Paying Dearly

“Much has been written about panics and manias, much more than with the most outstretched intellect we are able to follow or conceive; but one thing is certain, that at particular times a great deal of stupid people have a great deal of stupid money…”

– Walter Bagehot

Who is dumber – I revisit yesterday’s question – the Americans who think they can spend their way to wealth… or the Europeans who enable their delusion by lending them money?

There are a great many lunkheads in the world, as many in Europe and Britain as in America. But today I write to praise them, not to criticise. For, as Erasmus tells us, we are all fools in our own time and in our own charming way. And so much the better.

Rational consumers, as Robert McTeer explained yesterday, would have cut back spending and lopped off the economic expansion a long time ago. Rational investors would have sold and tech shares long before the bubble even began to lift off.

Thank God for all of us fools. We allow bull and bear markets to fully express themselves – and put on a good show doing it!

The newspapers are full of stupid people doing stupid things. Some of the fools are news makers. Others are just reporting it. Whatever their role, fools make the World go around.

Reading the news in 1989 – as I have mentioned ad tedium – would have left you with the impression that Japan was a booming economy where everyone was getting rich. In fact, it was beginning a downturn that would last for more than a decade and wipe out 3/4ths of all stock and real estate values.

Reading the news in 1999 would have given you a similar impression of America. You, dear reader, can recall those days as well as we can, so there is no need to remind you.

Yesterday, the Dow went down nearly 200 points. If historical patterns hold, we will look back in a few years and realize that, today, we are just entering the second stage of a major bear market. The bear has mauled the outlying tech stocks. Now, he is moving in on the center of the herd – the Dow stocks…IBM… GE…Microsoft.

In fact, if this bear market repeats the pattern of the last two major bear market cycles in the U.S., many if not most people reading this Daily Reckoning will never again see share prices at these levels in their lifetimes. Investors should be preparing for more than 15 years of falling prices and a collapse of their assets prices to about a quarter of today’s levels.

Markets make opinions, as they say. Eighteen years of rising share prices has led to the opinion that share prices always rise. ‘Nothing beats a well-diversified portfolio of long-term stockholdings,” the mutual fund ads promise.

Recent history has also left many people with the opinion that the entire secret of successful economic management lies in manipulating consumer demand by running interest rates up or down.

“Since the introduction of active demand management policies in most capitalist countries after the Second World War,” writes Anatole Kaletsky in today’s TIMES, skillfully making the macro-economic apology for the spendthrift attitudes in the Anglo-saxon world, “economy-wide recessions have always been caused by demand reductions that were provoked by monetary or fiscal squeezes and never by supply shocks in one particular industry such as energy, property or IT.

“The present economic cycle looks like a classic example,” he continues. “Interest rates have been cut dramatically in America. At the same time, the U.S. Government is sending out large tax rebates. As a result, the American and British economies seem to be starting to accelerate, after exactly the six to nine- month lag suggested by experience.”

Nine months after what, readers may want to know. Oh, after the most aggressive attempt at demand management in history…

Markets make opinions, I repeat.

And the press disseminates them, disguised as ‘news’. To be more precise, markets make the stupid opinions that you hear in the media….the very opinions that permit the fad du jour to reach its culminating peak of madness. “…At intervals,” as Walter Bagehot put it, “… the money of these people – the blind capital, as we call it, of the country – is particularly large and craving; it seeks for someone to devour it…there is ‘speculation’; it is devoured, and there is ‘panic'”

Bob Woodward helped give American media hacks their conceit of high-mindedness with his Watergate fandango. It was no accident that he also brought American investors a book lauding Alan Greenspan as ‘Maestro’ on the very eve of the bear market in the Fed chief’s reputation.

No one manipulates demand better than Alan Greenspan. And few doubted that the Maestro’s effort would pay off when, in early January, Greenspan began his rate cuts. Perhaps you recall this comment: “Even if this doesn’t work,” said Ed Yardeni, or words to that effect, “thereare 600 basis points between here and zero.”

Since then, rates have been cut an additional 6 times, leaving only 325 basis points to zero. So far, there are no real signs of recovery. In fact, things seem to be getting worse. Here is a description of the current situation from Frederick Sheehan, reported on

“Equity ownership in homes, as a percentage of market value, has not been this low since World War II. Home sales are at an all-time high and prices are rising. [T]his ‘day-trading’ of houses is a good indicator of a speculative asset. The installment debt of U.S. consumers, as a percentage of disposable income, has never been higher. The ratio stands at 21.7% today, compared to 17.9% in 1992, the post-recession low, after a 19.6% high in the Greedy Eighties.

“Another ratio: U.S. mortgage payments as a percentage of disposable income is at an all-time high: 6.5% today, 5.7% in 1992 and 6.3% at its peak in the eighties. Credit card balances are rising, as are credit card delinquency ratios. Since durable and non- durable goods sales have gone nowhere this year, households are adding more debt – including home equity loans – and hoping they can bail themselves out. How? Maybe VerticalNet will come back.”

Maybe VerticalNet, Amazon and Cisco will come back. But it is not likely. It has never happened before. When the leading stocks of a bubble go down – they rarely come back….ever.

And…gradually….opinions change as stupid people wise up, having paid dearly for their instruction.

Bill Bonner,
London, England
September 7, 2001

helping to make the World go around.

P.S. “The industries that are likely to lead the next economic expansion are coming into the financial headlines. And they are exactly the businesses – property, retailing and consumer finance – that usually prosper in an environment where investment in machinery is still declining and the stock market remains shaky…”

Ah…that is the hope….that demand can be stimulated once again….and that real estate will give consumers the purchasing power to allow them to continue spending.

Will it? Can it? I will take a wild guess about Dr. Richebacher’s answer – “Rubbish!’ – and rejoin the question on Monday.

“Shares slump as recession grips industry,” announces today’s headline in THE TIMES of London. “Rising fear over the economy sent the stock market crashing to its lowest level in nearly three years yesterday…”

The stock market THE TIMES referred to was the London exchange. But the same might have been said for almost any of the world’s leading markets yesterday… including the NYSE.

Manufacturing in Britain, as in America, is “suffering its worst collapse since the depths of the last full-blown recession in the early 1990s,” continues the TIMES article.

Marconi, recently Britain’s largest industrial company, has seen its bonds downgraded to junk status. The stock has collapsed by 95% in the last year and on Tuesday announced another 6,000 layoffs – including the chairman and CEO.

Also front page news in the TIMES: “Smacking of toddlers to be a crime.” On page 3, we learn that a man won $800,000 in a jumping contest on a lame horse. And on page 5, we find a photo of a model who is to replace Liz Hurley in perfume ads.

Nobody with any sense takes the news seriously. The ‘news’ is merely a compilation of the latest fads, group-stupidity and collective insanity. The media merely focuses and amplifies the effect – helping stupid people do stupid things all together.

Unlike the U.S. papers, the British press has few pretensions of High Purpose. “Naked Chef tells of bun in the oven,” informs us that a TV chef is going to be a parent. And later, we discover that “Britain faces a climate as cold as Canada,” a news item that warns of a slowing in Gulf Stream. Get out your overcoats. If the Gulf Stream flow keeps weakening at the same rate – Britain will be 40 degrees cooler in half a century!

Meanwhile, across the gutter, that is…on the facing page, “Beggar castigated,” reports the TIMES. Ouch…that should discourage them…

But back to the financial news. Addison reports from Paris:


Addison Wiggin watching “The Street” from France:

– “The tunnel at the end of the light,” Andy Serwer of The Street Life called it this morning. “Remember back in the spring of last year, when the Naz was at 5000? Well, there were bears out there then saying stuff like, ‘I wouldn’t be surprised if the Nasdaq traded down as low as 1600 or 1500!’ That was pure hooey, right? I mean DOOMSDAY scenario.”

– Well, surprise…er, again.

– By the time the dust settled on yesterday, the Dow was down 192 points and the Nasdaq sank for the seventh of eight sessions – leaving all major U.S indexes precariously close to “new” lows. Consider, with my compliments to USAToday, these figures:

* The S&P 500 – “a proxy for the broader market” – slid more than 2% to 1106, less than 4 points above its April 4 low of 1103.

* After falling 53 points to 1705, the Nasdaq need only fall 67 more points to retest its own April 4 low of 1638.

* If the Dow slips another 451 points – it will be sitting smack dab on its March 22 low of 9389.

– Investors in the US have entered the “Sisyphus” cycle of the bear market…

– Sisyphus, you may recall from Homer, was the wisest and most prudent of mortals… but having stolen secrets from the Gods was banished to Hades. His punishment there was to perpetually push an enormous boulder up a steep incline… only to watch it slide back down lower than its original point, from whence he was condemned to begin again – and so on, for eternity.

– Investors in the US stock market have been laboring for “profits” – under the illusion of a “second half recovery” – for 5 months… only to find themselves exhausted and the market straining to maintain a foothold against former lows.

– How long will this downward part of the cycle last before investors can begin pushing upward again? Well, it’s anybody’s guess. But, here may be a clue…

– “Japan is in outright recession,” writes Daily Reckoning cohort John Mauldin, “monetary deflation is the order of the day. Their market is now where it was in 1984 – a 17 year low! And there appears to be no bottom…

– “Ten years ago people were writing about Japan Inc. and telling us that the future was Japan. The US was but a fading star. Now we find the Japanese miracle was but a mirage, built on false premises and manufactured money.”

– Our sake drinking brethren are rooting around for a foothold back to a time when Caspar Weinberger had opinions you might have cared about.

– Meanwhile, “we have warned this would happen,” wrote Dr. Richebacher in August. “This traumatic profit disaster … has an obvious reason: Poor profitability in large parts of Corporate America over the past few years was obscured by deceptive propaganda and large windfall gains in the booming stock market.”


Back to Bill in London:

*** I got a call from my wife at 5:30AM this morning. Elizabeth was still in Paris, but preparing to take the train up to London for the weekend. Just one problem… I had taken her passport.

*** So I rushed over to Waterloo Station and looked for someone with an honest and helpful face. What I found was a pair of women with rather nice faces…So I threw myself on their mercy…explaining the situation, I asked if they would take Elizabeth’s passport on the train with them to Paris. They were very accommodating and happily agreed to undertake the mission.

*** Thank God for the kindness of strangers.

*** Which gives me an idea….

*** Every day, I write to you. You let me into your home, your office and your thoughts. I tell you about my home, my family, my gardener…things you have no reason to care about. But, you put up with my opinions, rants and personal news.

*** Have I ever thanked you?

*** Probably not.

*** Well, thank you, all you kind strangers…

The Daily Reckoning