 11/06/01 IN THE DUST * * * * * * * * * * * * * * * * * * * * * * * * * Lucky Fed #10? Not likely...but who'll notice? Stoking the urge to splurge no more... Optimistic...or delusional? What's the difference?
...if only Prez approval ratings were tradable - this
one's a prime short!... and more...
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* * * * * * * * * * * * * * * * * * * * * * * * * Today, the Fed is expected to continue its "March
to Zero" by cutting rates again - its 10th cut this year.
This will bring the key lending rate to its lowest point
since 1961. Now that the borrowing rate is below the
inflation rate - money is, effectively, free to member
banks. Richard Russell reports that the Fed has also
added $167 billion to the money supply in the last 5
weeks. The authorities are doing everything they can to
inflate the economy. But so far, they might as well be
trying to revive a corpse. Gold fell $1.30 yesterday. And long bonds - those
most sensitive to inflation - went up! It is not inflation that lies ahead, Mr. Market
may be telling us, but d-d-d-deflation...such a scary
thing that I can't even say it without stuttering. But stock market buyers don't seem to notice...or
care...do they, Eric? ***** - Anyone who might just be awakening from a two-month
coma could take a quick survey of the financial markets
and conclude that nothing much happened while they were
incommunicado. Stocks are about where they were two
months ago and so is the U.S. dollar. - But the world has changed and I will shimmy out on a
limb by saying that the changes are not bullish - not
for stocks and not for the dollar. That doesn't mean
stocks can't go up, of course. Like an Islamic
extremist, Mr. Market sometimes believes what he wants
to believe, no matter how little sense it makes. - The Nasdaq finished yesterday at its highest level
since the end of August. And in a flash of deja vu,
networking stocks like Cisco - along with Internet
stocks of all stripes - powered the Nasdaq to a 2.7%
advance. The Dow gained 117 points to 9,441. - After the close of trading, Cisco performed a
masterful encore performance of that Wall Street
classic, "The Pro Forma Earnings Game." The company
doubled Wall Street expectations with a pro-forma
earnings report of four pennies per share - that's four
whole cents per $18 share. Of course, after including
all those time-and-again "one-time" charges, Cisco's
theoretical profit turned into a LOSS of four cents per
share. - Meanwhile, revenues collapsed by nearly one third. All
this terrific news caused Cisco's stock to jump about 5%
in after-hours trading, bringing its advance since late
September to more than 60%. - The more the economy deteriorates, it seems, the
higher the stock market rises. Just think how much
higher stock prices would be if we could kill the
economy for good. - Without a doubt, we are witnessing a new and different
sort of stock market "bottom," typified by "values" like
Cisco Systems. Even after tumbling more than 75% from
its all-time high of 82, Cisco sports a whopping $140
billion market capitalization - more than 100 times
hoped-for fiscal 2002 earnings and nearly eight times
its current run-rate of annual sales. - Clearly, Greenspan's reflation efforts are working a
little magic on Wall Street. The Fed's easy money
campaign is providing fuel aplenty to power stocks
higher...for awhile. And as the market rallies, it fans
the latent bullish passions of many hopeful investors -
hopeful that 40 times earnings is actually cheap;
hopeful that the biggest jump in unemployment in more
than 20 years will be good for consumer spending;
hopeful that our war against an invisible, Hydra-headed
foe named "Terrorism" will be quick, painless and
economically stimulative. - We wish the hopeful investors well, even if we do not
share their optimism. - Out in the real economy, businesses continue to
struggle. Ski lodges are one of the myriad U.S.
industries to gripe that business is worse this year
than last. "Snow isn't the only thing starting to fall
at the nation's ski areas," USA Today reports. "So are
prices. While the start of the ski season remains a few
weeks away at most resorts, some ski lodges are slashing
rates by 20% or more." - David Tanner, president of Rocky Mountain Vacations,
tells USA Today "I've never seen rates come down this
far this early in this season." Despite the lower
prices, advance bookings are lagging well behind last
year's pace. Vail Resorts reports that its bookings are
off 15% to 20%. - "Jobs, the fear of losing them and the perceived ease
of getting them, are perhaps the single greatest
influence on consumer behavior," writes Barron's Alan
Abelson. "Until this year, we had an extraordinary
stretch - reaching back almost a decade - in which the
great job machine cranked out additions to payrolls with
exhilarating regularity." The booming job market, says
Abelson, stoked an "urge to splurge, got housing on a
roll, fired up the stock market, bubble and all, and
imbued [the consumer] with a feeling of entitlement, or
at least inevitability, so far as jobs went." - However, Abelson predicts, "The job picture is apt to
get worse, conceivably a lot worse, before it gets
better...as it does, we suspect, it will take a grand
toll on retail sales, on housing prices, which can
offset a substantial portion of the benefits of lower
mortgage rates, and, yes, on the stock market." - Hopeful investors, cover your ears! ***** Back to Baltimore... *** "The Heartland Hunkers Down" proclaims a headline at
Economy.com. "Businesses have been crawling into a
shell," the article quotes economist Mark Zandi. Slowly,
but surely, people are being laid off, costs are being
cut, and spending is being trimmed. *** Yet, Americans remain optimistic...or delusional.
The most recent Gallup polls show that they believe the
economy will soon come back to life...stocks will
continue to go up...and the nation's leaders are doing a
fine job. The Gallup pollsters found that 84% of those
polled approved of the way Congress is handling things -
the highest rating ever recorded. President Bush - at
88% - enjoys the highest approval rating ever given to a
living president. *** If only presidential approval ratings were a
tradable investment! A lot of money could be made on the
short side. For whenever anything finds such epic levels
of favor in the public's eye...it is just a matter of
time before it is held in contempt. * * * * * * * * Advertisement * * * * * * * * * * How To Remain Safe When Panic Strikes
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* * * * * * * * * * * * * * * * * * * * * * * * * IN THE DUST
By Bill Bonner
"There are some kinds of pain in life that cannot be
avoided. They must be endured. With a little luck, by
someone else!"
Bill Bonner
No suitable quotation came to mind...so I made up my
own. For when we parted company yesterday, we left with a
question mark hanging in the air like the odor of a bad
cigar in a small bedroom: People thought the Fed had the
ability to prevent recession, but now that we have one,
does the Fed have the ability to end it? Fed Governor Robert McTeer, last spotted on a Las Vegas
street corner offering "Free Rent" to passersby, thinks
so. "We are not going into deflation," he told an
audience last week. "Deflation is the hardest rock in the investment
universe," I told the audience in Las Vegas. Running
into it is painful. But McTeer and others still believe
they are in control of the economy and can drive it in
any direction they want. Here at the Daily Reckoning, we're not so sure. If they
actually knew where they were going, why did they drive
into the corn field of recession in the first place, we
wonder. And if they really could choose any compass
setting they wanted...why did they choose to run full
throttle towards the immoveable object of deflation? Bonds are up. Gold is down. Commodities are sinking.
Unemployment is rising. And the entire world economy is
deflating. "At the Hyatt resort in Bali," begins a Washington Post
article, "80 percent of its November bookings - British
car dealers, European druggists and Hong Kong bankers -
have been canceled. "In Japan, everything now comes with zero percent
financing - and even so, loan demand is so depressed
that some banks are simply depositing their
excess cash in other banks. "In Argentina, auto sales are down so much - 40 percent,
compared with this time a year ago - that Fiat has been
operating its plants there just one week a month. "And the annual staging of 'Aida' at the Great Pyramids
in Giza, a high point of Egypt's tourist season, has
been canceled because of security concerns. What already
was a global economic slowdown has been gathering
momentum since Sept. 11, dashing hopes for a quick U.S.
economic turnaround and raising the specter of worldwide
recession. J.P. Morgan Chase & Co. now forecasts that
global economic growth will barely exceed 1 percent this
year and the next, which would be the worst performance
in 20 years." "History tells us that recessions trigger deflationary
forces," observes Morgan Stanley economist Stephen
Roach. "For the world as a whole, I would judge the risk
of deflation to be higher than at any point in 70 years.
Therein lies the risk: Financial markets seem largely
unprepared for such a possibility." But myths and illusions die hard. One of the most
enduring myths of the New Era was that the Fed had
mastered the boom/bust cycle. Since the Fed could
eliminate recessions, there was thought to be no reason
why corporate earnings should decline and, therefore, no
reason for bear markets. So why not pay 200 times
earnings for a stock, if the price only went up? Since the beginning of this millennium investors have
been reminded that stocks can go down as well as
up...and as recently as last week, it was reported that
GDP fell in the 3rd quarter for the first time in a
decade. So the New Era wishful thinkers have turned their
attention from explaining why the Fed would never allow
a downturn to explaining how it can correct the one we
have. The "general rollback of risk-taking animal spirits all
could have been avoided," wrote Republican economist
Lawrence Kudlow in May. "It was the Fed that killed the
market." Mistakes come along just when you need them. Unwilling
to give up on the idea of the Fed's control of the
markets, economists now blame the Fed for raising rates
at the wrong time...or failing to cut them fast enough.
"If ever there was a greater example of a central
planning blunder, I can't think of it," Kudlow
continued. "Most if not all of it could have been
avoided if government officials paid attention to the
message of the markets...Bear market downturns represent
investor pleas for new government policies." Rich Karlgaard took up the same theme in the same place.
"Absurdly tight money has choked a ten-year boom," he
writes. Kudlow and Karlgaard both appeared in the American
Spectator magazine...which turned out to be a wealth of
post-New Era delusion. Even the Fed's mistake will not stop the economy, Kudlow
concluded back in May, because "the underlying forces
driving the New Economy are real and not easily
suppressed." Arthur Laffer, writing on page 42 of the same issue, is
hopeful too. Not only is the New Economy unstoppable,
but now "The Fed's Back on Track." "While I can't be
sure how much longer the mistake the Fed made in 1999
[raising rates] will continue to reverberate through the
economy, my belief is that the longer-term outlook is
pretty good...By the end of 2001 the economy should be
back to its normal long-term growth [ha ha]...The Fed is
now doing a great job." And over on page 45, George Gilder, considerably poorer
since the New Era ended, but no less hallucinatory,
writes: "We are not in a tech slump, or a business-cycle slump,
but a policy slump." In Gilder's mind, too, government
has the power to unleash the remarkable forces of the
New Economy, which he says "far from being over-hyped,
is still painfully under-appreciated." "The Coming Boom," he entitled his article, predicting
"a new phase of wealth creation that will leave the
Buffetts in the dust...A reasonable guess is that the
opportunities of the next decades are roughly ten times
more promising than the opportunities opening in the
mid-1980's multi-trillion-dollar wealth explosion." "The telecosm will prevail," he continues, "and
investors who understand its dimensions will be able to
spurn the catastrophists and prosper from the largest
opportunity in the history of the world economy." Here at the Daily Reckoning, we admit, we do not
understand the dimensions of the telecosm. Whether we
use feet and inches or the metric system, we can't even
figure out where to hook our measuring tape. Perhaps we
should toss it in a full barrel of water and measure the
overflow...but we can't get a grip on it. But we doubt that the Fed is any better at curing a
recession than it was at preventing one. Especially this
one. So we will stand, humbly, in the dust, doubtful that the
pain of a deflationary downturn can be avoided...and
eager to let Gilder's disciples and McTeer's admirers be
the ones to suffer from it. Your editor, Bill Bonner | 
