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-Caveat Lector-
* * * * * * * * * * * * 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.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
END OF THE GILDERED AGE, II
THE DAILY RECKONING
PARIS, FRANCE
FRIDAY, 21 JUNE 2002
* * * * * * * * * * * * * * * * * * * * * * *
*** Mr. Market seems sad.
*** Dollar at 2-year low...Gold up $3...
*** Foreigners own a lot of the U.S. - what if they
wanted to own less? U.S. savings...the World Cup...and
more!
* * * * * * * * * * * * * * * * * * * * * * *
A couple of things happened yesterday; Mr. Market didn't
seem to like either one.
First, the figures from April showed that the U.S. trade
gap has reached a new record - $35.9 billion in a single
month. Gradually, smart investors are becoming aware
that the U.S. stock market - and its economy - depend
upon foreign investors. If they ever stop buying our
stocks, bonds and dead presidents - the whole republic
is in big trouble. And, as Eric reports below, the
kindness of these strangers is wearing a little thin.
They're beginning to think that they've got all the dead
presidents they need. So, they're trading the green
Jeffersons, Jacksons, and Washingtons for funny-looking
paper with pictures of Europe, cathedrals and other
unfamiliar images.
Economists and investors now expect the dollar to fall.
What might still surprise them, though, is how much and
how fast. Not that we know anything...but Mr. Market
likes surprises, especially those that come at
investors' expense. Yesterday, the greenback hit a 2-
year low against the euro.
Then came more poll results, which don't really mean
anything but spook investors anyway. Seems the guy on
the street is beginning to wonder. Consumer confidence
is at a 9-mo. low, say the pollsters. Investors Business
Daily's index of leading mutual funds is down nearly 15%
so far this year.
It is now Year III of the bear market and ordinary
investors are beginning to have some questions. How long
will this go on? Who is responsible for this? If the
economy is recovering, why are stocks going down? If
buying and holding is such a smart idea, why is the
"smart money" - the insiders and the real pros -
selling?
And so....Stage II of the Great Bear Market of '00 -?
continues...
Eric, what's the latest?
******
Eric Fry, reporting from Wall Street:
- Mr. Market has become an "Eeyore." Like the despondent
donkey from Winnie the Pooh, he skulks through each day
moaning, "When it's daytime, I'm sad. When it's
nighttime I'm sad. But nothing that happens makes me
sad. I'm too busy being sad to be affected."
- Mr. Market is just not the kind of guy you'd want to
hang out with...He's a "downer." And yesterday was no
exception. The Dow slumped 129 points, depressing it to
9,431, while the Nasdaq dropped more than 2% to 1,464.
The dollar slipped as well, falling to a new two-year
low against the euro. Gold responded to the sliding
stock market and sliding dollar by jumping $3.40 to
$323.70 an ounce. The Amex Gold Bugs Index soared 5.4%.
For the bears, it doesn't get any better than this!...Or
does it?
- Neither the stock market nor the dollar can seem to
find their footing. Rather, they stumble through each
trading day like a couple of drunks heading home after
the bars close.
- Not surprisingly, therefore, foreigners are starting
to back away from US financial assets. According to the
Treasury Department, foreign investors purchased a net
$17.6 billion of US stocks in the first three months of
the year. That's down a whopping 58% from the $41.7
billion they purchased in the same period the year
before. We should not be too surprised if foreign
investors have become net SELLERS in the current
quarter.
- Worse still, the dollar labors under the weight of a
massive current account deficit - a deficit that grows
ever-larger. The government announced yesterday that the
deficit soared to a record $112.5 billion in the first
quarter of the year. That's up from $95.1 billion in the
first quarter of 2001.
- "While the consensus expects a strong dollar again
next year, we see it falling over time to new all-time
lows against the major currencies," says Dr. Kurt
Richebacher. To emphasize the dollar's vulnerability, he
compares the current state of America's national
finances to those prevailing in 1985, when the dollar
last suffered a major bear market.
"The biggest difference between the mid-1980s and early
2000 is, by far, the international investment position
of the United States," he says. "In 1985, the
international investment position of United States went
into negative territory for the first time. Foreign-
owned assets in the United States of $1.061 trillion
compared with U.S.-owned assets abroad of $949 billion,
for a net negative of $111 billion.
"At year-and 2000, the market value of foreign holdings
amounted to almost 10 times the amount of 1985: $9.377
trillion, versus U.S.-owned assets abroad of $7.189
trillion, resulting in net foreign indebtedness of
$2.187 trillion...Net foreign indebtedness is rapidly
approaching $3 trillion.
"These figures...provide some idea of the fantastic
magnitude of the forces that may come into operation
once the dollar's invincibility comes into question.
"Huge capital inflows have become the U.S. financial
markets' single most important pillar. Take this pillar
away, and those markets will instantly collapse with
devastating effects for the U.S. economy, turning
quickly into a savage credit crunch."
- To read the good doctor's prognosis for the U.S.
"recovery", click here:
The Bogus Recovery
http://www.agora-inc.com/reports/RCH/TheDaily
- David Tice is also a card-carrying member of the
Dollar Bears Club. The U.S. stock market's booming
performance in the '90s was wind-aided, says Tice, and
one of the most powerful tailwinds was the increased
foreign buying of U.S. financial assets. "Throughout the
'90s, non-U.S. investors were increasingly aggressive
buyers of U.S. securities," Tice explains, "helping to
drive U.S. stocks higher during the bubble, and keeping
them from falling further since...
"Foreign net purchases of U.S. equities increased
tenfold from 1991 to 2001," Tice continues, "...[But]
foreign investors bought more than stocks over the past
decade...Foreign investors now own some 40% of the
country's marketable Treasury securities, compared to
90% in 1992...It's a stretch to think that foreigners
will bet as heavily on U.S. markets in the next five
years as they did over the last five. Given the sheer
size of those foreign inflows, it looks like yet another
tailwind to U.S. stocks is changing directions."
- "The wind blows where it wishes," the gospel of John
observes, "and you hear the sound of it, but do not know
where it comes from and where it is going..."
- True, but that doesn't mean we can't keep a close eye
on the weathercock.
******
Back in Paris....
*** Is the U.S. situation really like Japan's - only 10
years later? Well, no...it could be much worse. The
Japanese went on a spending binge in the '80s, but they
started from a very high savings rate. Even at their
most spendthrift, Japanese savings rates never fell
below 10%. Which meant that the Japanese were prepared
for a long period of slow growth, bankruptcies, and
recurring recession. They had a pad of cash to cushion
the blow.
*** Americans on the other hand, spent every dollar that
came into their hands. Savings rates were never very
high in America. As in Japan, they fell about 10
percentage points during the boom years, but beginning
at only about 10%...which took them down to zero. How
will Americans cope with the low, slow, soft depression
of the next decade? We will see, dear reader, we will
see...
*** "If Congress doesn't take action immediately [by
raising the debt ceiling], the U.S. government will come
to a halt," says a hysterical message on the internet.
Why would this be a bad thing, we can't help but
wonder...
*** We had dinner last night with old friends. Rick Rule
is as knowledgeable as anyone about the gold market, so
I wanted to know: what gives?
*** "People are making a lot of money...a lot of money,"
said Rick. "The bear market in gold lasted so long it
knocked out many of the players. So there just aren't
many people in the hard money marketplace. The few who
are left are doing very well."
*** Gold rose again yesterday - up $3.
See: The Untold Secret Behind The Gold Rally
http://www.agora-inc.com/reports/400KPENY/WealthBuilder
*** "Hey, are you Americans," asked our taxi driver?
"Isn't that crazy? The good teams were knocked out...and
you Americans are still in it. But, heh heh, you've got
to play Germany tomorrow."
*** At the Hotel de Ville, near our office, the city has
set up a huge TV so crowds can watch the soccer matches.
The world championship games are going on now in Korea
and Japan. France, the winner 4 years ago, figured
Parisians would want to watch the home team win the
Coupe du Monde again. But France was beaten in 3 games
straight, without ever scoring a goal. Other front
runners - Italy and Argentina - were also knocked out
unexpectedly, leaving teams from the U.S. and Senegal in
surprisingly good positions.
*** "Did you hear that President Bush called the
American team?" asked a companion at dinner. "He said
something like 'Of course, no one over here really
cares...least of all me...'"
*** "Good luck," said the taxi driver as we got out of
the cab, "you'll need it."
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END OF THE GILDERED AGE, II
by Bill Bonner
"Over the next 12 to 18 months, investors will look back
at current prices of the leading players [telecoms] and
wish that they had bought stock at these prices."
Jack Grubman's State of the Union
March 2001
"It's '1985' all over again!"
So declares the headline on a subscription offer from
George Gilder's Technology Report. "Buy the right
technology stocks now and before long your skyrocketing
profits will make you think it's 1999 all over again,"
writes Gilder. "Don't let the 'Chicken Littles'...keep
you from a second chance to grow rich on today's best
technology!"
Unrepentant. Unreconstructed. Unbelievable.
Gilder reminds us that 1985 was not a great year for
technology stocks. People thought tech was "dead." But
fearless investors who bought Intel and Microsoft over
the next few years made a fortune. $20,000 invested in
Microsoft, for example, would have turned into $3.6
million over the next 15 years.
People who think they need to x-ray each other's shoes
are ready to believe anything - even that the U.S. might
be on the threshold of a great new boom.
Buy low, sell high. We remind ourselves and you, dear
reader, of the traditional rule. George Gilder couldn't
get enough of Global Crossing when it was trading at 33
times sales and $60 per share. The man must be beside
himself with joy today - now that he can buy as many
shares as he wants for only 6 cents apiece.
Investors have lost 99.9% of their money already. Can
they lose more? The shares are relatively cheap; an
analyst would have to look carefully to find out whether
or not they are absolutely cheap. After all, what is all
that glass fiber really worth? Perhaps, when the debts
are settled...Global Crossing might still be in business
when it gets out of the bankruptcy courts.
Maybe the promise of the Information Revolution will
come true at last. Suddenly, late at night when sensible
men have taken to their beds and only techies,
terrorists and teenagers are still awake, the world's
dark fibers will light up with data. Maybe then, the
stock will rise to 7 cents.
We come back again to George Gilder today, dear reader,
not to praise him, nor to bury him, but only to tease
him. For Gilder seems like a decent sort, after all. He
put his money where his mouth was...and lost it fair and
square.
Besides, every revolution needs its intellectuals, its
profiteers and its executioners. Gilder's role was to
justify the dreams of masses, helping persuade the
lumpeninvestoriat that they could get rich buying stocks
in technology they couldn't possibly understand. For
what was talk of gigabits of photons flying over glass
fiber and multiplexing, pulsating cransits...other than
the information age's answer to Marxist claptrap about
the class struggle, the proletariat, and dialectical
materialism?
And who can blame Gilder - or Marx - for the excesses of
their disciples, bowdlerizers and exploiters? Gilder was
just thinking, after all. Who can fault a man for that?
Here at the Daily Reckoning we rather admire it, not for
its utility, of course, but for its rarity.
As in every revolution, the real mischief was done by
the small cadre of cynical gun runners who followed in
Gilder's visionary footsteps.
Jack Grubman, for example, did what other Wall Streeters
had always done - he found a way to make revolution pay
off. In 1917, when the Bolsheviks needed money and
ammunition, Wall Street sent over a team of 16
financiers (attached to a group of 15 Red Cross
volunteers). Like Armand Hammer's father, who provided
the communists with "supplies", at a profit, of course,
Grubman hustled stocks to investors - ones that would
later blow up. The traffic made Grubman a rich man; he
earned as much as $20 million per year as Salomon Smith
Barney's telecom analyst. And unlike Gilder, he wasn't
dizzy enough to believe in the cause - he realized it
was just a way to separate the fools from their money.
Grubman didn't buy telecom stocks - he sold them.
According to press reports, Grubman worked closely with
Global Crossing's chairman, Gary Winnick...perhaps
advising him on his stock selections. "Winnick used to
walk around the office saying he owned Jack Grubman..."
said a former employee, quoted in FORTUNE. "Winnick and
his cronies are arguably the biggest group of greedheads
in an era of fabled excess," continues the FORTUNE
article.
Winnick, like Grubman, made money on Global Crossing -
again, by selling the stock, not by buying it. When the
telecoms blew up it cost investors $2.5 trillion in
market value. But Winnick walked away with $730 million
before the bomb detonated.
Poor Klaus "Patsy" Reinisch wasn't so lucky. A refugee
from WWII Europe, Mr. Reinisch retired from a New York
city job and invested some of his $300,000 in savings in
Global Crossing, following Mr. Grubman's advice.
Somehow, Mr. Grubman forgot to tell him when to sell.
Instead, almost exactly a year ago, Grubman wrote:
"There are historic opportunities to buy world-class
assets such as Global Crossing that are evolving into
world-class operating businesses at compelling value."
On that day, Global Crossing shares sold for $7.68. But
if they were compelling then, you'd think the shares
would be absolutely irresistible today. Alas, after the
company went bankrupt in January, Grubman...who owns a
$6 million townhouse in Manhattan, with neither mortgage
nor lien...simply "discontinued coverage" of the stock.
All of this may not mean much to Gilder. He's still
staring at the skies, thinking about gigabits, and
scribbling away...while creditors pull up in front of
his house and wonder how much they could get for it.
Is it 1985 all over again? Well, not likely. In 1985, it
was "morning in America." The Fed funds rate was near 8%
- with plenty of room to come down - and the average P/E
was near 15 - with plenty of room to go up. No matter
how many gigabits Gilder thinks he can squish through a
strand of glass, stocks will have a very hard time going
up in the years ahead. Fed funds will find little room
to go down.
Your correspondent,
Bill Bonner
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