Restraining Influences

“What happened to the bagpiper?,” asked an early arrival
at our company’s Christmas party.

“It’s a recession,” I explained.

“You mean, your business is suffering…you’re cutting
back?” came the logical reply.

Not really, but I didn’t like the bagpiper, anyway…the
recession is a good excuse to get rid of him…All over
the world, dear reader, mistakes are being written off
and quietly forgotten. Even in the Christmas season.

“A Dead Throws No Parties,” says an article in
S.F. Gate. “Over the last few years I went to one, two,
three parties a week – more during the holidays,” the
article quotes a tech writer, “But I look at my calendar
this year and it’s practically empty.”

And the few parties that are being held are more modest:
The gaudy excesses of the bubble economy are

“There are no waiters in tuxedos, no valet parking,”
observed a local caterer, with disgust. “They get trays
delivered instead of passed around by waiters. They want
paper plates, cold dishes, in the office.”

“There were ice sculptures, about a half-dozen different
types of food stations – including a sushi bar,” added
another partygoer, reminiscing. But then came the
layoffs and extravagant parties became “obscene.” “It’s
sad when a company forks over the money for a holiday
party when it’s already laid people off,” she added.

It used to be bad form to lay off people between
Thanksgiving and New Year. But that was before
businessmen had heard the phrase “maximizing shareholder
value.” Now, the Fizzywigs of the ’60s and ’70s have
been replaced by the Scrooges of the ’00s. Layoffs
continue, even throughout the holiday season. More than
a million people are on unemployment rolls in
California. And they are spending more time without
jobs; the time it takes to find another job has risen to
a 10-year high.

The point of today’s letter? Well, I don’t know yet.
We’ll have to treat it as a Christmas shopping
expedition. We don’t know what we’re looking for or
where we’re going to find it, but maybe something will
turn up along the way

The office party was a big success. Tim, one of our
maintenance men, has been polishing the woodwork so hard
I was afraid he would take the finish off. He rubbed so
much lemon-scented oil into the old mahogany, the whole
office smelled like a citrus farm. But on Friday night,
it seemed to pay off. The Christmas lights reflected off
the paneled walls richly, and warmly, so that faces
previously seen only at work – under fluorescent lights
– glowed with a new grace and beauty. Women, barely
noticed in jeans and sweatshirts, spread cheer and alarm
in their evening gowns…

Elizabeth had to stay in Paris with the children – who
are still in school. But my daughter, Sophia,
accompanied me to the party. There are advantages and
disadvantages to having two nearly-grown daughters: A
man scarcely gets through a single day without an
emotional crisis…but then, he can go out with a
beautiful young woman without worrying about running
into someone he knows.

Back in Paris on Sunday morning…

My other daughter, Maria, and I were greeted by a bitter
wind as we escalated out of the metro at Franklin
Roosevelt. It was early, and it was cold, but it was
worth it – for we were on our way to an outpost of
American civilization in Europe…

Elizabeth had entered in a horse-riding competition…
and the rest of the family had colds or other
engagements…so just the two of us set off up the
Champs-Elysees towards George V and the American

Inside, the church was packed. We had to sit on the far
left-hand side, behind a flurry of tiny angels, dressed
in white crinoline with cardboard halos covered in gold
lame foil. It is, of course, the advent season…and the
Christmas pageant brings out parents who rarely cross
the threshold otherwise…eager for a moment of
vicarious glory as their darlings act out the nativity
scene, in typical disorder and unintended comedy…and
anxious to avoid embarrassment.

Maria and I missed much of the performance, because we
were seated behind an enormous marble column. But the
spectacle seemed to go off without major disaster.

“I have a confession to make,” began a tall woman into a
microphone, after the angels, shepherds, 3 Kings, Mary,
Joseph and Holy Child had left the stage. The woman’s
talk was billed as a discussion of “stewardship,” which
had nothing to do with ships or ships’ stewards.
Instead, the church elders realized that this Sunday was
to be the high water mark of church attendance among the
most highly churched people in the world – Americans.
They decided to use that tide to float some money into
the coffers of what must be one of the richest parishes
in all Christendom.

The woman had a narrow head, affixed on a narrow body,
which was covered with narrow, fashionable clothes. Her
hair sprang out from her head and turned down…the
effect was a little like a pencil with a yellow tassel
at the eraser end.

“I want to tell you my personal story,” she said, “and
why I decided not to honor my pledge for this year. I
apologize for appearing before you in church to talk
about money, but this is important to the life of the
entire congregation.”

Uh oh…had we not stumbled into the middle of a church
financing war? Nothing is as miserably pathetic as a
bitter schism over money. People feel no need to
restrain themselves…perhaps because the stakes are so

Fortunately, my fears were unfounded.

“I had a very bad year. I was running a successful
consulting business. But like so many other people
[misery loves company…ed.], I began working with a company. I got caught up in the excitement of
the Internet revolution and before long, I was spending
all my time working with the Many of you may
have noticed that I didn’t come very regularly at the
beginning of the year. Well, that was why. I was working
18 hours a day…

“But then the went out of business…without
paying me!”

Thus are the echoes of absurdity still heard throughout
the land, as the restraining influence of normality
whispers in our ears.

The woman went on to explain that, in her reduced
circumstances, she had decided not to fulfill her
financial pledge to the church. But then, she
reconsidered…she realized the importance of God in her
life…and decided to increase her support to the
American Episcopal Cathedral on Avenue Georges V, not
bothering to clarify the connection. She suggested that
the rest of us do the same.

And thus may the bulls be in for a surprise. Typically,
the first quarter of the new year gets a boost – as
consumers spend end-of-the-year bonuses. Over the last
few years, a substantial portion of Americans’
compensation has shifted from fixed salaries to profit
sharing. While times were good, this gave consumers a
big wad of cash to spend at the beginning of the year.
But times are no longer good. Profits have been falling
since 1997, but this is the first year that year-end
bonuses and incentive schemes are expected to be hit

“Don’t bet on a swift recovery,” says an Economist
headline, summarizing.

Your editor, back at his desk…restrained.

Bill Bonner
December 17, 2001

Last week, in Baltimore, not a single person
mentioned the war in Afghanistan. That the world’s only
superpower would triumph over a few thousand barely-
armed goatherds seemed a forgone conclusion.

Things seem be getting back to normal…

…at least normal for this stage in a major
recession. The money supply is increasing at lightning
speed: M3 is rising at a 19% annual rate – nearly 3
times the usual increase for this phase of a recession.
“Broad money,” as it is called, has increased more than
$1 TRILLION so far this year.

Still, consumer prices went nowhere last month.
Prices are rising at 1.9% this year, compared to 3.5%
last. And economist Douglas Porter, in Toronto, says
“there aren’t any conditions that could make inflation
accelerate in the next 6 months.”

We don’t know about that. Mr. Market, we tend to
think, can do anything he wants.

Still, the real question is – why isn’t all this
new money finding its way into the economy? We think we
have an answer:

Cheaper credit and new money typically shows up
first in new cars, new houses, and capital spending by
businesses. But just as stock prices are too high to
form the foundation for a genuine bull market (the S&P
is trading at 39 times earnings according to
Barron’s)…so are the markets for cars and houses too
good to sustain an increase. Builders have been putting
up new houses as if this were the top of the economic
cycle, rather than the bottom – new house sales already
equal 4.4% of GDP. And cars sold at a near-record last
month – thanks to deep discounts and cheap financing.

Capital spending? Businesses don’t usually spend
money on new plants and equipment unless they are making
money. And the profit picture is the worst since WWII –
with operating earnings falling 32% this year.

So what is happening to all the money the Fed is
creating? Hmm…



– Sometimes, making money in the stock market is like
shooting a fish in a barrel. Other times, you are the
fish. Right now, a lot of fully invested fish are
ducking for cover, as both blue chips and second-tier
companies take turns firing off “surprising” earnings –
shortfall announcements.

– The list of recent high-profile underachievers
features Merck, American Express and Lucent. As a
result, the S&P 500 posted its largest weekly loss since
September, dropping 3%. The Dow fell 2.4% for the week
to 9,811, while the Nasdaq declined 3.4% to 1,953.

– The earnings “pre-announcement season” kicks into high
gear this week. We can expect to hear many more stories
of “sales and earnings below expectation,” coupled with
vague forecasts that reflect “tentative signs of a

– However, forecasting economic performance is like
viewing modern art – one sees whatever one wants to see.
The very same painted canvas that is to one viewer a
rich and evocative object of beauty, is to another
viewer an ugly mess.

– To this viewer’s eyes, the current state of the
economy is no work of art – unless perhaps, it is a work
of modern art.

– Capacity utilization and manufacturing output both
fell again in November, despite a very large 6.4% jump
in automobile production. Manufacturing output has
dropped 13 out of the last 14 months.

– Furthermore, S&P 500 earnings “are in a freefall,”
says James Bianco of Bianco Research, L.L.C. “They are
44.9% lower than one year earlier. The last time
earnings plunged this much was in the third quarter of
1938 and the fourth quarter of 1932 (the Great

– Most of the “pop” economists on Wall Street are quick
to point out that industrial production, corporate
earnings and many other such corporate vital signs are
“lagging indicators.” Maybe so, but for an economy that
is supposed to be on the mend, these lagging indicators
sure are lagging far behind.

– And Wall Street holds no monopoly on downwardly
sloping financial trends. Remember how the New York
property market was supposed to rebound after the
September 11th attacks removed 15 million square feet of
commercial real estate from “inventory?” Well, it’s not
happening. Rather, Crain’s reports, “The city’s office
market has weakened as companies that were permanently
displaced on Sept. 11 have leased only a portion of the
space they once occupied…Downtown, the vacancy rate
has jumped to 10.6% from 7.5% at midyear…The study
forecasts that the downtown vacancy rate will top out
late next year at 16% to 17%.” Ouch!

– According to a new study by real estate firm Grubb &
Ellis, the large companies that were displaced from the
World Trade Center and other damaged buildings in lower
Manhattan are taking only about half as much space as
they had occupied previously.

– Is the war against terrorism bearish for the dollar?
Could be, says James Grant. Euro bank notes will enter
circulation for the first time on January 1, 2002. And
Grant predicts good things for the currency, once it
becomes a tangible medium of exchange. Grant bases his
prediction in part – but only in part – on the idea that
Arab businessman might start to shift assets out of
dollars. He writes, “The Wall Street Journal provoked a
thought with a November 28 dispatch from Jidda, Saudi
Arabia: ‘U.S. moves to freeze the assets of Arab
businessman suspected of supporting terrorism are
prompting investors from Saudi Arabia and other Gulf
states to shift at least part of their $800 billion of
long-term investments in U.S. markets to Europe and the
Gulf, according to Arab bankers and businessman. “Events
in United States since Sept. 11 have created a bad
sentiment,” says a prominent Saudi businessman who is
reviewing his own investment portfolio. “Arab investment
in United States is quietly being reduced.”‘”

– Grant continues: “We are reminded by Gert von der
Linde, the retired Wall Street economist who keeps
forgetting to retire, that among the euro bills
forthcoming next month is a EUR500 note, equivalent to
[about] $450…That is 4« times bigger than the highest
U.S. dollar denomination in active circulation, the
trusty, world famous hundred-dollar bill. Possibly,
speculates von der Linde, a sum so portable may exert a
new bullish influence on a currency always seeming to
lack one.” All the same, don’t take any wooden euros.


Back in Paris…

*** The euro becomes the official money of France next
month. I have yet to see one. But the cash machines are
supposed to start dispensing them next month – if all
goes well.

*** All rarely goes well, of course. The French
bureaucrats charged with administering the changeover
have gone on strike.