The Ghost Of Christmas Past

The Daily Reckoning Presents: a DR Classique, revised
and updated for 2001…


Old Greenspan was not dead. Not dead as a doornail, nor
dead as a doorknocker. Not even as dead as a laptop
computer after the power goes out – not even John
Maynard Keynes is that dead.

Nothing is as dead as a computer without power. For even
a nail continues to provide good service after the spark
of life has gone out of it.

But Greenspan? The Fed chief was still alive. Not only
that, he still had the power to flood the economy with
cash…and lift stock prices.

At least, Ebenezer still thought so. He had seen
Greenspan on television not long ago. The old Rand-
worshipping jazzman had said as much. Ebenezer could
remember his exact words: “The committee will continue
to monitor closely the evolving economic situation.” It
sounded like mumbo-jumbo. But Ebenezer knew what it

Of course, there were some – such as his old associate
Bob – who said that Greenspan couldn’t do it…that
merely reducing interest rates wouldn’t work. But what
did they know?

“Bah,” said Ebenezer to himself, “humbug.”

“What reason is there to worry?” he asked, to no one in
particular. “If I could work my will, I would have every
idiot who goes about with ‘recession’ on his breath
forced to watch Wall Street Week and read the editorial
pages of the International Herald Tribune.”

His musing to himself was interrupted by the entrance of
two gentlemen who introduced themselves quickly and
proceeded to divulge the purpose of their visit.

“We thought that, perhaps, given the spirit of the
Christmas season,” said the leader of the two, “perhaps
you could spare a farthing for the poor, the destitute
and the needy.”

“There are many people who need our help,” added the
second, “…the poor unfortunates who invested their
money in dot-com stocks…or the big techs.”

“Need our help?” questioned Ebenezer. “Are there no
mutual funds?”

“Well, of course…” the first began to reply.

“And do they not accept small amounts?” demanded

“Yes…but…” replied the second before being

“And has not the bull market been a fact of life for
nearly two decades? And hasn’t every dip turned into a
buying opportunity?”

“Well, yes…”

“And has it not been shouted from every newspaper
headline…every news report…every Internet chat
room…and every conversation between even the most
casual passers-by at even the most ill-informed and
down-market drinking establishment in the most remote
and out-of-touch region of the country?”

“Doesn’t everyone who is capable of long division now
realize,” continued Ebenezer, raising his voice, “that
the recession is almost over…and that nothing beats
investing in stocks over the long run?”

“Yes, we are aware…”

“Oh! Good. I was afraid that something might have

Then, misinterpreting the ensuing silence for approval,
the second gentleman ventured, “Well, in this great time
of trial, how much would you like us to put you down

“My only wish is to be left alone so that I may continue
to enjoy the fruits of the greatest episode of wealth
creation in history,” replied Ebenezer. “Stocks may be
down, but so much the better. I take it as an
opportunity to buy more of them for less money…and I
suggest that others do the same. Good day, gentlemen.”

And Ebenezer turned and walked away, muttering, “A poor
excuse for picking a man’s pocket…”

That evening, Ebenezer slept poorly, under the fullest
moon in more than a century. He had been startled
earlier. Returning home from the office he had seen Alan
Greenspan’s face in his doorknocker! An odd sensation,
for Greenspan’s face was hardly one that he expected or
hoped for. But there it was…for a fleeting moment, at

And now, after finally achieving the sleep he longed
for, his rest was suddenly interrupted by the sound of
ringing bells.

Yes, bells.

The kind of bells they fail to ring at the top of a bull
market. But why now…clanging like chains in the middle
of the night?

The door to his bedroom blew open…and the clanging
sounds seemed to mount the stairs.

“Humbug,” he thought, “I won’t believe it. The bears
have been hearing ringing in their ears for years. The
poor fools. ‘Recession…bear markets…crashes…
deflation…’ and now they’re at it again…more
convinced than ever. Ha!”

His color changed though, when, without a pause,
something came on through the heavy door and passed into
the room before his eyes.

The face: it was the same face he had seen on the
doorknocker earlier in the evening. And on the
television a few weeks ago. It was the face of Alan
Greenspan, the Fed chief. His body was transparent,
ghostly, but there was the source of the clanging. For
the spectral figure was wrapped up in chains, to which
were attached various metals – gold, copper, silver…
both coins and nuggets, all clattering and
banging against one another.

Ebenezer had heard it said that Greenspan lacked guts.
But there they were. In this ghostly form Ebenezer could
see all of him, inside and out. It was as strange as it
was unappealing.

“Who are you?” asked Ebenezer, his voice cold and

“Ask me who I could be,” replied the phantom.

“Okay…who might you be?”

“That is a different question,” said the specter, “but I
will answer it anyway. I have no time for word games. I
am the spirit of Alan Greenspan…”

“I thought so…” whispered Ebenezer.

“…and it is required of every man that he walk among

“But you are not even dead yet,” protested the old man.
“I would know if you were dead…I would have read about
it in the paper…

“And what are these chains you wear?”

“They are the chains you forge for yourself. But instead
of gold and silver, yours are laden with computer
terminals, stock certificates, portfolio statements, the
New Era… You will be fettered not just for
your life, but for eternity. And they grow heavier with
each passing month. Unless, that is, you heed the
ringing of these chains…”

“I am here tonight to warn you,” the ghost went on,
“that you may have a chance of escaping your fate. Rise
and walk with me.”

“I am mortal…”

“Come,” said the ghost, taking Ebenezer’s hand…The two
of them rose as if weightless and slipped through the
mist of time:

“Here, look…” said the apparition, “Christmas Past:

Ebenezer could see for himself.

There before him was the face of another Fed chief. It
was Paul Volcker himself. And there, what was that? A
crowd of people were burning him in effigy.

But why? Then Ebenezer began to recall what that
Christmas was really like:

Inflation, measured by the CPI, rose at 13% that year.
Volcker’s job was to reduce that figure. He did so. But
it was not fun for anyone – except short-sellers.

The Dow fell 24% after Volcker held his famous Saturday
press conference and announced a change of direction.
Volcker threw out the WIN buttons and targeted reserve
requirements. Interest rates soared. Twenty-year
Treasury bonds yielded 15%. The prime rate hit 21.5%
percent. Homebuilders and farmers – and perhaps some
Wall Street brokerage houses – threatened his life.

The Dow fell to 776. Adjusted for inflation, a
generation of capital growth was wiped out.

But not everyone was hurt. Investors who bet heavily on
gold stocks, oil and collectibles did well – at least,
until Volcker’s purposes began to be realized.

Ebenezer recalled the predictions of 20 years ago:

** Oil would go to $100 a barrel

** Inflation would be at least 6% – forever

** Gold would rise through the end of the century

** Bonds were “certificates of guaranteed confiscation”

** Stocks were dead (a death that was confirmed by
`Business Week’ on Aug. 13, 1980 – the very bottom)

** The whole key to investing was to avoid risk

“Let us look a little further,” said the ghost. And with
that, Ebenezer saw a new scene. In this one, he saw
himself. But it was not himself as he was…but as he
had been.

There was the young Ebenezer. Full of enthusiasm and
eagerness to make his fortune. He had plenty of hair,
too. And, look, you could see the muscles bulging
beneath his polyester shirt.

“These are but shadows of the things that have been,”
said the Ghost.

And there he was, the young Ebenezer. Standing alone and
neglected at a Christmas party several years after Paul
Volcker had taken charge of the Fed.

He looked quite sad…but Ebenezer knew why at once.

“I won’t make that mistake again,” said the young
investor to himself.

“What mistake had he made?” asked the ghost of his

“Why does he reproach himself? For the right thing or
the wrong one?”

Ebenezer made no reply.

Monday: The Ghost of Christmas Present.

Bill Bonner
December 21, 2001

“Corporate America went long in debts and short in
assets,” writes Dr. Richebacher.

Investors are now paying as much for every dollar
of earnings as they ever did and about twice as much as
they typically do. And earnings have been going down for
the last 5 years…


Corporate profits peaked out in 1997. Now,
businesses are cutting back wherever they can in order
to bring profits back up. This means getting rid of
employees, dropping capital spending, closing
unnecessary offices, and selling off unprofitable
business lines.

This, in our view, is what the recession is all

The only trouble is there hasn’t been enough of
it. In the late ’90s, corporations found that they could
borrow as much money as they wanted, buy other companies
– often unprofitable ones – at outrageous prices, and
their stock would go up. They also found that it was a
lot easier to add the appearance of “shareholder value”
by means of mergers, acquisitions, stock buybacks, and
financial engineering, than by actually investing in new
plant and equipment (with one exception: they made heavy
investments in information technology…) Now they are
taking big write-offs for goodwill that wasn’t so good
after all…and selling off purchases at pennies on the
dollar…as profits continue to fall…

“It is our long-held view that, from a
macroeconomic perspective,” Dr. Richebacher concludes,
“the obsession with shareholder value in America is the
greatest folly in economic thinking and theory in

Earnings won’t improve quickly, Richebacher
believes. Because bad investments need to be fully
written off, savings accumulated, and new, better
investments made. See: Bursting With Strength and Dynamism, But Where Are The Profits?

Of course, no law says stocks can’t go up and down
in the meantime.

Eric, what happened yesterday?


Mr. Fry joins us from the Big Apple…

– What chance does the Santa Claus rally have when there
are so many Grinches milling about? The Spanish-speaking
Grinches caused the most anxiety yesterday.

– Chaos rocked Argentina’s financial markets amidst
rioting in Buenos Aires, the resignation of Economy
Minister Domingo Cavallo and rumors that the president
might also quit.

– “Argentina is hurtling down a road to disaster right
now, and I’m not sure anybody can save it,” a local
stock analyst told Reuters. “We’re going to have chaos
because there is simply no government in charge.
Default, devaluation – anything could happen.” Ratings
agency Fitch predicted that a “broad, disorderly”
default was imminent on $97 billion of Argentina’s debt.

– Fleet Bank wasted no time writing off $150 million for
Argentina losses – virtually wiping out the bank’s
fourth-quarter profits. Walt Disney was right; it’s a
small world after all. In fact, the financial world has
become so small that it seems like every time a
financial crisis erupts, you’re bound to bump into J.P.
Morgan Chase.

– “When last we visited our hero, J.P. Morgan Chase,”
writes, “the money center bank was
busy forgetting to mention that its exposure to the
Enron bankruptcy was actually $2.35 billion, not the
$900 million it was reporting at the time. And then, it
subsequently lent [to Enron] another $250 million in
debtor-in-possession financing. Wednesday night, Morgan
remembered a few of its other liabilities to Enron.” The
actual number…unless they’re forgetting something…is
closer to $2.6 billion.

– “Elsewhere in the financial house of cards known as
J.P. Morgan Chase,” Grant’s Investor continues,
“Argentina defaulted this week on part of the $900
million it owes to JP Morgan…Oh well, better luck next
global financial crisis.”

– “The Morgan” – which fell 4% and was the Dow’s biggest
loser on the day – helped to drag the venerable index 85
points lower to 9,985.

– Over on the Nasdaq, Juniper Networks plunged 18% –
setting the tempo for one of the biggest Nasdaq drops in
weeks. The index fell almost 3 1/2% to 1,918 – its
steepest one-day slide since late October.

– Juniper, like so many of its earnings-challenged tech-
stock peers, has been a very hot stock of late. Prior to
yesterday, the stock had rallied a breathtaking 200%
from its September low to its October high – a
beneficiary of the “tech recovery in 2002” story we’ve
all been hearing so much about. But clearly, no rebound
has yet arrived at Juniper. And so the company committed
the familiar sin of warning that fourth-quarter earnings
would be about half what analysts had been expecting.
(Are these analysts ever right?)

– As the Juniper debacle illustrates once again, “Buy
high…and try to sell higher” doesn’t seem to work
quite as well as “Buy low…sell high.” But that doesn’t
stop folks from trying to make a buck by buying high.

– Investing is never easy. But paying rich prices for
stocks makes things a lot tougher, as Morgan Stanley’s
Steve Galbraith demonstrates. “Tech [stocks are] now
trading at roughly 50 times 12-month forward earnings –
the highest since the 2000 bubble,” Galbraith says.

– “Historically, when the forward P/E has been 25, the
subsequent one-year return has been 17%…[A]t a 35 P/E,
it was negative 4%…and at a 45 or higher P/E, the
return was negative 35%…We think too much of a
recovery is priced into the technology sector.”

– While bad news floods in from Argentina and from the
U.S. technology sector, a few promising reports are
trickling in from Russia.

– “…good news for DR Blue readers who hold the ADR
shares of Russian natural gas behemoth Gazprom,” says
editor Dan Denning. “Russian President Vladimir Putin’s
hand-picked man at Gazprom, Alexei Miller, is finally
forcing his will on Gazprom’s recalcitrant board
members. Miller persuaded Gazprom’s board to buy back a
company which had previously been siphoned off by former
Gazprom cronies who had been using the subsidiary’s
revenues to line their own pockets.”

– Denning continues: “Since Gazprom supplies 23% of the
world’s natural gas demand – and nearly one quarter of
Russia’s tax revenues – expect to see Putin and Miller
keep pushing to see Gazprom realize its fair valuation,
which would make ADR shareholders quite happy.”

If you’re not Blue – see: Terror In The Streets

– And best of all for investors in Russian securities,
when it comes to defaulting on sovereign debt like
Argentina is now doing, Russia can confidently say,
“Been there, done that.”


Back in Gay Paree…

*** “Bonne Annee, Joyeux Noel…ho, ho, ho…”

*** We opened a bottle of champagne in the office
yesterday…celebrating the holiday season. We weren’t
exactly celebrating Christmas…because nearly half the
staff here in our Paris office are Muslim. Still, we
have a Christmas tree and picked names out of a hat to
exchange presents…in a “Secret Santa” ceremony.

*** Addison was St. Nicholas, wearing a red Santa
hat…and handing out the presents.

*** And I said a few words, commenting on the events of
the past year and wishing everyone a happy new one. Not
everyone speaks English, so I decided to give my little
“discours” in French. I turned to my French teacher,
Sylvie, to help me prepare.

*** “It doesn’t have to be perfect. They know my French
is not great,” I explained to her, showing what I had
written. “In fact, it should be French as spoken by an

“Don’t worry,” she said. “You don’t need me for this.
Your French is imperfect enough already.”

The Daily Reckoning