The American Syndrome
“Economist Anthony Chan met privately with Alan Greenspan and the Federal Reserve Board. After the meeting he was asked by a journalist: ‘Tell me a little about what that was like…and what you were able to learn that you didn’t know before.’
“‘Well,’ said Chan, ‘If I told you, or answered that question, I would have to kill you.'”
– The Washington Post
TIME advises its readers how to get through the “slump” while waiting for the stock market to make them rich:
“Put off purchases of things like cars and appliances… try to build a cash cushion equal to 3 months of living expenses…”
Alan Greenspan: Buy an SUV
TIME’s good counsel has a small potential flaw: if TIME readers were to take the advice seriously, it would almost certainly trigger a recession far worse than any expect. That is why Fed governor Robert McTeer gave his audience the opposite advice: buy an SUV.
Retail consumption represents 2/3rds of the U.S. economy. Consumption depends on spending. And, in America, spending depends upon borrowing. Americans already spend all they earn, and then some.
“It was in 1998,” writes Kurt Richebächer, “that everything, both the U.S. economy and its financial system, went completely out of control. Since that year’s fourth quarter, personal saving has plunged from $244 billion to recently [negative] $56 billion. As to the U.S. current account deficit, it increased from $77 billion to $140.5 billion between 1990 and 1997. By the 3rd quarter of 2000, it was running at an annual rate of $450 billion.”
If American consumers suddenly begin to act like their Japanese counterparts, it will set in motion what is commonly known as a “vicious cycle” of unpleasant effects. A cut-back in spending would produce a cutback in sales, which would mean lower profits. Lower profits would cause businesses to reduce their payrolls, trim inventories, and curb expansion. This would mean even less money in consumers’ hands. It would also encourage foreign and domestic investors to dump U.S. stocks…which would send the “wealth effect” into its own little vicious cycle…and cause collateral damage to consumer spending as well as investment spending.
The overall effect is recorded in the literature of the economics trade under the oxymoronic heading: The Great Depression.
Alan Greenspan: What Was So Great about the Great Depression?
What was so great about it? Well, you could walk into almost any restaurant in Manhattan without a reservation and still get served. You could buy a new car without having to spend time on a waiting list while it was assembled from component parts made on various continents. And vanity was cheaper. It didn’t take a lot of money in order to feel superior. A man with even as little as $1 million in savings in a solvent bank could still feel like a big shot.
“People worry too much about money,” said my friend François yesterday. “It’s madness.” Perhaps one of the things that made the Depression great was that people had less money to worry about.
But there’s good and bad to everything. Even the Great Depression was marred by widespread poverty and the Roosevelt administration.
Could we have another Depression, great or even not-so- great? It is almost unimaginable.
Why not? “Because the character of our economy has changed,” economists will answer. “During the ’30s, we put into place institutions that act as safety nets to protect people from catastrophic losses – such as Social Security and FDIC insurance. And the Fed now understands how to manage the credit cycle.”
What Roosevelt & Co. did was to implement the reigning illusion of the time: that technology and rational central planning could eliminate uncertainty. Government social programs would replace the chaos of tradition and culture. Keynesian fine-tuning would bring economic cycles under control. And the Federal Reserve would manage the currency and prevailing interest rates to ensure stability in the markets.
Alan Greenspan: The Biggest Economic Disaster of the Industrial Age
The result – much disputed by economists – was probably to turn a short, swift market break into the biggest economic disaster of the industrial age…and to burden American society with expensive programs from which we have yet to escape.
But here we are, in a new millennium, still counting on a pre-WWI idea – whose central, hidden tenet is that a man’s pockets should be picked by the government in exchange for protecting him from his own imprudence and misfortune.
Rather than let Mr. Market decide what interest rates should be, for example, Mr. Greenspan is forcing the issue: setting, by declaration, the rate at which banks can borrow.
Rather than allowing people to finance their homes at the market rates, Congress – in its wisdom – has reduced mortgage rates for millions of Americans, by backing the most reckless lenders in the world – Fannie Mae and Freddie Mac.
Rather than let people take care of themselves when times are tough – thus requiring them to save money for a rainy day – the government, and Federal Reserve, have encouraged the illusion of a vast umbrella, shielding the public from any major downpour. Since the Roosevelt era, it is believed, there will always be plenty of jobs…plenty of money…plenty of credit…plenty of food and fuel…plenty of everything – as long as you go along with program.
Alan Greenspan: Cheerleading Inflation
“We have noted before,” writes Sean Corrigan, of the Capital Letter [now Capital Insight], “the spread of the American Syndrome around the Anglo-Saxon world. Briefly, the characteristics are that household savings ratios have become depleted while personal borrowing has shot up. Exposure to the stock market has increased as market-valued net worth has risen, giving rise to an illusory perception of increased wealth. In essence, the Atlantic and Australasian Middle Classes have almost unknowingly been turned from creditors to debtors and have come to rely on – indeed to cheerlead – the process of monetary inflation to bail them out, as debtors have from time immemorial.”
Americans will not be disappointed by the Fed’s actions. They will not be crucified on a cross of gold…nor have a crown of hard dollars pressed down upon their brows. The Fed will make good on its promises. It will cut rates. It will increase the money supply. Fannie and Freddie are ready, too. As reported by Kurt Richebächer, “they have converted private mortgage debt into government debt at massive scale…When the credit market tightens, they step in and create liquidity. Just recently, Freddie Mac announced, “it expects to issue $90 billion of U.S. dollar- denominated Reference Note and Bond debt in 2001, implying a 25% annual rate of growth.'”!
All the expensive, lumbering gear of the Rooseveltian machine now stands at the ready, prepared to do its part…to protect and defend the world’s most profligate debtors from the fate they most assuredly deserve.
But will it work? Can you build an economy by destroying your own currency? Can you get rich by living beyond your means? Can the Federal Reserve really encourage the production of new wealth…by offering the public phony apples?
May 19, 2003
Today, we come to the aid of new or forgetful readers with some leading questions:
“The object of investing is to make money, isn’t it?”
Yes, it is.
“And the way you make money is by selling something for more than you paid for it, right?”
“But you at the Daily Reckoning claim to have no idea whether a particular investment…or stocks in general…are going up or down; is that right?”
“Then why should I bother to read your column?”
Actually, we also claim that no one else can tell you whether an investment is going up or down either…and if they could, they wouldn’t.
A good investment call is like a good guess at the race track: the more people who bet against your horse, the more it’s worth. Because as the odds go against your horse, the more you make if the poor nag wins. Ergo, the more you hear any particular investment advice…the less likely it is to be of any worth.
What we hear now is that the current rally will carry stocks much higher. And maybe it will…but you’re not likely to make much money believing it. So many people already believe that stocks will rise that they’ve tilted the odds against a big payoff on the long side of the stock market.
Here we are, 3 years after the beginning of a major bear market, and stocks still sell for the kind of price/earnings multiples you typically see at the top of a major bull market.
“Which prompts another question. You admit that as far as you know, stocks might just as well go up as go down. But when you say they are ‘expensive,’ you imply that you think they will be less expensive…that is, that they will go down…in the future. Have I caught you in a contradiction, or what?”
Oh stop your pettifogging cross-examination. Yes, we think stocks are going to be less expensive at some point. And yes, it seems inconsistent, but so what?
A strong intuition, combined with a careful look at the history of markets, tells us that a big top is sooner or later followed by a big bottom. We don’t know where…and we don’t know when. But we feel that stocks and cheap prices will meet again on some sunny day.
And since we know that stocks will someday be a lot cheaper than they are now, we would rather that someone else experience the pride of ownership during this drooping period.
In the meantime, we welcome the news of the rally with the same foreboding that might have greeted readers of a 1939 newspaper found in an attic trunk this weekend.
“French Forces Break Siegfried Line,” began the hopeful headline, noting that it was “too early to proclaim victory” in the new war. Six years too early, as it turned out.
Friday’s news brought more evidence that Fed officials are losing the war against deflation. Consumer prices fell 0.3%…housing starts fell 6.8%…and bonds hit new highs, even while the dollar fell.
Rounding off the news, the Dow fell…gold rose.
We know that the Fed is bringing out its heavy guns; the money supply – M3 – increased $83 billion in the last two weeks…or at a spectacular 25% annual rate. Still, we think it might be a long time before victory is finally achieved.
Over to our colleague in the Big Apple…Eric Fry:
Eric Fry in New York…
– The Dow may have fallen on Friday, but stocks gained ground for the fifth straight week…as the Dow Jones Industrial Average added 74 points to 8678 and the Nasdaq tacked on 18 to 1,538. The higher the market climbs, the more numerous the bulls become.
– “The most recent sampling of its members by the American Association of Individual Investors showed nearly 63% bullish and a meager 16% bearish,” Barron’s reports. “And, according to the latest available data from Investors Intelligence, 54.4% of the investment advisors are bulls, only 21.7% bears.”
– And the bulls are especially fond of tech stocks…The NASDAQ’s nearly 40% advance since last October suggests that investors anticipate a genuine and robust revival of technology spending. Curiously, most of the tech company insiders do not exhibit similar optimism. Not only are the insiders continuing to provide “cautious guidance” publicly, but they’re also continuing to sell their shares privately. We suspect that a genuine recovery in the tech sector – if it were underway – would elicit a very different response from tech company insiders.
– “There’s a host of economic data suggesting that a revival in spending on technology has arrived,” CNN/Money reports. “Output at high-tech companies was up 9 percent over year-ago levels in March…[and] for the first time since late 2000, new orders for tech goods are outpacing shipments.
– “But a closer look suggests tech’s revival may not last for long. Although tech is doing better, capital spending in general is not. In the first quarter, for instance, spending on new equipment actually dropped, falling to an annualized $981 billion from $992 billion. The implication is that companies are spending on tech not because they want to, but because they have to. And once they no longer have to, their wallets will snap shut again.”
– Nevertheless, the potent tonic of “less-bad” news is curing many tech stocks of the bear market blahs – helping them to recover from the lows they hit last fall.
– The shares of Gateway Computer, for example, have “taken the cure” – the less-bad cure. A few weeks back, Apogee Research cited Gateway Computer as an especially promising speculation. The timing of the recommendation was fortuitous, as the stock has subsequently soared 34%.
– The rally in Gateway shares kicked off in earnest on April 16th, the day immediately after the company released its annual 10-K filing. Since this annual report contained no NEW bad news, but just a bunch of OLD bad news, relieved investors started piling into the stock.
– “Gateway Inc. (GTW) has fallen on hard times,” Apogee Research observed in its initial report. “GTW has seen its bubble-era prosperity melt away and has struggled in recent years just to sustain profitability and cash flow. Truth be told, Gateway has not generated an operating profit for the past five quarters, having posted nothing but red ink since the fourth quarter of 2001. That said, there is a bull case to be made for Gateway. For one thing, at GTW’s current share price, investors can pick up the Company’s business operations for virtually nothing. For another, Gateway has initiated a new strategy to address its problems, and early signs point to success…
– “Obviously, we can’t say for sure that GTW will be a successful turnaround story. But with the market value of its operations at zero, any meaningful signs of success in this regard will most likely spark a substantial rally in GTW shares.”
– From Apogee’s mouth to Mr. Market’s ears… the stock has been rallying ever since.
– However, Gateway is not out of the woods, and neither is Cisco or Intel or Sun Microsystems or Dell…Last week, Dell reported a 31% annual profit growth on sales that rose 18% in a year’s time. But Dell’s in-line report and forecast spurred profit-taking that dropped its shares 3%.
– Nevertheless, the company remains very cautious about future demand. “While overall industry demand has increased slightly for the past three quarters, we don’t expect significant near-term improvement in economic or industry conditions,” Dell’s CFO admits. – The news from the technology sector, broadly speaking, may be less bad. But less-bad is not the same thing as good, no matter how many Wall Street strategists confuse the two.
Bill Bonner, back in Paris…
*** We were stopped on the highway by a pair of gendarmes Friday night.
“Just a routine check,” began a pretty blond woman in uniform. “Can we see your papers?”
“Hmmm…” she began, after examining them. “You have missed your car’s inspection. Did you know that it is obligatory to have your car inspected once every two years?
“I’m afraid I’m going to have to give you a ticket.
“I don’t like to do this, of course…I mean, as a foreigner you probably didn’t know. But you’ve been in France long enough…you should know that we can be strict…”
“You mean, the gendarmes, or the women?” asked your editor.
“Well, both I guess. But especially a woman gendarme needs to be especially tough…”
“Because if she weren’t, people would take advantage of her.”
“Oh, you know…flirting with us, trying to get out of getting a ticket…or just thinking they can push us around…”
“How despicable. Can I buy you a coffee?”