.”

*** Once again, labor and management are exploiting the capitalists: “The value of [Capital One’s CEO] Fairbanks options increased by about $160 million in 2000,” writes’s Andrew Kashdan, keeping an eye on the insiders for us. “For perspective, the net income of the entire company was up only $106 million year-over-year. Why single out Capital One when similar situations occur with regularity in the corporate world? Well, the last time we checked in with Capital One, we found the coincidence of a large share-repurchase plan along with executive options that would expire if the stock price target was not met.”

*** “Twenty years of lousy returns doesn’t change anything,” writes the steadfast John Myers, holding firm to the belief that gold remains a worthy dollar hedge. “After all, consider what the greenback had going for it:

– Interest rates on long bonds that fell from 17% to 5%.

– A Cold War won by the United States.

– Oil supplies guaranteed for a decade after the war with Iraq.

– A record-breaking bull market in stocks.

– One Asian debacle followed by another…almost outdone by a euro mess.

Basically every good thing that could happen to the dollar did. When people say, “‘Things couldn’t possibly get any better,’ they probably won’t.”

*** “We’ve been waiting a long time for this global warming,” joked my neighbor Patrick on Saturday night. We were standing in front of an open fire in the dining room, chatting about the favorite subject of local conversation, the weather. It is unusually cold and unusually wet in France this spring. Rivers have overflowed, flooding towns in the north of the country. In our area, the ground is so soggy, Mr. Deshais has been unable to work in the garden for the last couple of weeks. So he turned his attention to animals. He brought in two dozen ducklings…and put them in the chicken yard. He also set up a home- made incubator and managed to hatch about 15 little chicks.

*** But at Saturday’s dinner party, an obnoxious guest seemed genuinely annoyed: “I don’t understand you Americans,” he said to me, “you have all these environmental groups and you seem to care about the environment as much as anyone. But you still pollute the atmosphere at twice the rate per person as in Europe. And your president won’t even consider cutting back. We’re all going to end up living on houseboats.”

*** He was referring to the use of fossil fuel and how the added carbon dioxide in the atmosphere may be boosting temperatures, causing a melt-down of the polar ice caps. “Hold on,” replied Patrick, a no- nonsense farmer, “this global warming idea is just a hypothesis… Besides, I like houseboats.”

*** I returned from Madrid on Friday night. I had hoped to give you some notes from the city, but I had a very hard time connecting to the Internet – and besides, I was there such a short time, I had very little to report. All I could tell was that the city is booming. Is Spain ready for a Daily Reckoning? I don’t know, dear reader, but I hope to find out.