The Ghost of Christmas Past

Part I of the Daily Reckoning Christmas Trilogy, revised and updated for 2003…God bless us, one and all!

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. Or so everyone thought.

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 continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity." It sounded like mumbo-jumbo. But Ebenezer knew what it meant.

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?

Alan Greenspan: Bah, Humbug

"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 ‘deflation’ or `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 Ebenezer.

"Yes…but…" replied the second before being interrupted.

Alan Greenspan: The Recession Is Over

"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 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 happened…"

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 for?"

"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. "Good day, gentlemen."

Alan Greenspan: Crashes and Deflation

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 least.

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 caustic.

"Ask me who I could be," replied the phantom.

"Okay…who might you be?"

Alan Greenspan: Ringing Chains

"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 men…"

"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…mortgage refinancings. 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: 1980."

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.

Alan Greenspan: Reducing Inflation

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 ag

** 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 guest.

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

Ebenezer made no reply.

Bill Bonner

December 23, 2003

Tomorrow: The Ghost of Christmas Present…

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the No. 1 NY Times and International Best- seller: "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons).

There seems to be some natural cycle to the way societies, and even families, think about money – not seasonal, as Eric explains below, but epochal. It is not so much an economic cycle…as a moral one.

At first, early in the cycle of wealth building, people are careful. They work hard and save as much as possible. Americans once saved 20% of their incomes. Even after WWII, they saved more than 10%. Now, in the degenerate phase of American capitalism, the figure for net national saving is less than 1%. The Chinese, apparently just setting out on the road to wealth, are said to save as much as 30%.

As time goes by, people tend to forget that hard work and self-sacrifice is the way to build wealth. They confuse wealth with what money will buy…and begin to think they are wealthy when they are not building wealth, but consuming it. A man drives a big car, lives in a big house, eats at fancy restaurants, and enjoys frequent vacations and big screen TVs – he is said to be a wealthy man. In fact, he may not have a spare dime. Instead of conserving and accumulating riches…he may be using every penny that comes his way – and more!

We mentioned yesterday that the ‘recovery’ was a double- fraud. Now, we add another fraud. People have come to believe that if they are able to shop, they must be rich. They think that THINGS mean prosperity.. As long as they can bring THINGS home, they must be rich.

But a man’s possessions – and all his expensive habits – are not wealth at all; they are anti-wealth…obstacles to wealth…handicaps that prevent him from actually getting anywhere. Each one takes money away from his savings, and out of his wealth-building capital. And each one takes time and maintenance…distracting him from his goals and burdening him with on-going costs. Late in the cycle, however, no one seems to notice. They no longer know what wealth is; all they see is THINGS.

Typically, following a wintry recession, there is ‘pent-up’ demand for things that fuel a recovery. Consumers have put off spending, preferring to pay off debts and build savings. So, when the first crocuses of a spring recovery appear, the consumer is ready, willing and able to buy.

But rather than give the consumer economy a breather during the recession of 2001…Alan Greenspan and George Bush turned every knob and pulled every lever they could get their hands on to keep the big spending machine running at peak power.

With interest rates at Eisenhower levels…and government spending increasing at levels reminiscent of the New Deal or Great Society (despite tax cuts)…the machine whirred and belched. Millions of jobs were lost. Investment spending by businesses collapsed. But the consumers didn’t care. They kept on spending, buying THINGS and believing themselves wealthy. The consumer had long since forgotten how to save; he had forgotten what real wealth is. As long as he could make the monthly payment, he asked no questions.

Now, economists wonder what’s wrong with the ‘recovery,’ as if you could have a proper recovery without ever having something to recover from. There is no real pent-up demand; consumers have saved no money. So, they can only continue to spend by borrowing…that is, by making a bad situation worse, buying more THINGS on credit, bringing more impedimentia…more anti-wealth…into their lives.

The day will come when the dollar standard will have collapsed…when Americans will find no more money and no more credit to buy the things they want. Then, at last, the recession will become real…and they will rediscover the virtues of savings…and real wealth. We cross our fingers…and wait.

Eric…more news?

Eric Fry from the islet of Manhattan…

– Sellers swarmed around the dollar yesterday like tourists around the Christmas tree at Rockefeller Center. Rarely has the world observed a sight as dazzling and awe- inspiring…as the dollar’s collapse. For seven straight weeks the dollar has tumbled against the euro. Yesterday, the dollar slumped another 0.3% to $1.241 per euro, which boosted the gold price a bit. The yellow metal gained $1.10 to $410.45. Despite the dollar’s woes, the Dow jumped 60 points to 10,338 – a new 19-month high. The Nasdaq added 5 points to 1,956.

– Like the majestic, 79-foot tall Norway spruce towering above Rockefeller Plaza, the dollar’s slide is awe- inspiring. But unlike the famous Christmas tree, the dollar’s collapse is not a seasonal phenomenon; it’s epochal. The greenback’s century of monetary hegemony may be drawing to a close…

– But perhaps we are being overly melodramatic. Perhaps foreign investors and central banks will continue shipping cratefuls of euros, yuan and yen to our shores in exchange for ever-larger cratefuls of dollars. And maybe they will also continue buying billions of dollars worth of Treasury bonds every month, even though they receive less than 5% interest per year in a currency that is falling about 15% per year…Or maybe foreign investors will tire of their financial masochism.

– "There are rumors on the market," the Japan Times reports, "that China…is turning to the euro for part of its foreign currency reserves…The markets are worried…because of the worst-case scenario – that funds could start flowing out of the U.S."

– Americans have become so accustomed to the daily miracle of receiving $2 billion dollars in fresh financing from foreigners every day that the miraculous seems utterly ordinary. Unfortunately, a merely ordinary supply of foreign capital would not be sufficient to support the prevailing dollar exchange rates. In other words, the dollar’s value would continue to fall.

– "Few are expecting such a doomsday scenario," Reuters chimes in, "but with the dollar at a seven-year low against the Swiss Franc, an 11-year low against the British Pound and the euro enjoying an 18 percent gain this year, investors are hoping that the dollar is closer to the bottom than not." – The dollar has been sliding – and gold has been rallying – for so many months now that buying gold is no longer a contrarian investment idea; it’s almost mainstream…Behold the arrival of the contra-contrarians: A category of investors who love gold for the long run, but expect it to fall over the short run.

– "The same factors that lead us to believe a correction is overdue in the euro, have us worried about a similar move in gold," says one anonymous commodity analyst. "Overwhelming bullish sentiment and positive press have us worried about the short term. Does that mean we are no longer bullish? No. We remain as long-term bullish as we ever were and consequently, would not recommend completely abandoning long-term positions.

– "Thin holiday markets have the potential to exacerbate any corrective down moves," says the analyst. "Like the euro, gold can correct a long way without fundamentally damaging its long-term uptrend. $370 per ounce is not out of the realm of possibility. Recent rumors that one or another central bank may begin selling the Midas metal again probably won’t help matters either."

– It’s true, rumors of renewed central bank gold sales next year are starting to surface. But at this point, they are merely rumors. As for the euro, investor sentiment is beginning to shift in favor of the dollar. Some of the short-term – repeat, SHORT-term – sentiment indicators are showing that the dollar is overdue for a rally.

– Figures from the Commodity Futures Trading Commission show that the large speculators, also known as the "dumb money" have amassed some very large bullish bets on the dollar. The difference in the number of wagers by large speculators that the euro would rise minus bets that it would fall – so-called net longs – was about 34,800 in the week ended Tuesday, the highest since May 2002.

– Net-net, if we were to follow the contra-contrarians, we’d sell euros and gold for a short-term trade, and try to buy them back in a few weeks for a long-term investment. On the other hand, if we were to trust in the long-term dollar trend – down – and in the long-term gold trend – up – we’d forget trying to trade "tick-for-tick" and buy gold on weakness. Lastly, if we were to follow the common wisdom on Wall Street, we’d sell gold now, buy Intel and hold on until we reach Dow 36,000…You decide.

Bill Bonner, back in the French countryside…

*** Our friend Scott Burns writes that the average precious metal fund rose 64% over the past 12 months. Over the last 3 years, precious metal funds have gone up 44% each year – by far the most profitable sector.

Scott points out that a simple 10% position in a precious metals fund – an insurance position – would have protected the holder from losses in stocks and bonds over the last 3 years. Instead of suffering a 6% loss from pure stocks and bonds over the 3 year period, an investor would have gained 4%.

*** Our little choir has only 7 members, of whom almost half cannot sing at all. It lost another member the other day, when Jacques walked out.

"If you’re going to sing in Latin," he remarked. "I’m leaving." And he did.

French catholics are on ‘high alert’ against creeping latinism. They regard it as retrograde, elitist, bourgeois and ‘exclusionary.’ Of course, that’s just what we like about it. We only wish the priests would give their sermons in Latin. We wouldn’t understand a word, which would usually be a big improvement.

*** Everybody knows it is a safer world – now that Saddam is out of his rat hole and behind bars. And now at least two spokes on the Axel of Evil – Afghanistan and Iraq – have been shaved and rehabilitated. But back in the homeland, people seem to have the jitters. In a real war, the authorities try to calm the population, assuring people that there is nothing to worry about. The last thing they want are panicky crowds getting in the way. In Germany, at the end of WWII, for example, the authorities insisted that there was nothing to fear; even as the Russian army swarmed across the Oder on the Eastern frontier, raping and murdering thousands along the way.

But this ‘war on terror’ is different. The risk to the average American of getting killed in a terror attack seems vanishingly small. Still, Americans are supposed to be on ‘high alert’ against the threat.

*** The following appeared on a French website under the heading ‘Land of the Free.’

Coffee, Tea or Handcuffs?

An Australian journalist gets a taste of Department of Homeland Security hospitality

by Steven Mikulan LA Weekly

Sue Smethurst enjoys traveling. It’s one of the things about my job that I absolutely love," says the 30-year-old Australian, who works as an associate editor for the women’s magazine New Idea. She doesn’t even mind flying. "It’s one of the great pleasures of the world to be able to turn off your cell phone and be where no one can annoy you."

But when her Qantas flight from Melbourne, Australia, touched down at LAX around 8 a.m. on Friday, November 14, Smethurst found herself nightmarishly annoyed – by the Department of Homeland Security (DHS). Smethurst was supposed to continue to New York and on Monday interview singer Olivia Newton-John. Smethurst had honeymooned in Manhattan last year and was looking forward to a long, free weekend having a good walk through Central Park, getting a decent bowl of chicken soup and going Christmas shopping – all those gorgeous New York things."

Better still, her six-hour layover in L.A. would allow her to have lunch with her American literary agent. "I had a room booked at the Airport Hilton, where I was going to my leave bags, shower and get a cup of coffee."

But first she had to clear LAX’s immigration check-in, which she reached after 20 minutes in line. An officer from the DHS’s newly minted Customs and Border Protection (CBP) bureau studied the traveler’s declaration form Smethurst had filled out on the plane.

"Oh, you’re a journalist," he noted. "What are you here for?"

"I’m interviewing Olivia Newton-John," Smethurst replied.

"That’s nice," the official said, impressed. "What’s the article about?"

"Breast cancer."

When Smethurst tells me this, she pauses and adds, "I thought that last question was a little odd, but figured everything’s different now in America and it was fine." What she didn’t know was that her assignment and travel plans, along with the chicken soup and stroll through Central Park, had been terminated the moment she confirmed she was a journalist.

Fourteen hours later, she was escorted by three armed guards onto the 11 p.m. Qantas flight home.

"I want to say right off that I adore America and love Americans," Smethurst says. Still, she remains perplexed and emotionally bruised by what followed in Terminal Four. The CBP agent who read Smethurst’s traveler’s questionnaire took her to a secondary inspection area 30 feet away and told her to wait, then left for half an hour. He returned with additional uniformed staff who, professionally and pleasantly enough, asked more questions.

What sort of stories did she write? What kind of magazine was New Idea?

Where was it published? What was its circulation? Does it print politically sensitive articles? When would her interview appear? Who would be reading it?

"I laughed," Smethurst recalls, because we’re a cross between Good Housekeeping and People magazine. "The most political thing we’d likely print was Laura Bush’s horoscope."

The polite interrogation continued. Who was her father? His occupation? Her mother’s maiden name and occupation? What were their dates of birth, where did they live?

The agents gravely nodded at Smethurst’s replies and left once more, promising to return. When they came back half an hour later, one of the officers offered Smethurst a cup of airport coffee.

"I thought at that stage something was quite wrong," Smethurst says, "so I asked the man with the coffee if there was some problem."

"I will tell you when there’s a problem," he abruptly snapped, according to Smethurst. Then he pointed to a nearby sign:

Your Silence Is Appreciated

At about noon, CBP informed Smethurst she would be denied entrée into the United States: While Australian tourists visiting the United States are visa-waived for 90 days, working journalists need a special I-Visa, which Smethurst had not been aware of and did not possess. She had, after all, flown into LAX on the same passport eight times previously without incident. Now she was being asked to raise her right hand and swear that her answers had been truthful, then was fingerprinted and photographed – every time she comes to America, her swiped passport will bring up this documentation of her rejection. As Smethurst’s inked fingers were rolled onto the government form, she noticed its heading:


Eventually she was escorted under armed guard to a pay phone to make the call she vainly believed would clear everything up and allow her to stay in the country. Then, while conversations were occurring among her husband, editor and consul officers in L.A., Smethurst’s baggage was thoroughly searched and a makeup bag temporarily confiscated. She was then handcuffed and marched through the airport to another terminal, where LAX’s main detention center is located.

After the phone call she pleaded for food, having now been away from home nearly 24 hours. Smethurst offered money for a snack to be brought to her – French fries, potato chips, anything – but was refused.

"Would it be possible to get a cup of tea?" she asked. This too was denied, because it could be used as a weapon – someone, it was explained, had recently thrown hot coffee into an agent’s face. When she requested a cup of cold tea, she was similarly refused, although no one could explain to her how a cup of cold water could become weaponized.

Finally, around 6 p.m., a "detention meal" was pulled from a fridge, consisting of an orange, fruit-box drink and a roll that, Smethurst says, "I could play golf with."

For a while she sat in the main detention center, unable to eat the food, as eight armed guards watched TV. Then one of the staff returned with a bag of takeout and began eating a hamburger and fries in front of her.

"At that stage," she says, "I just lost the plot completely and threw the roll into the bin in front of me with sheer, utter frustration."

The CBP would later call this gesture a "tantrum"; Smethurst, in turn, claims that she was thoroughly body searched by female staff each time she was moved from one part of LAX to another, and that she broke down in tears several times, swearing to her captors that she was not a criminal, had done nothing wrong and should be allowed in the country. She also says one sympathetic staff member told her she’d simply had bad luck in getting the agent she did at the first customs station, since the I-Visa rule was enforced at the discretion of agents. Smethurst could have entered the country by simply declaring herself a tourist on her traveler’s form – a routine practice among reporters entering the U.S.

Eventually, Smethurst’s release was won by the Consul General’s Office. The consulate also gained one other concession – the cup of tea she’d begged for. It was prepared by a senior CBP official whom Smethurst thought was the kindest American she’d met that day.

"It was the best cup of tea I’d ever had," she says. I didn’t waste a drop."