The Mighty Fallen

Reputations are being corrected…along with stock prices, savings rates, and philosophies.

Today’s letter continues our enjoyment of the bear market. Bear markets do not come along every day. Like snow holidays, you have to take advantage of them when you can…

I have more examples of chicanery and the wages of sin…but I will save them for another occasion. Instead, today’s dramatis personae are neither crooks nor scalawags. And their faults, which are unlikely to give cause for legal action, are as much the results of others’ mistakes as their own. They sang their songs…who could blame them if the fans screamed, knocked down fences, and made fools of themselves?

One: a captain of an industry he practically created on his own. The other: the world’s most trusted, and many would say most powerful, bureaucrat.

Of the former, TIME magazine gushed: “Jeffrey Preston Bezos …peered into the maze of connected computers called the World Wide Web and realized that the future of retailing was glowing back at him.”

At 35, Bezos became TIME’s Person of the Year. “Every time a seismic shift takes place in our economy, there are people who feel the vibrations long before the rest of us do,” rattled TIME, “vibrations so strong they demand action – actions that can seem rash, even stupid.”

Well, yes.

“Amazon looks more and more like it is indeed doomed,” I wrote, a week after Jeff Bezos appeared on TIME’s cover. “The company used the Christmas season to test the old saw – that you can lose money on every sale and make it up on volume.”

Sales go up at the big River-of-No-Returns company. But profits? Amazon lost $545 million in the 4th quarter of 2000, up from a loss of $323 million in the same period the year before. Cummulative losses for the company almost exceed $3 billion.

“But Amazon’s losses,” TIME witlessly continued, “are also a sign of the New Economic of Internet commerce. These new rules spring from the idea that in the new global marketplace whoever has the most information wins.”

“It’s a revolution,” TIME declared. “It kills old economics, it kills old companies, it kills old rules.”

Well, yes.

Some people get rich in a revolution. Some people get killed. So far, people who have invested in Amazon have been the ones whose heads have been guillotined. The stock price has fallen 83% – down to the $10 range. And Downside Deathwatch says the company will run out of cash in July of this year.

Gretchen Morgenson, writing in the N.Y.Times thought Bezos deserved another honor. She gave him the “Fame is Fleeting Award…for one of the fastest falls from grace in recent history. A year ago he is TIME’s man of the year; now he is facing irate shareholders…”

Meanwhile, public servant Alan Greenspan was credited with managing the nation’s economy so perfectly that stocks would rise forever. Now he’s getting the blame when they go down.

“A year ago,” write E.J. Dionne in today’s International Herald Tribune, “this wasn’t even thinkable. Now Wall Street is all over Mr. Greenspan. He is accused of having kept interest rates too high for too long last year, and then not cutting them fast enough in recent months.”

Mr. Dionne says he believes this himself. “The genius of Mr. Greenspan until last year,” he says, “lay in his willingness to put aside his older views about how fast an economy could grow without inflation. Partly because globalization and technology were cutting costs, he decided this economy was more capable of sustaining rapid growth with low inflation than were the economies of the ’70s and ’80s. He was right. Applying that same view might have led him to keep rates lower over the last year or so.”

People who believe that central bankers can manage an economy have a ready explanation for the recessions and bear markets: somebody made a mistake.

In the simple-minded vision of the public and newspaper columnists there is no reason for economic slumps other than human error. “It is the job of the Federal Reserve to fight recession,” writes Roger Klein of the Klein-Wolman Letter. Thus does the fate of the entire world economy rest on Mr. Greenspan’s shoulders. He either gets it right or gets it wrong…rates could be too high…or too low…or just right.

“This is beyond idiocy,” comments Richard Daughty of the Mogambu Guru letter. “The New Mantra is the same as the Old Mantra; the Fed will cut interest rates by some magical fraction of a percent and the stock markets and economy will climb to new heights forever. If it were so, the entire corpus of economics could be replaced by a 3 x 5 card reading: ‘Interest rates are inversely proportionate to economic health.’

Alas, dear reader, it is not that simple. Maybe the economy and the stock market will rally. Maybe the bottom for this cycle has already been seen. I don’t know.

But of one thing you can be sure: whatever happens Mr. Greenspan will be blamed or credited. In either case, unfairly so.

There were bubbles and panics long before there was a central bank. And there will be bubbles and panics long after the Federal Reserve system is discarded.

“This is by no means the first stock market bubble,” writes Gregory R. Spear of The Spear Report, “and it certainly won’t be the last. Hopefully, we will all live to take advantage of the next one. (I think it may be in biotech.) Bubbles have been studied by market historians and have been found to have common characteristics. The principle of the ‘reversion to the mean’ applies to them all. In that oscillation process, markets tend to overshoot on the way up and to overcorrect on the way down. While history does suggest that eventually many of the pieces of Humpty Dumpty do get put back together, the basic conclusions historians draw is that it always takes longer to repair than people typically hope or expect – usually years, not months. Many of the stocks caught up in the mania fail to survive, as we’ve already seen in the debacle. Of those that do make it, all but the very strongest perform less robustly than before.”

Amazon may survive. Or it may not. But neither Bezos nor Greenspan will ever again be the men they were in 1999.

Mr. I-told-you-so,

Bill Bonner Gloating… Paris, France March 28, 2001

*** The Rally on Wall Street continued yesterday, boosted by the latest consumer confidence report. For the first time in 6 months, consumer confidence rose in March. “A little bit of happiness has come back,” said Sam Ginzburg at Gruntal.

*** The Dow rose 260 points. And the Nasdaq went up too – 53 points.

*** And now that the Dow is no longer officially in a bear market (no longer down more than 20% from its high) investors are hoping for a lot more happiness.

*** How much happiness are they likely to get? Richard Russell, a Dow theorist, suggests that the 50% mark is the critical point. The Dow lost 2333 points from its top of 11,722 on January 14, 2000. So, a 50% rally would put the Dow back to 10,555 or so. If it goes beyond that level, you may expect a new high, says Russell. If it fails to reach that level, look for the market to resume its bearish trend.

*** The bear market has been slow to develop. But then, the bull market lasted 18 years. But now that the bearish trend seems underway – those of us who predicted it (as far back as 1983 in some cases…ahem…) are beginning to feel more confident. It all looks so simple – like such a textbook case: stocks get inflated to preposterous levels…then they get deflated. The boom will be corrected, even over-corrected – with the Dow trading down to about 3,000 and the Nasdaq below 1,000.

*** And yet, it can’t be as simple as that, can it? Is Mr. Market that transparent? Has he no tricks up his sleeve?

*** The adoration of Alan Greenspan is being corrected. He “became adored by a new generation of equity market investors,” says the Financial Times. But now “his reputation is being destroyed by the bear market.”

*** “Suddenly, the world’s most powerful central banker is under fire for not doing nearly enough to keep the U.S. out of recession…” says Toronto’s Globe & Mail. More below…

*** “We believe the Fed delayed the onset of recovery by several months,” said Bruce Steinberg, Merrill Lynch’s chief economist.

*** Ed Yardeni, the top economist at Deutschebank Alex Brown, agrees. The Fed should have cut rates by 100 basis points, not just 50, on March 20th, he says. “Of course, it’s not too late,” he adds, “They still have 500 points left.”

*** How would Yardeni, Steinberg, or Greenspan know what rate the economy needs? They have no more idea than you or I, dear reader. Last week it looked like many more rate cuts would be needed to turn the economy around. But today – with stocks and consumer confidence rallying – it looks as though we could be off to the races again.

*** An alternative interpretation: there is no magical Fed funds rate. “Is Recession Certain, and Needed?” asks a Washington Post article. “Recessions happen,” says Stephen Roach, chief economist at Morgan Stanley Dean Witter. “And for a U.S. economy plagued with excesses, a downturn may be the only way to purge the reckless tendencies.”

*** In the 4th quarter, for example, household debt rose more than 7 times faster than GDP – 8.5% compared to only 1.1%.

*** And the Boston Globe reports that the “Boom Did Little for Typical Families.” The article cites a study that found median income in Massachusetts declined 10% from 1989 to 1999. Average income rose only 3% – reflecting the fact that people at upper income levels got richer while the poor got poorer. In Connecticut it was worse – with median income down 14%. “If this is true when the economy is red hot, what happens when it slows down?” asks the paper.

*** “If households were to respond to falling stock prices by even modestly increasing their savings,” adds the Washington Post, “economists warn that the corresponding decrease in spending would almost certainly tip the economy into recession.”

*** Here at the Daily Reckoning we suspect that there is no perfect interest rate that somehow avoids a bear market and a recession…and that Americans’ excessively low savings rate (negative 0.8% at last count) is likely to correct along with everything else. But we confess: we don’t know any more than Yardeni, Steinberg, Roach or Greenspan.

*** Productivity grew at a dismal 2.2% annual rate in the fourth quarter, down from 8% annual growth a year earlier. John Myers: “If productivity falls much further it will be in the range of the 1970s, a period of dismal stock performance.”

*** A bill that would “dramatically overhaul the nation’s bankruptcy code” and change “the centuries-old concept of being able to discharge your debt and enjoy a fresh start” is on the fast track to becoming law, according to “Hard to believe creditors were smart enough to get all their ducks in perfect order just as the U.S. began to slip into the economic mire,” writes my friend Rick Ackerman. “Wait till Joe Sixpack finds out in a few years what this bill is all about.”

*** “There’s more ‘sublease space’ coming on the marketplace,” reports Eric Fry from “And it’s not just from dot.coms, but from all the ‘camp followers’ – the folks who service dot.coms……the lawyers, the accountants, and consultants. When looking at the effect of a downdraft, you have to look beyond just the immediate tenants to include the ‘service’ tenants.”

*** Is Warren Buffett a “rent-seeking dirt bag”? Porter Stansberry thinks so: “Warren Buffett’s largest business is insurance. How many laws require you to have different types of insurance? How many legislatures mandate regulations on insurance providers? Why do you think Warren Buffett takes such a liberal stand on estate taxes? Why would Warren Buffett be in favor of allowing the government to take 55% of your assets at the time of your death? Perhaps because the best way to avoid such a tax is to buy life insurance from one of his regulated pseudo- monopolies?!!”

*** Rome is so colorful. Buildings are various shades of pink, beige, brown and yellow. And the colors fade beautifully. “Paris was once like this,” explained my companion, an architect. “But now the whole city is gray.”

*** Rome is much more chaotic than Paris. The streets wander around higgely-piggely, uphill and down. Ancient walls support new ones – with the relics of centuries scattered around like debris after an earthquake. But in order to appreciate Rome you have to do your homework first. To most tourists, the derelict columns, monuments, and ruins are as incomprehensible as they were to the Visigoth barbarians who sacked the city in 476 AD.

*** Back in Paris, I walked down the street next to the office. The three whores who seem to have a franchise on the street were all there. But one had left her usual doorway and positioned herself in the path of a small truck. She is a huge woman, with a broad face and thick, bleached blonde hair. She wears a short fur coat and, apparently, little else. Almost all of her legs are on display – which is too bad, for they are the size and shape of concrete posts – barely even tapering as they reach the ground. They look like they should be supporting a football stadium instead of a middle- aged woman. With these pillars visible I shudder to think what lies hidden.

As big as she is, she looked like a fair match for the little delivery truck. The truck tried to advance. She held her ground, with her big legs apparently anchored to the street like utility poles. The driver honked his horn…he pleaded with passers-by to get the crazy whore out of his way. And finally, for no apparent reason, she stood aside.

The Daily Reckoning