Victims Of Greenspanism
Hang the black crepe. Bring out the gladiolas…
I can almost see the caskets, laid out side by side.
If you have endured the last few days of the Daily Reckoning, you know the stiffs to whom I refer. For on Friday, I posed the question: upon whom will the deadweight of Greenspanism fall? When?
Force and fraud, the two weapons of modern government and managed currencies, are bound to cause some damage.
Jeffrey Rogers Hummel explains:
“The pirates who plagued colonial waters until the middle of the 18th century enriched themselves with captured cargoes. If they sank merchant ships in the process, then the losses of merchants exceeded the gains of the pirates. Economists call this excess burden ‘deadweight loss’…”
All government actions – whether making war, taxing citizens, or forcing funny money and artificial rates of interest upon them – leave a path of destruction. Today, I take a peek into the open boxes of two of tomorrow’s victims:
There, on the one side, is the investor – the poor soggy schmuck who was sunk by Wall Street and Fed ‘liquidity.’ Urged to ‘buy, buy, buy’ by shills like James Cramer and Abby Joseph Cohen, he went out and bought.
What chance did he have? Figures from May show more than $17 billion of new money reaching equity funds. And these are not cheap stocks he’s been buying. The Dow still trades at 25 times earnings. Despite the blow-up in tech, companies such as e-Bay trade at 170 times earnings. Loaded to the gunwales with these heavy stocks, he was sure to go under when the waves picked up.
And there on the right, is the American consumer, the poor schlep – he broke his back trying to carry the entire world economy.
Urged to excess by Dallas Fed governor McTeer, and low short-term interest rates, he did his best. Struggling with a greater burden of credit card debt and mortgage debt than the world has ever seen – he nevertheless tried to “spend, spend, spend” as if it were his patriotic obligation.
His situation had been hopeless for a long time.
When Greenspan began cutting rates, unemployment was below 4.5% – lower than it had been since the late 60s. How could he ever expect that unemployment would not rise? Previous downturns had sent unemployment soaring as high as 10% – as recently as the early 80s. In the slump of ’89-’92, the jobless rate hit 7.8%.
What’s the key to jobs? Easy – corporate profits. When profit margins come under pressure, managers cut payrolls.
“The signs of an investment collapse are everywhere,” wrote Dr. Kurt Richebacher in early July, “particularly in the steepest and most rapid slump of profits in the whole postwar period.”
“Corporate America is in a deep earnings recession,” observed Stephen Roach of Morgan Stanley, “and needs to cut costs. We went hog wild bringing in managers, and I think they’re going to get slashed…”
I examine the corpse in front of me for slash marks. Sure enough, there they are. But it wasn’t the sharp pink slip that killed him. It was what happened next.
Mr. Consumer could have cut back and hunkered down; he might have thrown away his credit cards while there was still a chance to save himself. But why worry? Wall Street and the news media assured him there would be a ‘second half recovery.’ Instead of cutting back, he actually increased his indebtedness in the first half of 2001.
In 1980, the consumer had only about 60% as much debt, relative to his earnings. And he had more savings, too. But this guy, in the coffin before me, left no savings…he had no margin of safety. When he lost his job, he could no longer support the weight of Greenspanism.
What a shame we have no suitable last rites…and no appropriate dirges or funeral services for those who have been blown-up by Wall Street, or drowned or broken by the Fed. Nor are there any placques…nor statues…not even a small white headstone erected to their memory. What a pity. For these two both heeded the call of duty just as any Johnny Reb, Doughboy or grunt. They went ‘over the top’ when they heard the whistle – buying stocks that were far too expensive…and borrowing more money, even when they already carried more debt than any trooper could bear. Surely, they deserve at least a memorial service…a few candles and a prayer?
But wait…this is still in the future.
The investor and the consumer are still alive. They still breathe and walk among us. Perhaps there is still time! Maybe they can avoid disaster…maybe it’s not too late! But how? If they sell their stocks, the market will crash and everyone will lose. If they stop borrowing and spending, the economy will come crashing down…and they’ll lose their jobs…
Oh well, at least we can prepare a decent wake and funeral oration. And a tombstone with these words chiseled out: “We did not fully comprehend the risk.”
Your reporter in Baltimore…dusting off his black suit.
July 23, 2001
Oh Amazon…another quarter gone by and Amazon.com has gone nowhere but down the river! 17 consecutive quarterly losses. More than 5 billion books sold…and AMZN has 50 cents of debt to show for every one of them. What a company!
But Jeff Bezos’ monster is just a sideshow. The real show is taking place in the credit markets…the economy…and the Dow.
Mortgage lenders Freddie Mac and Fannie Mae – the freaky Siamese twins of credit creation – are practically holding the economy and the Dow up alone. Fannie’s portfolio of mortgages grew by 70% over the last 3 years, while Freddie’s holdings grew by 134%. And Freddie, ever eager to help out a central banker in distress, has bought 180% more debt in the 2nd quarter than the same period a year ago.
We “did not fully comprehend the risk” said the CEO of AMEX recently, explaining how the company took a $826 million hit on its junk bond investments. AMEX expected the bonds to default at a 2% annual rate. Instead, 8% of them are going bad each year.
Whether for use by homeowners with too much debt, shareholders with stocks that are too expensive, foreigners with too many dollars, or financial institutions with elaborate derivative positions…the phrase – ‘we did not fully comprehend the risk’ – may come in handy.
But, Eric, what’s shakin’ on Wall Street?
Eric Fry reports from New York:
– Last week, Wall Street featured a lot of “sound and fury, signifying [next to] nothing.” The Dow gained a meager 37 points over five trading days and the Nasdaq fell a slightly more significant 55 points.
– The week’s overall message seemed to be that the slow- down is not over just yet. Although Nokia offered an upbeat forecast, AOL, Intel and EMC each told a tale of woe. When the dust settled, EMC’s share price had been sliced in two.
– “All of Wall Street is on the defensive,” The NYTimes reports. But not because the stock market is struggling. Rather, because the legions of investors who are only now coming to realize that “their decimated portfolios may never come back” are looking for someone to blame. Next step: sue your broker.
– Most of the unfortunate souls who lost a bundle in the stock market should probably begin their blame game by looking in the mirror. Greed loses far more money than any wire-house broker ever could. Couple a client’sgreed with a broker’s greed and it’s bye-bye savings.
– But then, following the timeworn American custom, it’s ‘hello lawyer’. To be sure, avarice is a dominant part of Wall Street’s DNA, but suing brokers for being self- serving is like trying to blame a rattlesnake for being poisonous.
– Nevertheless, Wall Street firms are the new Phillip Morris of American courtrooms – purveyors of a known toxic product, the victims of which claim ignorance when they suffer the consequences of using it.
– Says the New York Times, “…investing is not as easy as it looks.” Now they tell us!
– Wine futures will begin trading on – where else – the Paris bourse on September 14th. The Winefax futures contracts will cover three different price levels for French Bordeaux wine.
– Apparently, the hand of fate isn’t finished slapping the Japanese around. For more than a decade, asset values from stock to real estate to golf club memberships have been spiraling downward. At the same time, the industrious nation’s economy muddles along…on its good days. And now this:
According to the Ministry of Health, Labor and Welfare, Japan’s Pension Welfare Service Public Corp. suffered a loss of 2.31 trillion yen ($18.8 billion) in the year ending March 2001 – the national pension fund’s largest one-year loss ever… and that’s saying something, 12 years into a bear market.
– You gotta love Chris Byron. The inimitable financial writer for the New York Observer offers a unique take on Yahoo’s latest earnings. “The fact is, the only worthwhile business Yahoo now has going for it is collecting the interest it has been earning on its $1.75 billion of cash and marketable securities,” says Byron. “As such, Yahoo Inc. isn’t really a business at all; it’s just an enormous money-market fund that employs 3,000 people engaged in wasting shareholders’ money…
– “Just how overvalued is Yahoo, really?” Byron asks. “Yahoo is being valued at somewhere around $10.4 billion. So if someone came around and offered you the following – $10.4 billion in cash, or all of Yahoo Inc. – which would you take? Enough said…”
Bill back in Charm City:
*** “ENERGY IS DONE. Sell it all,” writes Dan Ferris, “Whenever people start talking about permanently high oil prices, you know it’s all over. Oil will continue its century-long real descent. That’s called progress, and it happens mostly when times are bad. The beauty in this is that human nature will never change, and this opportunity will come around every several years like clockwork. For now, it’s definitely time to sell oil.”
*** Meanwhile, my old friend, Scott Burns, urges caution: “‘The End of Cheap Oil’ – a landmark article in Scientific American in 1998 – asserted that global oil production would start to decline around the year 2010. Based on a global extension of techniques developed by geophysicist M. King Hubbert, the article showed that we were rapidly approaching the point where half of all oil reserves had been pumped out of the ground. The article also showed that most of the recent increases in oil reserves were political fictions, that new finds were smaller fields, and that global oil production would turn down as certainly as U.S. oil production had peaked in the late ’60s.”
*** “It should be noted that the authors [of the Scientific American article] are not members of the gloom-and-doom school,” Scott continues. “They were careful to acknowledge alternative sources of oil that are, as yet, undeveloped. ‘The world is not running out of oil – at least not yet,’ they declared: ‘What our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend.’
*** “One implication: The energy jolts of the last year could signal that we are about to experience the economic boom of the ’80s and ’90s in reverse.”