The Life of Alan

Let us return to our epic novel.

Our hero, Alan Greenspan, was a bright young man facing a modest career as a saxophonist in a jazz band and even more modest prospects as a gold bug and member of Ayn Rand’s small, gabby circle of ‘objectivists’ in New York.

In 1963, he wrote:

“The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirades against gold… Gold stands in the way of this insidious process. It stands as the protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

But neither power nor money are given in much abundance to such men. Neither clear-headed polemics nor saxophone riffs nor gold buggery pay very well. And so, our hero decided that rather than fight the statists, he would join them.

After many years of exertion, Alan Greenspan became one of the most powerful central planners since Joseph, the Jew who interpreted Pharoah’s dream and then became overseer of all Egypt, second in command to Pharoah himself.

Now, Alan faces his biggest test.

After 18 fat years, all of a sudden, the American economic Nile has begun to run dry. Our hero is on the spot. For unlike Joseph, Alan did not encourage savings during the bountiful years. He made a remark once about ‘irrational exuberance,” but that was the end of it. He later recanted, saying that there was no need to worry, and no need to save – future harvests would always be rich and full.

Worse, he nurtured the myth – now widespread among the people – that he, Alan Greenspan, could control the great river himself. Through the hocus pocus of the central bankers’ arts he was supposed to be able to restore the river to its former levels. Alan knew that this was not actually so, but he hoped that he could keep people believing it until the river recovered on its own.

And so, the drought has begun. And the granaries are empty. Already, those who were most exposed to the risk of drought conditions – the investors – have taken huge losses. But they were at the margins of the economy, not down in the rich, fertile bottomlands of the Dow.

Investors are not alarmed. The river will flood again, they say, it is just a matter of time. “The worst is behind us,” chant the corporate CEOs, the newscasters, the analysts, and the great steaming mass of investors. Still, the question is on everyone’s lips – when?

People still think Greenspan can restore the mighty river by opening the floodgates of liquidity. Indeed, so furiously has the Fed chief been working the winches and levers he must have gotten blisters on his hands.

Rates have been lowered 5 times in as many months. Next week, he will probably cut rates again, perhaps by 25 basis points, perhaps by 50.

And the money supply! “M3,” reports Dr. Kurt Richebacher, “shot up by $321 billion in the first 4 months of 2001… Broad money in the last few months has been expanding at an annual rate of 12% and higher.” M3, too, has been rising at a double digit rate year over year.

Surely, all this liquidity should find its way into the consumer economy, investors believe. Accordingly, they boosted share prices from April 2nd until about a week ago.

And yet, the irony we discovered yesterday is that Greenspan’s liquidity may never reach the real economy. Greenspan, master of the money supply, protector of the dollar, overseer of the entire world economy…cannot control the price of consumer credit. Greenspan may be willing, but he is not able. The markets stand in his way. Mortgage interest rates are higher than they were at the end of last year. And credit card interest rates have hit minimum levels.

“We notice a total failure of the Fed’s rate cuts,” writes Dr. Richebacher. The Financial Times elaborates: “The US economy continues to labour under an excess of unsold goods; an excess of production capacity; and an ongoing deterioration in corporate profits and profit forecasts. All have suggested the possibility of more cuts in production and staffing levels in the months ahead.”

Thus, Greenspan’s easy money flows, not to consumers, but into the vaults of bankers – who now borrow at real rates near zero and lend at real rates as high as 11%.

Mr. Greenspan, himself, responded to this perversion in his remarks yesterday. He urged bankers and other credit institutions to lend more freely in order to keep the economy moving.

Spend, spend, spend, urges Fed governor McTeer. Lend, lend, lend, urges Fed chief Greenspan.

But the object of their attentions, the consumer, upon whose back the New Economy has rested for so long, is about to collapse…

“Many experts convey the impression that consumer spending has remained strong,” writes the Jeremiah of modern economists, Dr. Kurt Richebacher, but “the general perception of rather stable consumer spending is another illusion.”

Auto sales for the month of April, for example, were reported to have increased by 0.8%. But this was achieved by manipulating the numbers of previous months and making seasonal adjustments. In fact, Dr. Richebacher reports, sales actually fell…from 603,340 autos in March to only 520,394 in April.

And, while consumer spending growth rates are still positive – around 2% – Dr. Richebacher explains, “the rate of growth of retail sales has literally collapsed over the year.”

“The great hope is that a debt-addicted consumer will keep the economy out of recession,” concludes Dr. Richebacher. “Don’t bet on it. He has no chance. The longer he keeps borrowing and spending…the sharper his later pullback in spending will be. His finances are in rapid deterioration: losses in the stock market and sharply lower growth in real disposable income…interest payments have become a quickly rising burden.”

The consumer is in trouble. The economy is in trouble. And Alan Greenspan, the most powerful central banker who ever lived, shudders in his bath.

Stay tuned…as we discover how this story will turn out – tragedy, comedy, or farce?

Bill Bonner
Paris, France
June 21, 2001

*** An AP article: “The bills are coming due for the shopping spree of the 1990s, and Americans are having trouble paying up. Personal debt is at an all-time high, and the amount of income Americans are dedicating to making payments on it is at levels unseen in 15 years. Mortgage delinquencies and write-offs by credit card companies are rising, and personal bankruptcy filings could hit a record this year…”

*** Among the things that consumers are beginning not to buy are mobile handsets and airline tickets. Northwest Airlines’ CEO said yesterday that he had never seen ticket sales fall off so suddenly. And the chief of one telecom company estimates that sales of 400 million phones this year would be “extremely ambitious.” Last year, 620 million units were expected to be sold this year.

*** Canada’s leading telecom, Nortel, fell another $4 yesterday. Even at the peak of the telecom boom, however, Nortel never made a profit. It hasn’t been profitable since ’97.

*** And the Industry Standard, host to technology company advertising, says that ads are off 70% since the beginning of the year.

*** Sales are falling and so are many prices. Steve Leuthold tracks 75 commodities. Recently, most of them are falling in price.

*** Greenspan is probably right. Inflation is not threatening the U.S. economy – not yet. Deflation is the threat. At least bond buyers seem to think so. The gap between the 10-year Treasury notes and inflation-indexed TIPS has fallen below 2%, suggesting either that bond buyers believe inflation will be below 2% for the next two years…or that they’ve lost their minds.

*** Support for the latter proposition is offered by a brief glance at a chart of inflation rates. Currently 3.7%, inflation has only been 2% or lower on two brief occasions within the last 30 years – once in 1987, and once again in the late ’90s.

*** On the other hand, I notice that the big losers yesterday were the gold stocks – down about 5%, while the price of the metal itself fell $1. Gold seems to see no inflation menace either.

*** Meanwhile, Lynn Carpenter’s writes to tell me she’s got another hot one on the burner – up 50% currently.

Let’s see what else happened yesterday, Eric?

– It was a warm, almost-summer day in Manhattan yesterday, and Wall Street finally enjoyed a day in the sun. The Nasdaq jumped 38 points, while the Dow tacked on 50.

– Nevertheless, the financial weather system featured more than a few storm clouds. Tellabs, Teradyne and Northwest Airlines each announced deteriorating profitability. Undaunted, very few investors ran for shelter yesterday. Rather, it was a day to ignore the gathering clouds and bask in the warm glow of hope.

– Consumer spending in New York is headed for trouble, according to Crain’s. “The city’s economy faces a big shock beginning in December and continuing into next year when Wall Street will issue bonuses. Bonus payments totaled about $13 billion this year and are one reason why the New York economy has held up so well compared with the rest of the country…Wall Street profits for this year are now likely to be only a third to a half of last year’s, which would reduce bonuses by at least that amount.”

– Yet, somehow, investors are keeping the faith in Greenspan’s ability to steer our economy on a steady course – at least judging by the strongly performing cyclical stocks. The Morgan Stanley Cyclical Index (CYC) has advanced about 30% from its October lows, even though signs of a recovery loom far beyond the visible horizon.

– Steve Leuthold, of the Leuthold Group, observes, “From 1900 to date, the stock market has compounded at a 10.8% annual rate.” However, says Leuthold, from 1995 through the 2000 peak, the S&P 500 compounded at the much higher rate of 25.7% per year.

– Only one of these rates of return could be considered “normal” – a hint: it’s not 25.7%. Citing the work of Anirvan Banerji, head of research at the Economic Cycle Research Institute, James Grant observes that U.S. industrial production, which has now fallen for eight months in a row, “has never [produced] a string of more than three monthly declines during the postwar era except in times of recession.”

– Likewise, Grant observes that the U.S. unemployment rate has risen 0.6 percentage point from its lows of last fall. “Never in postwar annals has the jobless rate climbed by more than 0.4 percentage point, except in recession.”

– A couple of weeks ago, 86,000 people from 143 countries signed up to take the Chartered Financial Analyst (CFA) exam. Only 10,000 eager applicants showed up for the test in 1990. The rapidly swelling ranks of CFAs means one thing for sure: the lower the stock market falls, the less likely we will be to receive incorrect change at McDonald’s.

– “Even as Tyco International CEO Dennis Kozlowski stacks floor after floor on the Tyco revenue edifice,” write’s Andy Kashdan, “the structure’s financial underpinnings are rotting away. Tyco is a growth stock without the growth. Tangible book value (the stuff that you can put a real value on) has literally disappeared – falling from $701 million at the end of fiscal 2000 to a negative $4.4 billion as of the second quarter.”

– “Just look at P/E ratios…” notes Dr. Richebacher. “Most of them are higher than a year ago as profits have fallen even faster than stock prices. This is overconfidence… Few people are ready to sweep the miracle stories of the past few years into the dustbin.” (More below…)

– Jay Akasie of “Krispy Kreme is a perfect example. Despite its listing on the Big Board earlier this year, KKD retains its Nasdaq-flavored valuation with a P/E of 118. Assume the doughnut king manages to post 25% annualized earnings growth… investors would actually lose an average of 7% per year. Even a five-year Treasury note would yield 4.8%. Given valuations like these, it’s clear the market is a long way from any bargain-basement values.”

*** “Hey Dad,” said Jules cheerfully, when I got home last night. “They passed me.” The 13-year-old flies dangerously close to the ground, in my opinion, but he seems to end up where he wants to go.

*** Later, I took the two girls and Elizabeth out to dinner. It was probably our last night out together in Paris – at least for a while. We are all returning to the U.S. for the summer. And then, Sophia, 18, will soon be going off to do other things in other places with other people.

*** ‘Children grow up so fast’ say the Empty-Nesters. ‘Not fast enough,’ say those whose nests are still full. But yesterday, on Midsummer’s eve, thinking about Sophia leaving, I recalled Shakespeare’s lines:

…momentary as sound, swift as a shadow, short as any dream

Brief as the lightning that in the collied night,

Unfolds both heaven and earth,

And ere a man has power to say: behold!

The jaws of darkness do devour it up.

So quick bright things come to confusion!