SOMETHING'S COMING...SOMETHING BIG

verfasst von Pancho, 12.10.2001, 11:00

SOMETHING'S COMING...SOMETHING BIG

THE DAILY RECKONING

PARIS, FRANCE

TUESDAY, 11 SEPTEMBER 2001

* * * * * * * * * * * * * * * * * * * * * * * * *

*** All eyes on the consumer...when will he fall down?

*** Bad debt soars at banks - up 50%..."A few big-
screen TVs here, a few minivans there, and before you
know it you've got a recession."

*** London stocks at 3-year low...Japanese consumers
cut back for 4th month in a row...tyranny in French
classrooms...and more!

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"All Eyes on Consumer Spending," says a NY Post
headline.

It is like watching a decrepit man after a late-
night booze session. Whether in amusement or horror, we
all wait for the American consumer to totter over.

Unemployment is rising, with twice as many
layoffs in August as in July. Debt delinquencies and
write-offs are soaring; banks wrote off nearly $8
billion in loans in the 2nd quarter, up 50% from a year
ago.

Understandably, consumer spending - which has
held up the economy for the last 12 months - is finally
falling over.

"For a whole lot of people," the LA Times quotes
Carl Steidtmann at Deloitte Research,"debt reduction
and trying to rebuild their savings is of utmost
importance right now."

"A few big-screen TVs here, a few minivans there,
and before you know it you've got a recession," says
the LA Times.

As a matter of fact, the jobless rate has now
risen by a full percent. This has never before happened
without a recession. (A more detailed look at the
American consumer...below...)

First, more details from Wall Street...oops, I
see that Eric has been delayed in a storm in Bermuda...
so Addison is reporting the latest news.

Addison?

*****

Addison from across the desk:

- er...

- Yes...a remarkable feature of bear markets is the
number of"sideways" trading days. The market stops,
like an animal holding its breath to hear, and waits
for something...anything...to happen. Will it be a
strong rally or...pandemonium?

- Yesterday was one of those days. The Dow held its
breath for 7 hours...and came out less than one point
ahead. Likewise, the S&P and Nasdaq tacked on 6 and 7
points respectively. Nobody wanted to be the one to
make the first move.

-"Many appear to be still clinging to the hope that
this time will be the fabled 'bottom' we keep hearing
is just around the corner," writes Lance"Crash" Lewis
of Prudent Bear fame."In the meantime, we'll have to
see if the bulls can bounce us forward for a few
days...or if we simply resume acceleration downward
[today]."

- Regardless whether today is"Turnaround Tuesday," as
the traders say, or not - the trend is unmistakably
down. The Dow for the year has shed an even 11%, the
S&P has lost more than 17% and the Nasdaq is off by
32%. The year's big losers are getting hammered even
harder: The Nasdaq 100 is down 42% for the year, and
TheStreet.com's Internet index is off by nearly 53%.

- The Blue Team's David Tice, mentioned also this
morning in an LA Times article, thinks we're going to
see Nasdaq 500 before we're through - another 70% drop
>from where we stand today.

- Estimates for a"recovery" by year-end were revised
downward yesterday by The National Association of
Business Economists."But," says CNNfn,"two thirds of
the 31 economists [polled] expect the economy to
recover by the end of the year." These economists
further declared that the Fed's actions this year in
dealing with the slowdown were"just right." We'll
see...

- Meanwhile,"Dot-com kids return to school," says a
headline in The Arizona Republic. The article tells a
story about Colvin Pitts, age 22, who left Stanford
last year for a $45,000 a year programming job, with
$70,000 in stock options. This year he's back in
class...as the company he signed on with went the way
of the dot.com...and his options?"I could net about
$200 if I sold them today," he says.

- China - the country - will launch a mainstream mutual
fund, says the Financial Times. Professor Song Fengming
of Tsinghua University helped devise the fund in an
attempt to develop China's volatile, oft manipulated,
financial markets."The Chinese stock market has all
the characteristics of an emerging market and no real
blue chip stocks," says the professor. Derivatives are
on the way.

*****

Back to Bill:

*** Let's see...what else...

*** Well, the FTSE in London just sank to a new low -
wiping out the last 3 years' worth of gains. And in
Japan, household spending fell for the 4th month in a
row...down 1.6% in July.

*** Paul O'Neill, America's excellent Treasury
Secretary, is over in that part of the world. According
to the Financial Times, he's putting pressure on the
Japanese to reform their economy.

*** Soon, we imagine, the Japanese will return the
favor.

*** Last night, Elizabeth and I endured a three-hour
parent-teacher meeting at Henry's school. It is a
different world...where pettifogging teachers lecture
parents for hours on how to maintain school discipline
and decorum. Woe to student and parents if the child's
briefcase is disorderly!

*** Then again, the kids seem to learn something.

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SOMETHING'S COMING...SOMETHING BIG
by Bill Bonner

"On Long Island," the LA Times tattles on a man 3,961
kilometers away,"bakery worker Carlos Gaviria said the
market collapse has caused him to rein in his personal
spending. If enough people do the same, he said, it
could add up to something big."

"What's going on on Wall Street...tells me that
whatever money I have, I have to hold on to, because it
isn't predictable what's going to happen tomorrow,"
Gaviria said."By holding my money, maybe I am
affecting the economy itself."

Gaviria, an economist might explain, is slowing down
the velocity of money and contributing to an economic
slowdown. Instead of spending it immediately, he's
letting it sit around for a day or two, hoping it will
get comfortable and stay longer.

"What exactly is happening in the financial system when
the money velocity collapses?," asks Dr. Kurt
Richebacher in a recent letter."In short, it
inherently reflects a general attempt to replenish
money balances (liquidity) following a prior depletion
during the boom."

"Cash is trash" in a boom. But in a bust, cash becomes
as precious as water on a long desert hike. The shift
in"liquidity preference" doesn't happen very often.
But when it does, it causes"something big."

In this case, the"something big" is what Dr. Kurt
Richebacher calls"The End" - the end of a two-decade
economic expansion in America that began when Paul
Volcker said he was ending double-digit inflation and
meant it.

Volcker drove up interest rates...squeezed credit...and
eliminated inflation. Thereafter, interest rates could
begin a long and fruitful decline...allowing consumer
credit, spending, and stock prices to begin a long
march to glory.

Twenty-something years later, the assault on Dow 36,000
has run its course. Businesses and investors stopped
making new investments more than a year ago. They began
to see that they had already spent too much and worried
that further investment might be bad money after good.

But consumers have soldiered on, hoping that they would
soon be resupplied and reinforced. Quartermaster
General, Alan Greenspan, lowered rates 7 times -
cutting in half the cost of borrowing at the Fed Funds
rate. A relief column - the 2nd half recovery - was said
to be just over hill.

There were a few false sightings...and a few scouts
thought they could hear the fife and drum in the heavy
summer air. Even now, His Most Excellent Treasury
Secretary, Paul O'Neill, says that the U.S. economy is
merely suffering from a"cyclical downturn" which would
end"later this year." But it is already September...
and already the weather has an autumnal chill.

Is it any wonder that some of these loyal consumer
troops are anxious? Laden with packs of debt heavier
than any consumers have ever borne, menaced by rising
unemployment - up a full percentage point in the last
year - and with supplies running out...how long can
they continue?

"Sauve qui peut" - the whispers run up and down the
rants. It is every man for himself and his family...

Here at the Daily Reckoning, we have a growing
intuition that the markets serve an even greater
purpose than distributing capital, setting prices, and
providing entertainment. They seem to be an important
source of moral lessons, too.

Indeed, at the beginning of each day we ask ourselves:
which sin or weakness will Mr. Market punish today?

Will he strip the greedy of their bull market gains?
Will he ruin the fearful with inflation? Will he
plunder the gullible or reduce the too-proud pundits to
tears? Even Daily Reckoning editors are not exempt, we
remind ourselves, as we watch the spectacle from what,
we hope, is a safe distance.

Surely all vices are paddled, but so too are some
things that pass for virtue.

Fed governor Robert McTeer tells consumers that it
would be unpatriotic to cut spending now. The health of
the entire economy, he points out, depends on the
willingness of consumers to continue doing the
"irrational" - spending money they don't have...thus
adding weight to their packs even as their food runs
low.

Have the gods gone crazy, dear reader? Would they
really allow a world in which a man, doing what is
sensible and right for himself and his family, makes
things worse for his friend, neighbors, and fellow
countrymen?

Or does Robert McTeer err? Could it be that additional
consumer debt - like an errant army pushing deeper into
enemy territory after its supply lines have been cut -
invites an even bigger debacle?

Robert McTeer is a fool, of course. So is any consumer
silly enough to continue his march to insolvency. But,
here at the Daily Reckoning, we suffer fools gladly.
In fact, we celebrate them.

No fools, no bubble. No bubble, no bust...no cycle of
madness and reason that eventually brings perfectly
good investments down to prices that are attractive
again. Today, the P/E ratio of the S&P is 24. A
dollar's worth of stock brings you only 4 cents of
earnings...and much less in actual dividends. At the
bottom in '74, a dollar would buy you 14 cents of
earnings. And in 1980, you would have gotten 12 cents.

Consumers - like tech investors two years ago - offered
themselves in sacrifice to the market gods. They did
the irrational - buying at prices that were
insane...and spending long after prudence urged
restraint...

Today, we salute them both.

Bill Bonner, paying homage, once again, to the
fools...lest he be counted among them!

P.S. Most likely, stocks will soon rally (they will
not go gently into the good night of a major bear
market). But something big is on its way. Just as the
biggest fools of all - buying tech stocks at the very
top of the bubble - could not prevent a collapse of
share prices...nor will foolish consumers be able to
prevent an economic collapse. The economy will sink.

And soon, the bubble, the boom, and the bull market on
Wall Street will all be dead. James Grant, writing in
the NY Times, seems to have found the perfect ancient
inscription for their headstones: Mundus vult decipi;
ergo decipiatur." The World wants to be deceived; let
it therefore be deceived.
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gesamter Thread:

• @bosscube - PuppetMaster, 12.10.2001, 10:50
  • SOMETHING'S COMING...SOMETHING BIG - Pancho, 12.10.2001, 11:00
    • Re: SOMETHING'S COMING...SOMETHING BIG / vielen dank (owT) - PuppetMaster, 12.10.2001, 11:02
  • Re: @bosscube - BossCube, 12.10.2001, 13:28