Lusting After Spiff

I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.

For man also knoweth not his time; as the fishes that are taken in a net, and as the birds that are caught in a snare; so are the sons of men snared in an evil time, when it falleth suddenly upon them.

Somewhere in Ecclesiastes

We sense a change of Biblical proportions coming on.

Three years ago, when money flowed in the streets like rivulets of rum and prosperity bubbled up like warm champagne, Americans were a happy race. The sun shone down with such beneficence, it seemed as though no investment was too absurd to make a man rich. Almost any business concept or investment scheme one could think it would bear fruit, it was thought. You had only to spit the seed out the car window while you were on your way to refinance your house; like a peach pit, it would take root in no time at all.

But now the papers are all turning a little sour. A company that reports decent earnings is thought to be lying and any man who manages to get himself a little spiff is considered to be courting jail time. The heroes of today’s news are no longer the captains and first mates of industry…nor the technological innovators… nor risk-taking entrepreneurs of the ’80s…nor even the visionaries and hallucinators of the ’90s. Instead, it is the public prosecutors, reformers and the sanctimonious I-told-you-so socialists who get the good ink.

Of the latter species, Philip Bowring kvetches for the International Herald Tribune:

"The three crises of the past year make it plain that the international financial community has learned nothing from the Asian crisis. Despite the domestic disgrace into which Wall Street has fallen, thanks to years of excessive greed leading to recent multiple scandals, the nexus between Wall Street, Washington and the International Monetary Fund may have even been strengthened.

"Just as Wall Street in the 1990s came to be dominated by get-rich-quick schemes, so international short-term capital flows have continued on a massive scale, to the benefit of no one except the intermediaries…

"How many more Argentina-style crises will it take before the world learns the wisdom of taking power away from the casino operators, the investment banks, and handing it back to elected governments?"

Bowring has a point. When it comes to separating people from their money, no institution does it better – at least not on a grander scale – than elected governments. What’s more, governments do it more reliably – and much more democratically – almost everyone gets ripped off to some measure.

A casino, after all, takes only 10% or 12% to pay the electric bills and free hors d’oeuvres…and players find it entertaining enough to come back. Even the "friction" on Wall Street…the cost of all the analysts, margins, commissions, fees, and brokers’ yachts…which Buffett estimates as high as 30%…is not without its socially-redeeming results. A man who invests in Global Crossing at $60 with no gun to his head might be said to deserve what he gets. And then, once his money is gone, he represents little further menace to the world economy.

But give economic power to bureaucrats…or let your neighbors vote on what you should do with your money… well, who in his right mind would do such a thing? If a man wants to suffer, he might as well smear honey on his naked flesh and lie down on an anthill.

Public officials love bear markets. The best of them stop claiming credit for the bull market and begin coming up with crackpot solutions to ease the suffering of the downturn. The worst of them get out the handcuffs and begin campaigning for higher office.

That is the case, we fear, with the attorney general of New York, Elliot Spitzer. "Not for nothing is the National Association of Attorneys General mockingly referred to as the National Association of Aspiring Governors," says a FORTUNE article. "Many a state attorney general has used the job as springboard to higher political office. Rarely, however, has there been an example as egregious and blatant as that of Eliot Spitzer, current attorney general of New York State."

Spitzer, along with the rest of officialdom, was silent when Global Crossing was at $60 a share. That was not the moment to mount a white horse and attempt to save the little guy. Whatever Winnick, Ebbers, and Kozlowski were doing to him…the poor little guy wanted more of it. But there’s nothing like a bear market to change peoples’ attitudes. By the beginning of 2002, the little guys were counting their losses and looking for someone to blame. Spitzer’s moment had come – the elected official soon became "household."

"His most recent and notorious case – the one that made him a judicial superstar overnight – is his investigation into the stock research practices of Merrill Lynch," continues FORTUNE. "Armed with a New York State law that gives him carte blanche to bring civil and criminal lawsuits against companies that fail to disclose conflicts of interests, Spitzer seemed poised to force Merrill to separate its research and investment banking businesses, or even to spin off research entirely. In late May, Merrill agreed to settle the case by paying a $100 million fine and to reform its procedures to avoid future conflicts of interest.

"Spitzer has been lionized… for wielding the first shovel in the Augean task of cleaning up Wall Street."

Of course, money isn’t the only form of spiff and Mr. Spitzer’s interests are as subject to conflicts as anyone else’s. The little guys vote, he may think to himself. Spitzer wants to be the next governor of New York. What better way than by getting himself on the evening news as the champion of the little guy against Wall Street? But wait, he may need some campaign money as well as some votes; better not be too rough on the big money. The best thing for Spitzer to do would be to treat the whole contest like a professional wrestling match: beat up on Merrill for the benefit of the rubes, but only for show. Merrill will reel and howl in public…and hit the mat in mock pain…($100 million sounds like real money to the patsies, but it’s barely cab fare to Merrill Lynch, which takes in that much in revenues every couple of days). But soon the show is over and both wrastlers can go back to what they were doing before: lusting after spiff.

The Bear Market comedy continues…

Bill Bonner, enjoying the show…lusting after spiff, like everyone else.
June 25, 2002
Paris, France

What to make of yesterday’s stock market action? Stocks went down. Stocks went up…

And the Great Bear Market of ’99 – ? continues.

Rumors ran around the Internet yesterday. One rumor had it that the Fed would knock another ¬ point off the Fed Funds rate in today’s meeting. Anything is possible, but neither rate cuts nor rate hikes are very likely, in our humble opinion. The Fed is trapped…it cannot cut rates without admitting that the 475 points it cut so far failed to do the trick. What good is another 25 basis points going to do, domestic investors are likely to ask themselves? What will happen to the dollar, foreigners would like to know; isn’t it already falling fast enough?

On the other hand, it was widely predicted that the Fed would be considering rate hikes by now. A robust recovery would need a cooling off, people thought, in order to avoid inflation. Think again.

A little bit of credit may be a good thing. But too much of it does for an economy what Jack Daniels does for a teenager’s party – things tend to get out of control. Now, the average family has $8,367 worth of credit card debt…and late payments are at a 5-yr. high. The consumer owes a lot more money on his house too – much of it on adjustable-rate mortgages.

Businesses, meanwhile, were encouraged by low short-term rates to exceed their financing needs with debt rather than equity and to swap long-term debt for debt with near-term maturities.

For both groups – consumers as well as business – an increase in interest rates could be lethal. Which doesn’t mean that isn’t exactly what Mr. Market is planning…



Eric Fry, our man on Wall Street:

– Mr. Market lost his footing at the edge of an abyss yesterday and tumbled out of sight. Investors feared the worst…They waited…and they worried (after all, he was carrying their money with him when he fell)…and they wondered, "Would our hero be lost forever?" Suddenly, around midday, Mr. Market reappeared – having scaled his way back to the brink from his near-fatal dive.

– The Dow plunged as much as 175 points early on Monday – the fourth triple-digit loss in as many days – before clawing back to positive territory, and then to a triple-digit GAIN. From trough to peak, the blue chips climbed nearly 300 points.

– Although the DOW faded in the final half-hour, the blue chips finished the day with a 28-point advance to 9,282. The NASDAQ, likewise, recovered from early morning losses to gain 1.3% to 1,460.

– The dollar – in concert with the stock market – bounced off of its worst levels of the trading session, but still finished the day at a new 27-month low against the euro. The US Mint seems to be issuing only two series of dollar bills these days: "Scorned" and "Reviled." The US mint’s "Revered" series of dollar bills is no longer in circulation. Speaking of reviled, gold slipped 40 cents to $324.70 an ounce as the equities market rebounded.

– Perhaps Monday’s dramatic stock market reversal marks the beginning of a meaningful bear-market rally – emphasis on "bear market," not on "rally." Certainly, the market is overdue for a little levity. There’s no particular reason why stocks ought to rally, of course; they just do sometimes, even in bear markets.

– "I’m not in the mood to buy stocks for the next six months," says the skeptical money manager, Felix Zulauf, in this week’s Barron’s, "but I can tell you what I think is going to happen into August. We will see a tremendous short squeeze in technology, telecom, biotech and other NASDAQ-type stocks in Europe and the U.S… The NASDAQ could go up 30% or so over the next two months…But you have to get out after that move, because it won’t last for six months."

– Nimble – or lucky – traders might be able to make a buck or two on whatever rally might materialize (then again, they might lose a buck or two trying). Even so, the bears needn’t recant their faith just yet. Long-term investors probably ought to keep in mind that most U.S. stocks aren’t cheap. In fact, they remain expensive.

– Further, investors do well to remember that economic busts can last as long as the preceding booms… and sometimes even longer. The latest issue of Grant’s Interest Rate Observer offers a witty big-picture perspective about investing during booms and busts by quoting the 1940s classic, "Where are the Customers’ Yachts?"

– Grant quotes the section entitled, "A Little Wonderful Advice," in which the author, Fred Schwed Jr. writes: "For no fee at all, I am prepared to offer to any wealthy person an investment program which will last a lifetime and will not only preserve the estate but greatly increase it. Like other great ideas, this one is simple. When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds.

"No doubt the stocks you sold will go higher. Pay no attention to this – just wait for the depression which will come sooner or later. When this depression – or panic – becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you’ll have the pleasure of dying rich."

– With good genes and a little luck, you might even be able to spend some of your winnings before you go.


Back in Paris…

*** Americans planning for retirement are beginning to wonder too. They were counting on stock market gains for their golden years. No, maybe they wouldn’t be able to get 20% per year…but at least 7% or 8%! But, as Eric told us yesterday, stocks have gone nowhere for the last 5 years. What if they went nowhere for the next 5? Or worse…what if they went down?

*** Corporate pension programs have been replaced by 401K plans. But half of all 401K plans have less than $14,000 in them. And unlike the Japanese, Americans have little in savings in any form.

*** Americans have come to believe two great myths:

That real estate and stocks always go up in the long run…

And that they will always be able to tap into the "equity" that builds up…

*** So, they think that a couple of years of bad returns can be taken in stride. By the time baby boomers retire, they say, stocks will be booming again. And if that doesn’t work…well, they will still have their houses.

*** Of course, it doesn’t quite work that way. If you’d bought stocks in ’66, you would have made nothing for the next 25 years. And houses can go down in price as well as up, too. If you have a $200,000 house with a $200,000 mortgage…all it takes is a slight downward drift of real estate prices and a rise in interest rates…and your goose is cooked. You have higher monthly mortgage costs (assuming an adjustable-rate mortgage)…and unless you can come up with cash, you can’t sell your house! If real estate prices fell just 10%, you’d have to come up with $20,000 just to get out of your house – with nothing to show for it. But don’t worry about that. Because, when the boomers all retire and head for the sun, who would you sell to anyway?

*** A recent survey by Newsday suggests that pre- retirees are getting hip to the problem. Ninety-five percent say they intend to keep working after reaching retirement age.

*** If you visit Paris this month, be sure to pick up a copy of ELLE magazine. Then, throw the magazine away…but take a look at the advertising supplement. That’s my daughter on the cover.

The Daily Reckoning