The Ghost Of Christmas Past

[This article originally appeared in The Daily Reckoning on December 21, 2000]

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.

Not even God himself, but that is another story.

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.

And Ebenezer knew it. He had seen him on television not long ago. The old Randite 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 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?

“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.”

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

“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.

“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 downmarket 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 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, “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 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 sleep 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…” And now they’re at it again…more convinced than ever. Ha!”

His color changed though, when, without a pause, it 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 Greenpan lacked guts. But there they were. In this ghostly form Ebenezer could 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?”

“That is a different question,” said the spectre, “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 then, after a pause… “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…”

“Barely,” said the ghost. “Here, look…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.

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 shortsellers.

The Dow fell 24% after Volcker held his famous Saturday press conference and announced a change of direction. It took people a while to realize that Volcker, unlike previous Fed chiefs, meant what he said.

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 guest.

“Why does he reproach himself?”

Ebenezer made no reply.

Tomorrow: The Ghost of Christmas Present.

Bill Bonner

Paris, france

December 21, 2000

*** Let’s see, if I twist my left leg up to touch my right ear…

…I’ve just spent the night on an airplane, contorting myself in different directions in order to try to get comfortable. Then, we got stuck in a traffic jam coming into Paris… so we’re a little late this morning…

*** But what can I tell you that you don’t already know? Instead of taking the holiday season off, Mr. Bear is having his revenge. For 18 years, he’s been growling in the wilderness – ignored, dissed, even thought extinct. But he’s back and seems to want everyone to know it.

*** It’s very, very unusual for stocks to fall in the last 2 weeks of December, says Richard Russell, but they’re falling anyway.

*** The Dow dropped 265 points yesterday. The Nasdaq suffered a 178-point decline.

*** Volume was big – as twice as many stocks on the NYSE, and 4 times as many on the Nasdaq, declined as advanced. There were a shocking number of stocks hitting new lows on the Nasdaq – 933.

*** What went wrong? Well, nothing…and everything. Merrill Lynch analysts seemed to have gotten up on the wrong side of bed. They downgraded a group of stocks including Cisco, Hewlett-Packard and IBM. The whole crew took a dive, with Cisco down almost 3%…IBM down 4.6%…and HP minus 13%.

*** The big tech collapse continued yesterday – with the Internet index down 10% and the big techs down across the board. drifted yet further down the river of no returns – opening at only $16.

*** And giant AT&T announced that it was so squeezed for cash it would have to cut the dividend by 83!

*** Sic Transit Gloria Mundus – what else can I say? Take eToys, please! The online toy seller was once thought to be worth $1.9 billion. That billion, with a `b’. Now, investors give it a market cap of only $37 million.

*** “Given the stunning lack of consumer demand for eToys’ much-enhanced services this season,” wrote a researcher for Robertson Stephens earlier this week, “it is now clear to us that eToys substantially over-spent relative to consumer demand.”

*** “People rarely invest based on an ability to tear apart income statements and balance sheets,” writes Doug Casey, “not to mention understand the business firsthand by not only interviewing management and employees, but suppliers and customers. They invest based on what are tantamount to tips and gut feeling. That’s why nobody was in the market in 1982 and why everybody has been in it for the last five years.”

*** How times change. Just 6 months ago, many people thought you couldn’t overspend. The sky was the limit. But now…the Summer of Love is gone. The Autumn of Anxiety if passed. And here we are in the Winter of Woe – and all the news is bad news.

*** But here at the Daily Reckoning, you are always ahead of the curve – and sometimes around the bend! Investors are beginning to notice what we’ve been talking about for months: the economy is falling apart…the big techs are a death trap for capital…and the dollar is in decline.

*** They’re even beginning to wonder whether Alan Greenspan really can save the day. “Wall Street still weighed down by doubt,” says a headline in the Financial Times. If Greenspan can save the day, people wonder, what is he waiting for?

*** “The Fed cut rates massively and immediately during the Long Term Capital Management debacle, thus saving the day …” writes fiction writer Paul Erdman. “What is happening in the stock market now could have immeasurably greater consequences. But Greenspan does nothing but issue more enigmatic statements. It is as if Greenspan’s vision is limited to trees such as Long Term Capital and the banks that backed it, but he’s unable to take in what is happening to the forest known as Nasdaq in which most of us have a very significant stake.”

*** Don’t worry, Paul, Greenspan will take action. It just won’t do any good.

*** The Nasdaq has now surrendered all of its gains since March 1999. Erdman says that the total loss of capital thus far in the bear market is up to $4 trillion. For reference, or amusement, that’s about $40,000 per family. Can the average family afford to lose that much in stocks? We’ll see…

*** I love this item: Bryan Piskorowski, analyst for Prudential Securities, is quoted as saying that investors are “groping for a bottom.” Watch out, Bryan, you can get arrested for that.

*** But while Bryan and other analysts are groping for the bottom of their dreams, they are grabbing cash. “While many investors have been hammered,” begins a report on the Prudent Bear site, “such a dreadful situation is apparently not going to keep Wall Street employees from big year-end bonuses…

“The median bonus for Senior Managing Directors is between $2 and $3 million, Managing Directors (1-3 years) $1 to $1.75 million, Senior Vice President, Director, Principal $850,000-$900,000, Vice President (class of ’94) $750,000- $800,000, Associate (class of ’97) $475,000 to $485,000, and second-year Associate $250,000. And while ridiculous compensation was tolerable during the boom, it’s hard to believe such pay will garner much goodwill going forward. It is certainly interesting how CNBC now mocks Wall Street analysts on a daily basis.”

*** The euro rose over 90 cents yesterday. Looking ahead, March contracts have the Esperanto currency up to 91 cents.

*** Oil fell $2.19_ but gold rose (Feb. contracts) $2.70. Gold stocks were the big winners yesterday – rising 4%. Afraid of a meltdown in the dollar? Worried about a multi- year bear market on Wall Street? Concerned about debt, defaults, bankruptcies? Don’t worry. Be happy. Sell the rallies. Buy gold stocks, euro bonds, and ultra ugly stocks..

*** What else? Well, Asian stock markets are heavy with techs. And they’re getting hurt. Poor Ms. Wu, remember her? She was moaning and kvetching when her stocks were down 20%. She even joined a demonstration urging the government to “do something.” But what can the government do? Korean stocks are now down 41% for the year. In Taiwan, they’re down almost 50%.

The Daily Reckoning