The New Era's Four-Letter Legacy

The Daily Reckoning
Weekend Edition
July 6-7, 2002
Paris, France
By Addison Wiggin

“Vast infusions of dishonest money,” wrote Sean Corrigan, the Daily Reckoning’s London correspondent, this week, “always lead, via fervent speculation, to rampant corruption. Always. If you doubt this, go check the historical record.”

But now we’ve entered the retributive phase. The unwinding of the credit bubble has encouraged a thousand-and-one sniveling do-gooders to begin pouring over the books of countless corporations…

“Many corporations are in a bind,” writes our friend John Mauldin. “They have over-stated earnings because they had assumed the stock market would grow faster than is realistic in the current environment. That means instead of earnings from their pension funds [for example], they have pension liabilities for which they have not yet accounted.”

Mauldin estimates overstatement of growth for the average corporate pension was as high as 20% in 2001.

Trouble is, especially given the current sentiment, if anyone attempts to re-state earnings of this magnitude, they’ll immediately get hammered in the stock market…get hauled before any number of sanctimonious SEC auditors… and trussed up by the press like a rue des Lombards whore.

“Of course, management will trot out the ‘independent’ earnings estimates which they use to support their assumptions,” says Mauldin. “But these ‘rent-an- assumption’ estimates are going to be seen as a very flimsy excuse in the Enron Era.”

With all the media speculation and attorney hand- wringing going on, we return once again to the central point: “The whole New Era productivity myth,” writes our man main on the London scene, “was based upon [Greenspan’s] false syllogism that if profits were up and costs were subdued, then heightened investment – in shiny new technology, naturally – was generating increased productivity and so monetary policy could remain accommodative.

“Easy money – [in the form of irrationally exuberant rate cuts and a host of Fed coupon passes] – was artificially stimulating investment, and eventually malinvestment. The two together were boosting the prices of financial assets.”

And helped to promote a cult of equities, in which, those who make financial decisions in nearly 50% of American households took to mean they were going to get unimaginably wealthy… in exchange for… what?

Even now, “there is still very much a desire on the public’s part to look at this as being a few bad apples,” Brad Fay, a market research analyst with delphic powers, told Newsweek on Wednesday.

In a patriotic fervor investors, hearts still burning from hotdog-and-beer barbecues, sent the indexes soaring Friday. The Dow lept 324 to 9379 – its strongest gain since September. (For the week, the Dow was up 136. But, despite a 5% gain on Friday, the Nasdaq finished 1% in the hole for the week. The S&P slept through the week, closing just about where it began.)

Trouble is, “not only were profits often fraudulently overstated,” Corrigan continues, “but ‘growth’ too, was slower than reported in the boom years.” The stock market and the economy, having been irretrievably bound together, were both subject to the same collective halucination.

But now that the party is winding down, the only ‘real’ thing left to confront the revelers is: debt. “Incontrovertibly, unimpeachably, and rigorously recorded. Debt – even if the ultimate title to much of it has been obscured by Wall Street’s skills in financial engineering. Debt. Liabilities. Owing money. Claims on yet-to-be-earned income. A lien on the future. A mortgage on Tomorrow. Debt. The real, four-letter legacy of Alan Greenspan and his former accomplice, Bob Rubin.”

Whether yesterday was a commencement of the annual summer rally we’ve come to enjoy over the last few years, or just an ecstatic bear market rally, it’s not within your humble editors’ power to say.

But we suspect that, like the second helping of potato salad just now coming to rest at the hips of many a middle-American housewife, the debt burden will have to be worked off somehow.

Yours for a fine summer weekend,

Addison Wiggin,
The Daily Reckoning
July 5, 2002

P.S. You may have seen Sean Corrigan’s daily commentary in the British edition of The Daily Reckoning, but he does his most arguous thinking on behalf of his professional clients at Capital Insight.

P.P.S. Adam Lass, mystic behind… I mean, editor of… the perfectly impenetrable Q-Wave Trader suggests that following this Friday’s rebound “the probability of another 500-point drop is so high as to seem fated.

“Let’s just say that the previous low of 8,831 was not a ‘buying opportunity’,” says Lass. “Rather, the recent high of 9,435 was a last exit before a very long express ride to a very dark place…”

For insight into Adam’s prediction, you don’t want to miss this week’s installment of Flotsam & Jetsam… below…

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THIS WEEK in THE DAILY RECKONING
by Bill Bonner

07/05/02 EVERYBODY DOES IT

“…Americans are happy to look the other way while their heroes warm up the numbers a little – but only so long as they feel they will get a slice of the pie. In a bear market, the pie shrivels up, and people turn from noble detachment to squabbling overcrumbs…”

07/04/02 WHAT SO PROUDLY WE HAILED

“…In America today, nothing is too trivial or too private to escape the notice of the heirs of Misters Adams and Madison. Every aspect of your financial life, for example, is open to inspection. Every molecule you swallow is subject to government approval. Every root cellar and pigsty you build must have the permission of a swarm of agents. Instead of working less than 3% of the time to pay taxes, as did the American Colonists, we now work about 50% of our time to support federal, state, and local parasites…”

07/03/02 TOMORROWLAND
Guest Essay by Lynn Carpenter

“…I don’t doubt that at least a few people at Enron, WorldCom, and so on deserve a federal vacation behind a real high fence. But that doesn’t take the burden off us to look at what they’redoing…”

07/02/02 BUSINESSMEN, CEOS AND OTHER DESPERADOES

“…Your editor can’t help but feel a little sympathy and solidarity with corporate CEOs who were lured into a life of high-living and low crime in the late ’90s and now find themselves spat upon by every crackpot, politician and hack in Christendom. What’s more, out of pure contrariness if nothing else, we feel we should stand up for ourclass…”

07/01/02 ENVY

“…Lusting after spiff is what America is all about. The country never had dukes nor earls…no class order was ever imposed upon it…neither by God nor byeconomics…”

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HEADLINE, NEWS And INSIGHT: Bankruptcies, Lawsuits and Legislation – Doesn’t Anyone Believe In Honest Brokers Anymore?…Your Best Bet Now? “Do It Yourself”…And The Dollar Drama Continues… Plus, Adam Lass predicts doom for the Dow (Again)…

Praising the Equity Culture
by Raymond F. Devoe, Jr.

“…Suspicion towards Wall Street will revive, particularly if the bear market continues and the economic recovery is not as robust as widely anticipated. Then, the public attitude towards stocks and company managements could turn ugly. The ‘equity culture’ is morphing – into what is not known, but certainly something lessfavorable…”

5 Basic Rules For “Investing” (As Opposed To Gambling)
by Lynn Carpenter

Rather than join a chorus of reprimanding do-gooders calling for blood, we thought we’d take a moment and share with you 5 basic rules we follow to steer clear of the Worldcom’s of this market. They worked during the bubble…and they continue to work following itsimplosion.

The Dollar Merry-Go-Round
by John Mauldin

“…Dollar bulls have been right about demand for the dollar for a long time, as those who worry about our trade deficit have been wrong in predicting a crash in the dollar. Why should the next few years be any different than thepast?…”

FLOTSAM AND JETSAM: The Madness of Crowds Or Predictably Gullible Investors? Adam Lass leafs through history for some answers and comes up with… another 500 point drop in the Dow?

The Paragon Of Fraudulence
– Adam Lass

“… All this recent talk of insane buyers and crooked sellers rings awfully familiar to my ear. Last night I spent some serious time on the couch with my dog-eared editions of Mackay and de la Vega in search of a bit of der lange Atem. [Editor’s note: That’s German for ‘the long view’ or more literally ‘long wind.’ Take heed.]

For those who aren’t cozy with the financial classics, Charles Mackay’s 1841 memoir, ‘Extraordinary Popular Delusions and the Madness of Crowds,’ is the source of most of the modern language of bubbles. Someone starts to rant about herd mentality, tulip mania, or South-Sea fever, they are probably cribbing from Mackay.

While Mackay’s prose is a bit archaic, his basic theory is still of interest. He stipulates that, while any given adult may be reasonably intelligent, as soon as they gather into groups, they are prone to ‘avaricious frenzies.’ Indeed, he basically blames all sudden market booms and crashes not on the snake-oil sellers who pitch the stuff but rather on the compulsive foolishness of large groups of investors as they attempt to pile on to a perceived ‘good thing.’

But it was in Mackay’s analysis of the ‘Mississippi Scheme,’ which rocked the French markets in 1720, that I first encountered Defoe’s epigram on market schemers:

Some in clandestine companies combine;
Erect new stocks to trade beyond the line;
With air and empty names beguile the town,
And raise new credits first, then cry ’em down;
Divide the empty nothing into shares,
And set the crowd together by the ears.

By placing this quote so prominently in his treatise, Mackay would appear to undercut his own thesis, backing instead the ideas expressed by Joseph Penso de la Vega in 1688 to the effect that it’s all just one big con job.

In his ‘Confusi¢n de Confusiones,’ this wily veteran of the Amsterdam trading pits insists that the market’s apparent erraticism is hardly the result of madness. Rather, the herd is being deliberately led astray by sly market manipulators intent on reaping enormous gains by lightening the pocketbooks of gullible investors.

De la Vega declares that the market only appears to stumble drunkenly because you cannot see the sub roseate actions of cabals and consortiums: ‘…at the stock exchange innumerable men try with Herculean strength to catch the Fly of Money [a bit of a pun here: the Spanish word ‘mosca’ can refer to both insect and coin], and for this purpose, many speculators spread poison and invisible threads…’

More than 300 years ago and those in the know were already referring to the ‘enigmatic business’ as a ‘paragon of fraudulence.’ So it’s probably a little late for anyone to run crying from the table.

But cry they will, and I’ll tell you why. These accounting crises will continue to hold the headlines… and continue to depress prices… for the simple reason that they excuse buyers of overvalued paper from their own stupidity. If the whole ‘bubble’ was really just a question of fraudulent bookkeeping, then it wasn’t their fault if they sank their life savings into Pets.com.

Right.

Now you know why my long-term stock holdings are at zero. Nil. Nada. How can you use any of the accepted metrics – be they value – or growth-oriented – when your inputs are poisoned? The only method that continues to make sense is to measure the ebb and flow of the buyers as they reel about. In other words, merciless short-term trading using technical analysis in general has become the only acceptable modus.

Which brings me to my current market forecast: The waves of exiting investors have brought the Dow to within a gnat’s whisker of my high-probability target. Now, having fulfilled my secondary prophecy of a Fibonacci- driven rebound, the probability of another 500-point drop is so high as to seem fated.

Let’s just say that the previous low of 8,831 was not a ‘buying opportunity.’ Rather, the recent high of 9,435 was a last exit before a very long express ride to a very dark place…”

Editor’s Note: Christoph Amberger, Adam Lass’ publisher, also passed on this note: “According to Mackay, the French, in order to avoid the ungainly and un-Gallic “aw” phoneme, addressed John Law as “Monsieur Lass.” Adam swears that he has no connection, familial or otherwise, with the progenitor of the Mississippi madness.

Hmmmn… qu’est-ce que tu pense?