Pursuit Of Mediocrity

“There is always some leveling circumstance.”

Ralph Waldo Emerson, 1841

“Napoleon Bonaparte and his generals did an excellent job. So masterful were they that they managed to bring an entire army all the way across Europe, from Paris to Moscow. What a pity they almost all died on the way home.”

Bill Bonner, 2001

Yesterday’s modest insight is followed today by an even more modest one:

You should always try to do the best you can, dear reader. But there are things at which it is better to fail than to succeed…and times when mediocrity beats excellence.

We have enjoyed an excellent boom in America…followed by an excellent bubble…followed by an excellent end to the bubble.

Shares on the Nasdaq are down more than 50%. Those on the Dow have gone nowhere for two and a half years. Will we now get to enjoy an excellent bear market…or just a mediocre one? Will the boom of the last two decades be followed by a truly exceptional bust…or just an ordinary one?

The worse thing that can happen to a young man is that he succeeds too early and too easily. For he fails to develop a proper respect for failure…and sufficient modesty to protect him from future mistakes. As Edmund Burke put it, “No man had ever a point of pride that was not injurious to him.”

Facile good fortune has befallen several men of my acquaintance – and usually with disastrous results. Getting rich too early, they became poor later…when it was much more inconvenient.

My own career, as I informed our employees at an annual meeting on Wednesday, has been blessed by failure and incompetence. A more capable man might have taken a different route…marginally succeeding at one task or another. But, in my case, my failures were unequivocal – I was forced to try something else, eventually stumbling upon something that suited me.

As Emerson put it, “Every man in his lifetime needs to thank his faults.”

All of this is prelude, of course, to revisiting our own Secretary of the Treasury, Paul O’Neill, a man who seems to have no faults to thank.

Mr. O’Neill’s point of pride is that he brings the pursuit of excellence to all that he does. There is nothing wrong with that, in itself…except that it fails to prepare him for a circumstance in which even mediocrity will be an improvement.

“We have amazing flexibility in our capital and labor markets, broader and deeper capital markets that match resources to good ideas faster than anywhere else in the world, creating greater return on capital here than anywhere else in the world. ” said the Treasury secretary recently. Mr. O’Neill was referring to the same capital market matchmaker that put thousands of investors’ money together with Webvan.com and telecom bonds, now trading at pennies on the dollar. But he seemed not to notice.

“We have the world’s most productive workers and the world’s freest labor market. Free markets, productive labor and lower taxes will in turn keep capital flowing here, even during a downturn like the one we are experiencing today.”

That may be. Or it may not.

Stephen Roach, appearing before Congress on Wednesday, testified as to why even the most excellent treasury secretary in America’s history may not b able to keep capital flowing here:

“The world is in the midst of what could well go down in history as the first recession of this modern era of globalization. It’s a recession whose seeds were sown in the depth of the financial crisis of 1997-98. . America moved aggressively to save the world nearly three years ago, it has paid a steep price for those noble efforts. That rescue mission fostered a climate that took the US economy to excess — resulting in a destabilizing asset bubble, an overhang of excess capacity, and an extraordinary shortfall of consumer saving. It also left the United States with its largest balance-of-payments deficit in modern history.

In Roach’s opinion, the current worldwide slump is the result of the excellent management of previous slowdowns by previous Treasury secretaries

“It all started in the fall of 1998. The global currency crisis that began in Thailand had cascaded around the world, eventually leading to Russian debt default and the related failure of Long-Term Capital Management. The result was what Federal Reserve chairman Alan Greenspan dubbed an “unprecedented seizing up of world financial markets.” US President Bill Clinton and Treasury Secretary Robert Rubin went even further, both calling it the world’s worst financial crisis since the Great Depression.

“The Fed swung into action to save the world, [and] the world economy sprang back with a vengeance that few anticipated. In the midst of the Fed’s emergency easing campaign, America’s real GDP surged at a 5.6% annual rate in the fourth quarter of 1998. Far from faltering, the US economy was on a tear. I cannot remember when such an aggressive monetary easing had occurred in the context of such an outsized gain in economic growth. Although our central bank began to take back its extraordinary monetary accommodation by mid-1999, by then it was too late — the damage had been done.

Moreover, it was compounded by the Fed’s now infamous Y2K liquidity injection of late 1999. America was on the brink of a runaway boom. A Fed-induced, Nasdaq-led liquidity bubble gave rise to the great IT overhang that has since wreaked such havoc on the US and the broader global economy.”

It probably would have been better if the “Committee to Save the World” – Robert Rubin, Larry Summers, and Alan Greenspan – had failed. A modest boom would have been followed by a modest bust. Instead, they succeeded so well that it looked as though the world’s central bankers had finally mastered the secrets of managed currencies. All they had to do was to provide liquidity at crucial moments.

That – and not letting markets run their natural courses – became the definition of excellence in central banking. And so, investors bought stocks and bonds – particularly in the most excellent market in the world, the U.S – while consumers bought cars, houses, and whatever else they wanted. And here we are.

“The other shoe is about to fall,” guesses Roach. “That, in my opinion is the painful legacy of a financial asset bubble that took our real economy to excess. Consumers have over-spent. Businesses have over-invested. And the United States funded these excesses by borrowing from abroad… the math is straight-forward: An ever-widening current- account deficit implies that foreign investors will ultimately end up “owning” America — unless, of course, something gives. And it usually does.”

But Paul O’Neill is not the sort of man to let things happen. He would prefer to make them happen. “I don’t think we should accept the notion [of a contagious global slowdown] as something God intended for us to have.”

Here at the Daily Reckoning, we do not presume to know what God intended. But we feel pretty sure that, whatever it is, even Paul H. O’Neill’s most excellent management will not stand in its way.

Your editor,

Bill Bonner
July 27, 2001

P.S. In a bull market, an investor aims for the stars – for excellent returns. But in a bear market, he should lower his sights – if he can merely achieve mediocre results, he can count himself lucky

P.P.S. Sunday, I leave for a 2 1/2 week vacation. For the first time in two years, dear reader, you will get a relief from my letters. I hope you will miss me, but the Daily Reckoning will continue during my absence with Addison reporting from Paris…and Eric from Wall Street.

The Financial Times calls it “the encircling gloom”…the earnings announcements continue. Carly Fiorina of Hewlett Packard told investors not to expect a 2nd half recovery. HWP fell 7%.

JDS Uniphase will be a source of interest today, after news last night that the company had managed to lose $46 a share, a remarkable achievement for a $9 stock.

Dividends from the S&P 500 are off 6.6% this year – not since the ’70s have dividends dropped as much.

Meanwhile, Wall Street strategists are the most bullish they’ve been in 16 years. But Wall Street analysts, once idolized, have become a laughingstock…or a scapegoat. The same financial press that reported their recommendations as if they were important, now record the results of their recommendations with indignation.

Addison, more details on yesterday’s Wall Street action, please…


Addison Wiggin reports from Paris:

*** “I don’t feel too good…” says Tom Ahrens.

Six months ago, Mr. Ahrens, a Canadian soybean farmer, had approximately $210,000 in Nortel – comprising about 2/3 of his expected retirement funds. Today, his shares are worth about $45,000 – and he owes $30,000… to his broker.

“We milked cows for over 10 years,” Mr. Ahrens told the International Herald Tribune. “I should have stayed with John Deere.”

Nortel’s stock – trading at $89 when Tom Ahren’s retirement years gleemed brightly – now sells for $12.

*** JDS Uniphase announced it’s 4th quarter loss had reached near $8 billion…HP revised its sales forecast downward for the second time this year… and both companies announced another round of layoffs.

*** Japanese electronics maker Sony announced a loss of $242 million through June. The giant French telecom Alcatel weighed in with $2.73 billion in losses. British telecom registered a 70% drop in first quarter profits. As Bill mentioned yesterday, the only thing new in the “news” these days… is the names of companies getting mauled, torn-up and spit out by the worldwide depression in telecom…

*** “When Federal Reserve policies create low interest rates that lure entrepreneurs into markets that would not pay a profit without fiat money, the boom is sure to become a bust,” writes Gary North. “That is what has happened to tech stocks. It is what is in the process of happening to the conventional markets. I don’t mean stock markets as such; I mean markets in general, i.e., the economy.”

*** “The crucial, precarious aspect of the negative saving rate,” writes Dr. Richebacher, “is that it reflects an unprecedented, bubble-related escalation of consumer spending. If the Fed’s drastic easing fails to revive the bubble, the massive overspending by the consumer will burst just like the massive malinvestment of businesses in the high tech sector.”

*** All the same, yesterday on Wall Street the investment horde didn’t seem to notice. The Dow gained 49 to 10,455; the S&P 500 rose 12 to 1,202 and Nasdaq was up 38.64 to close at 2,026 … even the Russell 2000 and the Amex composite rose slightly.

*** John Mauldin points out: “Despite the 20% plus decline in the S&P in 2001, the current p/e is 29. Comparatively, the average p/e of the S&P during the boom years 1990- 2000 was 22… even during the greatest bull market in stock market history 1980-2000 the average p/e on the S&P was 17.

“If the markets dropped to a more historical p/e ratio level of just 20 – that would mean a drop to around 900.” That – if you’ll permit me to do the math – is another 25% drop from here…

*** “Commercial real estate is quickly becoming the proverbial ‘next shoe,'” writes Chad Hudson at the Prudent Bear. “A recent survey indicates the vacancy rate along the northwest corridor [In Denver] jumped to a whopping 32% from 3.8% at the beginning of the year.” According to Chris Ball, a real estate analyst in the area, “landlords are upfront that you can get six, nine, or 12 months of free rent.”

*** “Boston is another area that boomed with the technology,” reports Hudson. “Yet the occupancy rate in the Greater Boston area declined almost 5% in the first six months of the year” with another 8.6% drop in industrial space…

*** But consumers are undaunted. Home builder Centex – up 93% since we first covered it here in the Daily Reckoning – reported its best ever first quarter, with sales up 19% and backlogs growing 17%. Beazer Homes also announced its best ever third quarter with revenue and closings up 15%, new orders and backlog – up 34% and 31% respectively.

*** A DR Reader writes: “This is the biggest bubble in history. I will wretch if I hear the word ‘saving rate’ again. Walk up to a 60-year-old guy. He’ll get about $18,000 in SS, he has an IRA with $75,000, his retirement from XYZ corp is $20,000 and THE HOUSE HE PAID OFF TWO YEARS AGO IS $365,000. Get it yet? Need some help with this? It’s all about houses and what they are worth, not about’savings’. The f***ing house is the savings.”

*** Modest question: What happens when on the heels of commercial real estate… residential follows?


Back to Bill…

*** It’s summertime here in Baltimore. And the livin’ is easy. The fish are jumpin’ and the cotton is high.

Hazy, hot humid weather settled on Baltimore last night, like distant relatives arriving for what looked like a long visit.

For every advance in human progress, alas, there is a retreat. People used to gather on the sidewalks for a breath of air in the evenings – and talk. Music would come from open windows and the smells of summer living – both good and bad – would drift through the fetid air like trash floating in the harbor.

But air-conditioning and television changed everything. People now stay indoors – watching “Sex and the City” or surfing the worldwide web…

Returning from a restaurant late at night, the woman next door was sitting out on her marble steps – the way people used to do on hot summer nights. She was beautiful, but like the neighborhood, touched by decay – a woman who looked as though she might have retired from a career in Hollywood or perhaps from playing Blanche Dubois in regional theatres.

She had a serene look, but also a bit of sadness in her eyes…the kind of look people have when they realize that they are out of scotch and the liquor stores have closed.

“Nice evening,” I said.

“Yes, and so quiet.”

“Can I give you a hand?” I asked, noticing that she was struggling to open a bottle.

“I have always depended on the kindness of strangers,” she replied.

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