| FALLING DOWN THE DAILY RECKONING LONDON, ENGLAND TUESDAY, 5 DECEMBER 2000 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** Recession, recession, recession - everybody's talking
about it! It must be the coming thing... *** Dow up, Nasdaq down...but the big news is in the
currency markets - "Major Reversal!"... *** The Seven Year Itch...and more... * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** Henry Kaufman says the economy faces a 40% chance of
recession next year and a 100% chance within 3 years. *** Reuters reports a "Rising Recession Risk." And even
noted economist Dick Cheney says he thinks the U.S. "may
well be on the front edge of a recession." *** All this recession talk comes as the economy yields
more and more signs of a slowdown. Yesterday, the
Conference Board said its index of leading indicators
slumped 0.2% in October. Home sales were off less than
expected, but still dropped 2.6% in October, as the mean
price of a new home rose to a record $218,400 from $204,300
in September. *** The main cause of recession-thinking, however, is the
`reverse wealth effect' of falling stock prices. Half of
all American households own stocks. Some open their
statements each month and see how rich they are. Others
find out how much money they can afford to spend. In either
case, when the statements show a big drop, consumer
spending is not far behind. *** Yesterday, stockholders got a bit of a break. The Dow
rose 186 points. But, typical of a bear market rally,
relatively few people got much benefit out of it. More
stocks actually went down than up on the NYSE - 1440
compared to 1421. And more hit new lows than hit new highs
- 123 compared to 119. *** Meanwhile, over in the land of Big Techs and vanishing
dot.coms - the Nasdaq fell 29 points. Intel lost more than
$1 to close at $33. Cisco fell $2 to $45. Early last year,
I warned that more people would lose more money in these
Big Tech stocks than anywhere else on Wall Street. I wasn't
predicting the future - just noticing that there was so
much money in them to be lost! *** Not all the techs and nets went down yesterday. Amazon
gained almost $2. And Qualcomm rose $7 to $90. *** But the big news, again yesterday, was in the currency
markets. The dollar index dropped to 113.63 and the euro
rose over 89 cents. Currency traders are expecting the Fed
to switch to a neutral bias next week - which will be more
bad news for the dollar. I wish I had bought those euro
bonds when Marc Faber suggested it. But it's not too late.
The euro probably has a long way to go against the dollar. *** Even Citibank has urged investors to get out of the
dollar, warning of a "major reversal" ahead. "If we go into
a hard landing [recession], the U.S. dollar is a loser,"
said a Citibank analyst. The greenback has been a 'winner'
for so long, it is shocking to think of it as a 'loser'.
But that is what it is likely to be in the months ahead. *** The U.S. ratio of savings to income is the lowest it
has been since 1933. The trade deficit is the highest it
has ever been. And European investors are losing their
appetite for U.S. acquisitions. Recent experiences - such
as the purchase of Chrysler - have given Europeans cause
for second thoughts. *** Now, with the dollar falling, look for The End of the
World As We Have Known It - more below. *** Gold rose $1.90...to $273 yesterday. Oil fell 80 cents. *** Interest rates in Turkey spiked up to 1,700% over the
weekend...stocks fell 46% in November. *** The rise of the dot.coms was amusing...but their fall
is even funnier. Apparently, there's even a contest for the
saddest dot-com disaster story. The winner
gets a $1,500 bottle of Screaming Eagle Cabernet. It's at:
screaming eagle *** The British press reports that TheStreet.com has closed
its UK shop and told its employees to hit the road. The
stock rose to $60 after going public in May of '99. Now,
it's about $3 - giving the entire company a value about $10
million lower than its cash on-hand. More on this story...
maybe tomorrow. *** Sophia and I went to see "The Seven Year Itch" at
Queen's Theatre in the West End last night. Daryl Hannah
does a good imitation of Marilyn Monroe, illustrating what
kind of trouble a married man can get into when left on his
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and I feel fine...
R.E.M.
"We are about to enter a period of deflation," wrote John
Mauldin recently, describing The End of the World As We
Have Known It. "By that I mean a period in which prices in
general drop and interest rates get very low. If I am
right, the investment strategies that have worked for the
last 60 years will need to be changed to reflect the new
economic realities." It is not often that the end of the world comes. So, when
it does, people tend to be unprepared. In fact, of all the
world's peoples none are quite as unprepared for deflation
as Americans. If you expected a period of inflation, what might you do?
Mortgage your house...borrow as much as you can...and spend
your cash as though it were going out of style. This is
exactly what Americans have done - expecting inflation to
wipe out their debts and boost up their assets. U.S. investors still expect asset inflation - rising prices
for their main holdings, their homes and their stocks. So
confident are they that they have bet everything on it.
Take away the value of stocks and residential real estate
and there is not much left. And yet, if the Law of Perverse
Outcomes is to be honored, they will get not what they
expect...but what they deserve: falling asset prices and
recession. These two trends are already underway. The Nasdaq, in very
round numbers, used to be worth $6 trillion. Now it is
worth only half that much. What happened to the money? It didn't go into the Dow, which has also drifted down
since March. Some leaked into cash and other assets. But
most of the money simply dematerialized. At any given time, most people who own stock are neither
buyers nor sellers, they are holders. Yet the value of
their assets is determined by those few who want to either
get in or get out. When more people want in than out...the
price rises and the holders all feel richer, even though
they may own exactly the same percentage of exactly the
same business as they did before. In a bear market, the bids disappear and prices fall. Fewer
than 1% of all shares may have changed hands - but price
could be cut in half, or worse. Thus, a company might be
worth $100 billion one day and only $50 billion the next -
even though only a handful of shareholders actually sold
shares. The shareholders would have lost $50 billion in
purchasing power overnight. What happened to the $50
billion? It simply vanished. That is what happens in deflation. Money just disappears.
The houses are still there. Factories do not go away. Cars.
Gold coins. Fast-food restaurants. Movies. Real wealth
remains. But the illusions of wealth give way to reality.
Deflation is a learning experience. "In an ideal world," John Mauldin continues, "deflation
should be the norm. In theory, over time competitive
businesses should become more productive and able to
produce more products for less cost. Prices gradually drop
and we all get more bang for our buck." More bang for the buck is what economist Gary Shilling
expects. His book, Deflation, lists 14 reasons why you
should expect falling prices: 1. End of the Cold War led to global cuts in defense
spending 2. Major country government spending and deficits are
shrinking 3. Central banks continue to fight the last war -
inflation
4. The increasing number of people retiring in G-7
countries will lead to reduced benefits and slower growth
in incomes and spending 5. Restructuring continues in English-speaking lands and
will spread 6. Technology cuts costs and promotes productivity 7. Information via the Internet increases competition 8. Mass distribution to consumers reduces costs and
prices 9. Ongoing deregulation cuts prices 10. Global sourcing of goods and services curtails costs 11. The spreading of market economies increases global
supply 12. The dollar will continue to strengthen 13. Asian financial and economic problems will intensify
global glut and reduce worldwide prices 14. US consumers will switch from borrowing and spending
to saving On at least one of these points, Shilling is about to be
proven wrong. The dollar will not continue to strengthen:
it will fall, and has already begun doing so. But this, it
turns out, will make asset deflation - if not consumer
price inflation - even worse. More tomorrow... Bill Bonner | 
