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* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you receive
Bill Bonner's DAILY RECKONING. This will help you to keep
pace with the changes in the markets. Bonner and I agree
on most things in the field of economics, so the two letters
reinforce each other.
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The House of Morgan
THE DAILY RECKONING
BALTIMORE, MARYLAND
FRIDAY, 15 FEBRUARY 2002
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*** Dow over 10,000...Gold over 300...Moon over
Milwaukee...
*** *** No passion on Wall Street...J.P. Morgan finds
another bad credit risk...
*** Cliggott leaves for Stockholm...Argentinean Pawn
Shops...Telling it like it ought to be...
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Not much excitement in the markets yesterday. The Dow
closed above 10,000. Gold closed above $300.
The recession is over. Stocks are nearly as high as
they've ever been. Why? Because investors lack
imagination. They believe the next 20 years will be like
the last 20.
If the next 20 years are like the last 20, in 2022 gold
will again close at $300...and the Dow will close at
100,000.
People generally find it pretty easy to extrapolate out
current trends. Why shouldn't the Dow continue to go up,
they ask. Why shouldn't gold stay where it has been?
And maybe that is exactly what will happen...
But Mr. Market, we observe, likes to surprise people.
Stocks could go nowhere for the next 20 years...just as
they did following the peak of '29 and the peak of '66.
Gold, on the other hand, could be at $3,000 an ounce by
2020. Sounds incredibly high. But it's less than 4 times
gold's previous peak - set more than 20 years ago!
Eric?
******
- Forget about the heart-shaped box of chocolates. Put
away the pink lingerie. Valentine's Day on Wall Street
featured no passion whatsoever. The stock market's
trading action was like a kiss from grandma. Some stocks
fell; some stocks rose; some did nothing at all.
- The Dow Jones Industrial Average managed to close a
hair above 10,000 by gaining 12.32 points. However, the
Nasdaq Composite slipped 15.78 points to 1,843.38.
- It should be clear by now that we here at the Daily
Reckoning are lovers...not fighters. And we are
particularly infatuated with poking fun at Wall Street's
absurdities...like the CEO who can't remember anything
about the company he ran last year, or the analyst who
makes a couple million dollars per year no matter how
rarely he is correct, or the highly regarded bank that
never met a bad loan it didn't like.
- JP Morgan Chase made more of the wrong kind of
headlines yesterday. Day after day J.P. Morgan's name
keeps turning up in the wrong places. Yesterday, its
name turned up in connection with the financially
destitute Qwest Communications.
- Qwest's stock and bonds tanked yesterday, Bloomberg
News reports, "after the fourth-biggest local phone
company borrowed $1.1 billion from banks because it
couldn't get money from money-market investors. Qwest
tapped a credit line arranged by J.P. Morgan Chase & Co.
and Bank of America Corp. for day-to-day financing
because the company couldn't sell commercial paper."
- "Tyco International Ltd. tapped bank lines last week,"
Bloomberg reminds us, "and Enron corporate did so before
filing for bankruptcy."
- Morgan is a prominent lender in all three cases.
- One thing I'm dying to know: Has J.P. Morgan Chase
made any GOOD loans?
- I'm also very curious to know why the esteemed Wall
Street strategist, Douglas Cliggott, abruptly announced
that he will resign his post at J.P. Morgan.
- On the one hand, the move seems fairly predictable.
The habitually bearish Cliggott always seemed like a
misfit within the oh-so-New-Economy House of Morgan.
- On the other hand, it is quite curious that Cliggott
would depart from JP Morgan, the investment bank
nonpareil, to join the virtually unknown Brummer &
Partners, an asset management firm in Stockholm, Sweden.
- Maybe Cliggott caught wind of some kind of upsetting
news one day by the water cooler. Or maybe he just likes
herring and Abba.
- J.P. Morgan's serial lending disasters illustrate that
there may be a lot more that we don't know about this
banking giant than we do know.
- It's enough to make an investor paranoid.
- But if the folks running American corporations are as
deceptive, greedy and/or inept as recent events suggest,
paranoia is not a psychosis, but a rational response.
- In the current environment it's easy to feel like a
woman who suddenly discovers that her husband of 25
years has a second family in Thailand and a third family
in Newark. Every minute detail of those 25 years
suddenly falls under a dark cloud of suspicion.
- Meanwhile, the woman's friends, somewhat nervously,
begin to wonder where their husbands' second and third
families might reside.
- "The issue isn't so much whether many companies are
committing fraud," the Wall Street Journal explains,
"it's more a question of how many companies tweak their
earnings numbers here and there just to make the crucial
number, earnings per share, look better."
- It's true that "tweaking the numbers" has become as
politically incorrect as smoking cigarettes, and that
investors want "honest numbers"...or so they say.
Unfortunately, the dishonest numbers we've grown to love
look a heck of a lot better.
- "The attention being paid to quality of earnings is
likely to increase rather than fade away," says
Bridgewater associates, "and the surprises are more
likely to be bearish then bullish."
******
Back in Baltimore...
*** Lost money in the stock market? Don't spend a minute
worrying about it.
*** My son Jules was out late at night with his 14-year-
old friends. One of the group stepped out into the
street and was struck by a speeding van.
*** The boy was rushed to shock trauma. At first, the
family was hopeful that he would be all right. But it is
now 2 weeks later, and today brings sad news. The boy is
still in a coma...and seems to have suffered severe
brain damage. He may never wake up, say the doctors.
*** "I can't imagine how bad Edouard's parents must
feel," said Elizabeth when she told me the news by
phone. "I don't even want to try."
*** When you are crossing the road in Paris...or any
city...please be careful.
* * * * * * * * * Advertisement * * * * * * * * *
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* * * * * * * * * * * * * * * * * * * * * * * * * * *
THE HOUSE OF MORGAN
By Bill Bonner
"Day after day, J.P. Morgan's name keeps turning up in
the wrong places."
Eric Fry
>From south of the Rio Plata comes more evidence that
Central Bankers - like other bankers - will only give
you money when you don't really need it.
"Every day, about 1,000 Argentines like Gauto stand in
line to sell anything from cameras to violins to ivory
chess sets at Banco de la Ciudad de Buenos Aires, the
only government-owned pawn shop in the capital," reports
a Bloomberg article. "With a devaluation that has cut
the peso's value in half the past month eating into
wages, and most savings still locked up in banks,
Argentines have resorted to selling their most valued
items to pay for food and rent.
"The recession has brought new business to Banco Ciudad,
owned by the City of Buenos Aires, where the number of
pawned items has almost doubled since December, when
Argentina first limited withdrawals. On Tuesday,
Argentines pawned 900 pieces of jewelry valued at
233,000 pesos, 102 items of audiovisual equipment worth
14,000 pesos and five works of art appraised at $3,000.
In the 12 months through January, sales of goods brought
in for direct sale rose 30 percent to $320,000."
Argentines desperately need money. And if any central
bankers know how to "crank up the presses," surely it is
the Argentines. As recently as the late '80s, the
printing presses of the pampas cranked out so much
currency that a peso printed at the beginning of the
year had lost 90% of its value by Christmas.
But, of course, that was when Argentina had no use for
additional currency. In the '80s, Argentines needed less
money, not more.
Who would have imagined what would happen scarcely a
decade later? Argentina, as you may recall, beat its
inflation problem by turning off the presses and pegging
its peso to the U.S. dollar. The dollar, though, has
been remarkably high, which put Argentina's exporters at
a comparative disadvantage. Within a few years, the
economy was in a slump. This year, in fact, marks the 4th
year of recession.
Argentina, of course, borrowed billions from
accommodating lenders such as J.P. Morgan...which, as
Eric points out above, never met a bad loan it didn't
want to make.
Finally, Argentina had to break the currency peg and
stiff its creditors. Naturally, people in Argentina
worried that the peso would fall in value and rushed to
banks to try to get their money. The government moved to
protect the banks by limiting the amount of money a
person could withdraw. Even if you have a million pesos
in the bank, you're only able to take out about $800 per
month to live on.
We reported the strange case of a man who showed up at a
bank with a hand grenade - threatening to blow the place
up if he didn't get his money. The man was arrested.
Which just goes to show how upside-down things really
are in the southern hemisphere. It should have been the
bankers and politicians who were arrested - for stealing
the poor man's money. But that is not the way of the
world south of the equator...or north of it.
Central bankers can create "money," dear reader, but
only when you don't really need it. The argentine peso
has lost 50% of its value in the last month. Still, in
real terms, prices are falling - as desperate people
unload family heirlooms in order to get enough cash to
pay their rent. The pawnshop lines begin forming at 4
a.m., reports Bloomberg. And prices for unreclaimed
goods are plummeting. Unemployment is soaring to Great
Depression levels. If central bankers really could
create "money," what better time to show off their
skills?
But that is the problem. Alan Greenspan is only a
maestro at creating "money" in a boom. In a real bust -
which we haven't had yet in America - he will be a total
flop. In a bust...that is, when money is most needed...
the demand for cash goes up, but the supply goes down.
Central bankers can do nothing about it.
American Banker magazine reports that the largest 25
U.S. banks have $16.6 billion of exposure to just two
risks - Argentina and Enron. And the bank with the
largest exposure - to these as well as other hazards -
is J.P. Morgan. Today's news tells us that the House of
Morgan was also the most aggressive lender to Tyco...
from which it now faces a loss of up to $1 billion.
As long as the economy was in boom mode, lenders were
happy to throw their customers' money around. But when
times begin to get tough, it becomes tough to get new
credit. Lenders become wary. Even as the central bank
lowers short term rates, borrowers find they have to pay
more for their money.
As Eric notes above, Qwest had to draw on more expensive
bank financing after it was unable to sell its
commercial paper. Other borrowers are facing the same
problem. Regardless of what Greenspan may want, the
credit markets have interest rate policies of their own.
A credit downgrade is equivalent to an interest rate
hike.
J.P. Morgan was named "Bank of the Year", "Derivatives
House of the Year", and "Loan House of the Year" by
International Financing Review. But when one's star has
risen so high that one's mug appears on a magazine cover
- like Jeff Bezos on the cover of TIME - it is usually a
prelude to disaster.
In the investment world, few indicators are as reliable
as the big banks. Find out where the big banks are
lending a lot of money - and it is almost always a black
hole. Each decade seems to produce at least one major
cosmic implosion in the banking world. In the '70s,
banks lent to oil producers...and Texas real estate. In
the '80s, it was emerging markets. In the '90s, telecoms
provided the garbage pail for bankers' money.
And some banks seem to be able to get in on every losing
opportunity that comes along. So far, no major losses
have been announced in the press without J.P. Morgan's
name mentioned. Enron, Qwest, Argentina, Tyco...how many
of these disasters can the bank sustain?
We don't know. But the problem goes far beyond J.P.
Morgan.
"Maybe I'm naive," writes Stephen Roach, "but I must
confess to being amazed at how little we in the macro
community know about the possibility of more Enrons. The
same is true of the markets...there can be no mistaking
the broader excesses of corporate leverage in the
system; corporate debt currently stands at a record 65%
of US GDP. While that doesn't guarantee that there will
be more Enrons to come, it does speak of a business
culture replete with risk - one that is ill-prepared to
handle a broader contagion that would raise borrowing
costs and/or result in a significant restatement of the
underlying earnings stream that is required to service
such obligations."
"The same can be said of household sector leverage in
the United States," Roach continues. "Total consumer
indebtedness currently stands at a record 73% of GDP.
This, in my view, is an unmistakable legacy of the asset
bubble. First stocks, now homes, American households
have been unusually aggressive in borrowing to support
lifestyles. In doing so, of course, they have depleted
traditional saving balances and relied increasingly on
readily available credit to extract newfound income from
inflated asset values. The overhang of excess debt,
however, remains a troubling aspect of the post-bubble
hangover. Should income continue to weaken, or interest
rates suddenly increase, it would be exceedingly
difficult for the household sector at large to keep
servicing this debt. The problem, of course, would be
even more acute if the U.S. were ever to experience a
whiff of deflation. The debt-deflation trap is one of
the most intractable dilemmas for any economy. Just ask
Japan."
We don't know what will happen to J.P. Morgan. (We'd
like to know where the big banks are going to lend next,
so we can sell short).
But we're willing to bet that even J.P. Morgan is
beginning to ask questions of its borrowers, and may ask
for a point or two of extra interest to try to offset
its losses in other parts of the business. And, we'll
hazard another guess - that the recovery in the U.S.
economy will be as strange as the recession that
preceded it. "Money" will get tighter, not looser. The
more people really need it, the less money will be
available to them.
Telling it like it ought to be,
Bill Bonner
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