Mr. Market Whispers

“The real treat,” says an article on Stock Trader’s
Almanac Investor, referring to a recent conference, “was
guest speaker Lawrence Kudlow’s moving speech about the
rosy outlook for the U.S. and world economy, highlighted
by his reminder that the market is telling us good times
are coming.”

Kudlow belongs to the Laffer/Gilder “growth” wing of the
Republican Party…a group that believes in the wonders
of Free Enterprise and technology the way toddlers
believe in Santa; that is, without asking a lot of

In their view, bad things only happen to Democrats…or
those who interfere with the marvelous godlike workings
of Mr. Market. They believe, for example, that stocks
fell from their March 2000 highs because the Fed erred
by nudging up interest rates too high and keeping them
there too long. There was nothing wrong with stock
prices at the top, they believe…Nor was there anything
wrong with the New Economy, which – even now – Gilder
says is “underappreciated.”

Thus, they were not at all surprised to see stock prices
rise from the Sept. 21 low. Mr. Market was speaking to
them, they thought. “Oh ye of little faith,” whispered
the Great One, “do not despair. Good times are coming.”

Perhaps Mr. Market speaks to Republican economists and
new-tech hallucinaries. Even so, might he not mislead
them…and chuckle as they make fools of themselves?
Today’s letter is written merely to remind readers that
the great god of the market works his wonders in
strange, and often pernicious, ways.

Jim Cramer, also had something to say in the above-
mentioned issue of Stock Trader’s Almanac Investor.

“…finally there is tangible evidence of an economy
where lower rates finally matter,” writes the founder of, congratulating the Bush team for turning
around the economy with government spending. And then,
Cramer begins his sermon on the omniscience of Mr.

“…Do you think the market doesn’t see and know things
that individuals can’t grasp? Do you think the market is
just stupid and rallying for no reason? Nah, the market
is smart. It sees these things even as the analysts on
Wall Street pooh-pooh them.”

Not even the smallest sparrow falls from the most abject
and forlorn pine tree in Afghanistan, dear reader, but
that Mr. Market takes notice.

But wait. Is this the same Mr. Market who, a year ago,
thought Enron shares were worth $90? Is it the same Mr.
Market who put a $71 price on Jim Cramer’s
shares, now available for $1.05 a share?

What sparrows was Mr. Market counting when the Nikkei
Dow rose to nearly 40,000…? What is he thinking today,
with the Nikkei near 10,000?

Father Market may know best, dear reader, but that
doesn’t seem to stop him from doing a lot of very
stupid…or wicked…things.

Mr. Market cooed soothingly and often following the
crash of ’29. As we have pointed out before, there were
5 rallies of 20% or greater between ’29 and ’33. But
none of them was followed by the “good times” that
Misters Kudlow and Cramer now expect.

Sixty years later, Mr. Market’s dulcet tones were heard
in Japan…again, five times between the crash of the
Nikkei in ’90 and today. Still, “good times” have yet to
be seen.

Marc Faber reminds us that when Mr. Market speaks, even
people who know what they are talking about are often
led astray. In the aftermath of the crash of ’29 many
people thought they heard Mr. Market’s mellifluous

“Stocks began to recover strongly, following the
November 13, 1929 low, amidst wildly bullish comments
and confidents statements by Wall Street

“From a low of 199 on November 13 (down from the
September 4 peak of 381), the Dow Jones Industrial
rallied to a high of 294 in April 1930 (up 48%…)”

Then, as now, the central bank provided easier credit:

“The Federal Reserve Bank cut the discount rate from 6%
to 5% on November 1, 1929,” Faber continues. Then, “to
4.5% on November 15, and to 4% on January 30, 1930.
Subsequently, it was cut to 2.5% in June 1930, to 2% in
December 1930, and to 1.5% in mid-1931.”

America enjoyed the blessings of the free enterprise
system back then, as it does now. In fact, it was a
freer enterprise system in the 1930s than it is in the
2000s. But that didn’t mean that it could not break
down. And that rate cuts could not fix it. Rate cuts,
and the bullish momentum that had built up since the
early ’20s, merely encouraged investors to self-
destruction. Faber:

“Charles Mitchell, who headed the National City bank,
announced soon after the crash that the trouble was
‘purely technical’ and ‘the fundamentals remained
unimpaired,’ while the President of the Continental
Illinois Bank said, ‘There is nothing in the business
situation to justify any nervousness.’

President Hoover assured Americans that ‘the fundamental
business of the country – that is, production and
distribution of commodities – is on a sound and
prosperous basis.’

Treasury Secretary Andrew Mellon was bullish too: ‘I
have every confidence that there will be a revival of
activity in the spring…'”

The great economist Irving Fisher, Faber continues,
“stated that the ‘factors leading to the crash of the
American stock market were not factors of depression but
of prosperity, unexampled prosperity,’ and thought that
stocks were ‘ridiculously low.’ (Subsequently, they fell
another 80%).”

Even Bernard Baruch, who anticipated the crash and made
a fortune from it, later said: “I never imagined, in
these last months of 1929, that the collapse of stock
prices was the prelude to the great depression. Anyone
who knew the potentialities of the American economic
system, as I had come to know them, could not help but
believe that the market break would just inevitably be
followed by an even greater prosperity.”

The great investor, Jesse Livermore, had outsmarted Mr.
Market in the summer of ’29, when he sold short. He
could do it once. But not twice. “To my mind this
situation should go no further,” he said, jumping back
into stocks after the sharp October ’29 downturn. But
Mr. Market had deceived him. Stocks fell again and
Livermore lost all his fortune between ’30 and ’32.
Wiser, but sadder…Livermore later committed suicide.

Your correspondent, back in Baltimore…where it is
beginning to look a lot like Christmas…everywhere I

Bill Bonner
December 13, 2001

Mr. Market seems puzzled. Everyone tells him that
stocks should be going up. But, he’s not so sure.

Neither the Dow nor the Nasdaq went anywhere

Perhaps Mr. Market was worried about credit card
delinquencies – which are rising along with the
unemployment rate. The latter rose to 5.4% in
October…while delinquencies went up to 5.3%.

Businesses are having trouble paying their debts
too. An S&P study reported the highest bond default rate
in 10 years.

And, worldwide, all he sees is trouble.

“Prices drop in Britain and France” reports the
International Herald Tribune. Germans are selling fewer
cars. Argentines are fleeing their currency while the
Japanese hoard theirs. And hard times seem to be
settling in for a long stay, almost everywhere.

With so many reasons not to, why should Mr. Market
get enthusiastic about stocks?



Eric Fry from the great state of Maryland…

– I’m checking in from Baltimore today, home of the
infamous PSINet Stadium. From this distant perch, Wall
Street seemed pretty quiet yesterday. Some stocks rose,
some fell, but on average they didn’t do a whole heck of
a lot.

– Out in the real world, the economic news is equally
directionless. Some signs point up, some down, but on
average they point nowhere.

– On Madison Avenue, for example, times are tough.
Advertising spending fell 7.8% for the first three
quarters of 2001 compared with the same time period of
2000, according to a report from marketing research firm
CMR. National newspapers suffered the sharpest decline –
down a painful 21%.

– Meanwhile, down on Wall Street, year-end bonuses will
likely be at least 30% less than last year’s, or about
$4 billion less than the prior year’s bonanza. “The drop
in bonuses comes on top of the dot-com bust, the
national recession and the fallout from September 11th,”
gripes the New York Times. (Oh well, it’s probably
nothing that 11 or 12 or 20 rate cuts can’t cure).

– Yet, the optimists abound.

– “Economic recovery likely in 2002,” says the ISI
Group. “Growth is likely to improve next year for four
main reasons: 1) Record monetary stimulus; 2) Record
fiscal stimulus; 3) Significantly lower oil prices; 4)
Inventory rebuilding. Our feeling is that these four
lifts would produce 6% growth were it not for the long
list of formidable negatives [like] excessive debt, a
post-bubble environment and an extended consumer.”

– Hmmm…sounds a little bit like saying, “I’d be
slender…if I weren’t so fat.”

– J.P. Morgan Chase may be too big to fail, but it’s not
too big to have some big problems – witness the fact
that Morgan loaned hundreds of millions of dollars to
Enron, then Enron filed for bankruptcy, then Morgan
loaned millions more to Enron and then yesterday Morgan
sued Enron for $2.1 billion. Sounds like the left hand
better start talking to the right hand a little more

– “Like Enron, J.P. Morgan Chase has reinvented itself
as a trading business,” James Grant observes. “And like
the pre-Chapter 11 Enron, Morgan is an institution so
admired as to be almost above its counterparties’

– But Morgan is no more a traditional bank then Enron
was a garden-variety energy company.

– For example, Grant notes, “So dominant is Morgan Chase
in the derivatives markets than its exposures look like
typographical errors. At June 30th, according to the
Office of the Comptroller of the Currency, the notional
value of derivatives contracts of Chase Manhattan Bank
and Morgan Guaranty Trust was $29.3 trillion – that’s
‘trillion’ with ‘t.’ That’s a great big number even for
a great big bank.”

– Expressed another way, Morgan’s derivative exposure as
a percent of its “tangible equity” is four times larger
than Citicorp’s.

– Derivatives are the “meat by-products” of finance.
They may look and taste like the real thing, but they
are sometimes a little tough to digest. We would not be
surprised to see Morgan come down with a bad case of
indigestion. But Morgan is just one overvalued stock
among many.

– Picking up on the overpriced-U.S.-stocks theme, James
Grant observes, “Whereas the MSCI Euro Index changes
hands at 18.5 times earnings, its U.S. counterpart is
quoted at 34.6 times. It is the widest disparity since
1972, at least.” Europe’s relatively inexpensive stocks
combined with its relatively undervalued currency make
buying European stocks a compelling idea…relatively

– “One part of the ‘information sector’ may be about to
stage a major revival,” writes Joel Kotkin on
He is referring to the “couch potato” industries like
video and computer games, video-on-demand and
“traditional motion pictures.”

– During the weeks following the Sept. 11th disaster,
Kotkin notes, “U.S. box office revenues, as well as
video rentals, shot up dramatically…The sector to
watch most closely may well be that of video games, a
huge part of the home entertainment market,” says
Kotkin. Video games are fun, but is there any form of
home entertainment more enjoyable than curling up in
front of the fireplace with the latest copy of the Daily


Back to Bill, hmnn…also in Baltimore…

*** You may want to take note. On Sunday evening,
January 27, 2002, at 7:30 p.m. est, Dan Denning of the
DR Blue Team, Lynn Carpenter, editor of the Fleet Street
Letter and John Myers of Outstanding Investments will be
joining to discuss moneymaking in today’s difficult
environment via telephone conference call.

*** I hear from Daily Reckoning readers all over the
world. Some have remarkable contacts and insights. Thus,
one DR reader comments on James Sinclair’s Indian guru,
Sai Baba:

“I am surprised that you dont know about Sai Baba ! My
sister lives in New Delhi. She is a prominent member of
parliament in India. She calls herself a devotee/A great
friend OF SAI. I have visited sai Baba.

“At first i did not believe in his tricks !! BUT I
actually saw him materialise real expensive watch, right
I saw him, IT HAPPENED AT a very close quarter NEAR TO
Sai BABA AND HE had absolutely bare minimum of clothing

“Millions of followeres visit him. Money flows to baba
like it was just water. HIS FOLLOWERS INCLUDE WEALTHY
wealthy Japanese Bankers and busenessmen come to visit
his ashram with their entire families. I SAW THEM simply
fall at the feet of Sai as if THEY WERE WITH A modern
day Christ. MIND YOU!! THESE Japanese and arabic
followers are ever willing to shower wealth at Sai Baba
but he simply gives AWAY everything as a gift. Sai Baba
is truely impressive. YOU MUST SEE HIM PERSONALLY…

“The country Of India seems to be very full of similar
people. Only lAST YEAR ALONE I came in contact with a
simple man ; who shocked me by his ability to read
exactly what I had written in my own note book which was
10 feet away from him. In my presence he wrote verbatim
which I had written in my private corner. He even made
the spelling errors and other erros which I had
made in my original text. Oddly this man did not want to
profit anything from me; material or otherwise from me.
Besides this man was totally humble and behaved with
honest manner. He would answer any question. I wish I
had taken his address. I am still impressed with him. I
cant believe how one can know the EVEN spelling errors
which I made in writing a text which I did far away from
him. I never ever showed him the piece of the paper.”