Last Man Standing


We had asked Lord Rees-Mogg what he thought of Alan Greenspan’s speech in Wyoming.

We hate to bring it up again, dear reader. You must be getting tired of hearing about it. But we can’t resist. Here at the Daily Reckoning we are connoisseurs of absurdity. And here we have the man who – in an unusually lucid moment – described stock market investors as ‘irrationally exuberant’ in ’96, claiming he could see nothing untoward 5 years later, even with the Dow 100% higher. He would not know a bubble if it blew up in his face, he seemed to say; he would have to wait and check in the mirror for bruise marks.

And even if he had been able to spot the bubble expanding, the Fed chairman continued, he would not have been able to find a pin or even to duck. The hundreds of economists at the Fed were powerless, "confronted with forces that none of us had personally experienced… aside from the recent experience of Japan, only history books and musty archives gave us clues to the appropriate stance for policy."

In today’s letter, we revisit our Fed chief. We do so partly for the pure baroque mischief of it – like offering an immensely fat person a second helping of dessert – and partly because we have an investment insight that might be worth sharing.

You see, we have come to believe that Alan Greenspan is one of the last of the New Era heroes. As long as he still stands, we think, the delusion of greater wealth through greater borrowing stands too. Yesterday brought news that the current account deficit hit a new record in the second quarter – internationally, Americans continued to spend more than they earned – $130 billion more. And, as reported above, consumers stood in line to borrow even more money on their homes – even as mortgage delinquency rates hit new records.

But the last man standing – the only member of the ‘committee to save the world’ triumvirate still in office, the Caesar of central banking – cannot last much longer.

And now the pundits are edging his way, golden daggers in their hands. Paul Krugman in the New York Times… Abelson in Barron’s…they’re escalating their attacks, from criticism to open contempt.

When Greenspan’s reputation gives way…we think…so will the dollar, and the consumer. Yesterday, the price of gold rose to $320. We’re willing to bet that when the bubble in Greenspan’s reputation finally bursts, many more people will want to trade 320 of the chairman’s paper dollars for an ounce of gold. Then, it might be too late.

The photo in today’s Daily Telegraph shows the titan of central banking looking a little tired. Even an hour soaking in his bubbles does not seem to be enough. Speaking before Congress must be a wearying job, of course. Neither Congresspersons nor their many apparatchiks are likely to understand what he is talking about. Of course, the chairman himself may not know what he is talking about – that was the implication of his testimony which, in the little bits reported in today’s paper, made absolutely no sense…maybe he is becoming confused. But absurdity takes energy. The Fed chairman rested his chin against his arm, as if he was running low.

The minutes of past meetings of the Fed’s Open Market committee reveal a surprisingly more confident and energetic chairman. In September ’96, for example, Mr. Greenspan told his fellow central bankers: "I recognize there is a stock market bubble at this point." Then, referring to a suggestion that margin requirements be raised to dampen speculation: "I guarantee that if you want to get rid of the bubble, whatever it is, that will do it."

What became of these insights? What became of the Alan Greenspan of that era? He is no Volcker; the former fed chief was made of sturdier stuff and was willing to go against the mob. Greenspan bent.

The Fed chief already had re-invented himself to suit his ambitions. Had not the gold-buggish Ayn Rand devotee remade himself into a the greatest paper-money monger the world had ever seen…increasing the supply of dollars more than all the other Fed chiefs and U.S. treasury secretaries combined? Had not the man who once wrote that gold was the only honest money already betrayed his own beliefs as well as the nation’s currency?

Now what can he say…now that the only thing still keeping the world economy growing is the willingness of the poor, hapless consumer to keep ‘extracting equity’ from his home – that is, going deeper and deeper into debt – in order to continue spending? Can Greenspan admit that he has done the nation a great disservice… allowing the debt bubble to expand, wafting the hot air of ‘productivity miracles’ into it…and turning up the gas with below-market interest rates? Or will he try to keep the consumers borrowing even more – as the Japanese did – with still lower rates and even more confident hokum? "He’ll end up as the most hated man since Herbert Hoover," continued Lord Rees-Mogg over dinner. "He gave America the ‘Clinton Boom.’ Clinton is gone. But Greenspan is still there. He’ll be the one left holding the bag."

Your correspondent,

Bill Bonner
September 13, 2002

On television this morning – which was unavoidable in the hotel breakfast nook – an analyst described Greenspan’s testimony to Congress. He wondered how the Fed chief – who had lured the entire nation into an excess of borrowing – could now complain about federal deficits.

"Greenspan’s Job Grows More Difficult," headlines an AP report.

Poor Alan has stayed too long at his post…his errors are catching up to him. More below…

Even the press is beginning to notice. "Japan and US, two popped bubbles," reports a headline from CBS Marketwatch. "Debt Bubble," says the San Jose paper. Loan delinquencies are at an 8-year high. The U.S. current account deficit just hit a new record in the second quarter – $130 billion. And Alan Greenspan, looking weary, warns Congress against overspending. Household debt, including mortgages, rose by more than 100% since ’91, to just under $8 trillion. Add business and other debt and the total is around $24 trillion – or more than twice U.S. GDP.

Eventually the consumer will break down under the load, we keep saying. But eventually always seems to come long after we think it should. Most figures, for example, show the demand for mortgages has reached record levels. Consumers may already have more debt than is good for them. But the poor turnips are still asking for more. Well, Mr. Market, go ahead…give it them…good and hard!

Eric, we understand that the news from Wall Street yesterday was not good. Details, please…


Eric Fry, in New York City:

– The weather in Manhattan yesterday was sunny, crystal clear and beautiful. It was so clear, in fact, that the red lights and minus signs on the illuminated ticker tape sign at the corner of Wall and William St. seemed more brilliant than usual. The green lights and plus signs probably would have seemed brighter than usual as well, but I never saw any.

– The Dow cascaded 201 points yesterday to 8,379, while the Nasdaq dropped 2.7% to 1,279. The dollar also dipped a bit, as gold jumped $2.30 to $320.40 an ounce. In other words, anxiety is visible in the financial markets.

– Nowhere is anxiety more visible – we would guess – than in the Kozlowski household. "Dennis," as his cellmates like to call him, used to be the CEO of Tyco International, the GE-wannabe that never quite was. Yesterday, the New York State Supreme Court indicted Kozlowski for "larcenous acts" worth tens of millions of dollars. Kozlowski did not actually go to jail…yet. But he did appear in court wearing handcuffs and the judge did set bail for him at $100 million dollars. The former CEO remains free, however, until after a court hearing next Thursday.

– Hey Dennis, it was fun while it lasted, and no one can take THAT away from you.

– There’s an old Wall Street joke that goes, "What do you call a losing trade?"

Answer: "A long-term investment."

– As the stock market drifts ever lower, many folks – mutual funds included – find themselves holding almost nothing but "long-term investments." Most folks will simply sit on their losses and pray for a rebound. (The agnostics among them might take to wearing a rabbit’s foot or looking for four-leaf clovers).

– But a lot of investors are starting to cash in their chips, or at least some of their chips. Investors yanked a record $52.6 billion out of equity mutual funds during the month of July, pulling an astounding $1.3 billion out of Fidelity Magellan Fund alone.

– And in a classic case of tail wags dog, when mutual fund investors withdraw their cash, mutual fund managers have to sell stock to raise money, whether they want to or not. This forced selling can, and often does, push share prices lower, which leads to even more redemptions and therefore more selling. This is not a pretty picture.

– In the olden days of the 1980s and early 1990s, mutual funds used to hold significant cash positions with which to meet redemptions from panicky investors. But as the bull market of the 1990s progressed, investors came to believe that they should only panic about when to buy MORE stocks – never to panic about selling them.

– Mutual fund managers, therefore, abandoned the practice of holding large cash positions. Cash was for old fogies and idiots. Everyone knew that investing every available cent in the stock market was the best way to produce big gains.

– Unfortunately, the downside of the mutual fund industry’s overconfident imprudence is now in full flower. Cash levels at mutual funds are near all-time lows. At Fidelity Magellen Fund, for example, cash represented only 0.5% of its assets as of July 31, compared to 3.2% one month earlier.

– What does all this mean? Best case: Mutual funds don’t have the "scratch" to do much buying. Worst-case: If dejected mutual fund investors start to redeem their shares en masse, the funds will become forced sellers of stock into a falling market.

– One hedge fund manager I know told me that the mutual funds have been conspicuously absent from the day-to-day trading in the stock market.

– "About the only trading activity in the market these days," he says, "is from the hedge funds trading back and forth amongst themselves. The mutual funds aren’t active because they’ve got no money. They’re seeing nothing but redemptions.

"So that leaves the hedge funds, and they all seem to be working on the ‘you-have-to-make-money-now’ model." In other words, the hedge funds are trading actively because they’re under so much pressure to make money each and every month. All this trading activity and volatility creates a lot of "noise" in the stock market. And that noise can be quite distracting. But most successful investors seem to ignore the noise, as they follow the siren song of "buy low, sell high."

– Robert Tracy, demonstrating why he is the key analytical mind behind Apogee Research’s success, sent me an email yesterday entitled, "Synchronicity?" Robert writes: "The S&P 500 ended Tuesday at 911. The New York Lottery was drawn as 9-1-1. And 7-Eleven shares closed yesterday at $9.11, which raises our trailing stop-loss limit to $7.11." Thanks for the keen observation, Robert. 7-Eleven stock is a recent recommendation from Apogee Research and so far, so good. The stock has gained 24% since recommended on July 22nd.

See: Apogee Research


Back in London…

*** We do not often watch TV and are usually appalled when we occasionally do. This morning’s chatter included a series of analysts discussing one company and then another one. Investors think they do themselves a favor by being "informed." We’re not so sure. How could they possibly hope to gain an advantage by knowing what everyone else knows and thinking what everyone else thinks?

*** Turning on the TV last night brought us unexpected and salacious entertainment. The British seem obsessed by sex…but not romantic or erotic sex. They seem to favor quirky or perverse encounters. A show called "British Sex" – on a main channel – showed grown men being whacked by a huge woman with a hairbrush the size of a baseball bat. *** "Anglo-Saxon culture is amazingly vulgar," said a French friend. There was a time, of course, when the graces of the rich and well-bred were admired. Ads in newspapers and magazines in America used to offer the hoi polloi an opportunity to improve their grammar or their social standing. "Do you make these common mistakes?" asked a popular headline.

But those days are gone. Sometime between the wars, or perhaps just after WWII, Anglo-Saxon culture seems to have turned upside down. Ever since, the children of the rich have imitated the language, dress, and social practices of the ghetto. Merchandisers look to the lowest classes to try to get a jump on the next fashion hit…and television merely reinforces the most revolting trends. Herewith, we at the Daily Reckoning offer some purely gratuitous and unprovoked advice: Do your children a favor; get rid of your television.

*** We checked the newspapers. Page one of the Daily Telegraph has a huge photo of an aircraft carrier. "British troops head for Iraq War," says the headline.

Lower on the page is the story that sells the tabloids. Michael Barrymore, a popular TV game show host, discovered a dead man in his pool. Late at night, after an impromptu party. Then it came out that the young man had been sexually assaulted…and that Mr. Barrymore had divorced his wife not long ago, admitting his preference for the opposite sex – opposite, that is, from his wife.

And so the sordid details are in all the papers…and the naughty vicars will have to wait ’til next week.

*** War with Iraq? Bush, Cheney and Rumsfeld all seem to want it. Polls show Americans favor an unprovoked attack against Saddam too. No one seems too bothered by constitutional or moral restraints. But since we are giving unwanted advice today we will not hold back: the gods of war rarely look favorably upon the nation that strikes first.

*** Perhaps Hugh Shelton will have a differing opinion. Remember him?…uh…neither did I. But Addison tells me he is a former Joint Chief of Staff and will be the keynote speaker at the New Orleans Investment Conference, set to take place in a few months, from November 6-10.

Addison also tells me that Monday is the last day you have to take advantage of the special deal that we’ve secured for Agora readers. We already have attendees coming from as far away as Norway, Germany, England, Ireland, Brazil, Canada, and Switzerland. I’ll be coming too, all the way from France.

It should be a great event.

Call Steven King, the man with all the details, at 1- 800-992-0205.

The Daily Reckoning