*** His hour come round at last...Greenspan slouches toward
rate cuts
*** Dow rallies...but "Profits are falling off a cliff..."
*** The magic...actual rate of return on borrowed
money...con game...and more.
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The landing approach has begun. The flaps are down. A
moderate slowdown has hit the U.S. economy. Investors are
still optimistic. But consumer spending is way off.
Still...it seems that everyone believes that Alan Greenspan
will engineer a soft landing for the formerly high-flying
tech bubble. But according to one of the world's leading
economists, it's worse than blind faith. It's "high-octane
'new paradigm' propaganda."
Here's what you need to do -- right now -- to prepare yourself for the
coming crisis:
http://www.agora-inc.com/reports/RCLF/CrisisComing
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*** The hour cometh, cometh the man. And the man of the hour
is Alan Greenspan...to whom the entire world turns its weary
eyes today. The Great Helmsman of the Fed is widely
expected to save free-market capitalism's biggest boom ever
by rigging interest rates.
*** Few people appreciate the irony of this. And perhaps
only those few suspect the futility of it. But we will
see...
*** A WSJ story yesterday let out the news that the Fed
might be considering more aggressive efforts to avoid a
severe business slowdown. The signs of such a slowdown seem
to be multiplying.
*** "Profits are falling off a cliff," says an analyst
quoted in the Economist. Estimates for profit growth in the
fourth quarter have dropped from 15.6% in October...to less
than half that amount now. In the tech sector, analysts have
lowered their expectations from 29% (annualized rate of
increase for the quarter) to 10%.
*** And the techs keep falling. Cisco lost more than $5
yesterday, for no apparent reason. Sun Micro dropped nearly
$2. Microsoft gave up another 3% of its value. And Amazon,
our favorite river-of-no-returns stock, fell below $20.
*** The number of profit warnings is up 70% since last year.
And Moody's says, this year, 4 times as many companies have
had their credit ratings downgraded as have had them
improved.
*** Yesterday, Time Warner alerted investors that profits
would not be as expected. Gerald Levin, head of Time Warner,
was among many of the rich and powerful on Wall Street who,
at the peak of the Internet mania, wanted to be sure he "got
it." So, he decided to buy it -- by merging with AOL. Now,
he's getting it. Time Warner stock, $105 in March, fell 13%
yesterday to $63. AOL, its merger partner, dropped 14% to
close at $42. It was a $95 stock last year.
*** Be careful what you wish for. Once you get it -- you
might discover that you were better off without it.
*** A lot of people are "losing it" on Wall Street and
throughout the nation. And they are hoping that Greenspan
has the magic to bring it back.
*** The Dow rose 210 points on that hope - 1,880 stocks
advanced on the NYSE; 1,084 declined.
*** Greenspan will surely try to accommodate these hopes. He
will do the one thing he knows how to do -- he will make
money more readily available to those who want to borrow it.
*** But, "for the magic to continue," opines a piece in
yesterday's New York Times, "that is, for the economy to
avoid a nasty recession in the next few years -- the
borrowers must remain prosperous enough to pay off their
bonds, credit cards and mortgages."
*** Financial commentators -- perhaps looking for the Big
Bottom -- have noticed another anatomical feature: "The
unprecedented level of private debt," continues the NYT
article, "could well be the biggest single threat to the
soft landing..."
"`This could be the economy's Achilles Heel,'" the NYT
quotes economist Mark Zandi.
*** "The dust behind [Greenspan's] magic has been debt,"
notices the NYT. Consumer debt, at $7.5 trillion, is more
than twice the level of 1990. Corporate debt has reached
$10.6 trillion.
*** Can you really defuse such a big debt bomb -- by making
even more debt available? Greenspan can lower only nominal
rates -- not the real, effective rate of return on borrowed
funds. In the last eight months, investors who bought Nasdaq
stocks with borrowed money have suffered a loss of 50% on
the stocks...plus the interest charge on the debt -- for an
effective rate of return of nearly MINUS 60%. A quarter-
point drop in the Fed funds rate is not going to make that
hurt go away...nor is it going to entice borrowers to take
on more debt.
*** There's also a new element in financial discussion:
people are beginning to look for someone to blame for their
losses. The Miami Herald reflects on the tech mania with
this headline: "The boom was too good to be true...was
America conned?" The Bay Area's Mercury News refers to the
run-up in tech stocks as a "legal con game."
*** "Minor manias or bubbles don't lead to any significant
economic disruptions when they burst," writes Marc Faber,
"because they are only based on a relatively small sector of
the economy and are usually local in nature. Major manias,
by contrast, are significant in the context of the whole
economy and are very often of international dimensions and
attract a large flow of foreign money." (see: The Dynamics
of Investment Booms
http://www.dailyreckoning.com/body_headline.cfm?id=826)
*** "The steep slide of the high tech stocks, the broad
retreat of the Old Economy stocks...," writes Dr.
Richebacher, "multiplying bank announcements of sharp
increases in bad loans, the virtual shut-down of high-yield
lending, record-high indebtedness of firms and consumers, an
unsustainable negative personal saving rate, an
unsustainable, monstrous current-account deficit and
countless profit warnings -- all these bigger and bigger
economic and financial negatives, relentlessly eroding the
U.S. economy's stability and strength, are flatly ignored by
Wall Street's Panglossian economists... What's more, the
markets have readily and unreservedly embraced this shallow
approach." (see: Lies, Damn Lies, Wall Street
http://www.dailyreckoning.com/body_headline.cfm?id=827)
*** The Web's many content sites are taking a beating along
with everything else. Salon.com has gone from $15 to $1.
TheStreet.com from $71 to $2.50. Millionaire.com from $27
to 18 cents...and the Individual Investor Group has
collapsed from $7 down to 63 cents.
*** I've tried to keep my eye on TheStreet.com -- since it
is in the same business I am. Recently, the market cap fell
below the available cash on hand. Aha, I thought...this
might be an opportunity. But TheStreet is still losing
money at Internet speed -- and seems to be making a death
march toward insolvency.
*** How about the Dailyreckoning.com? Well, we're profitable
-- thanks to you, dear reader. But then, our expenses are
extremely low. Addison and I make up the entire editorial
team. And we don't earn much.
*** But money isn't everything. My tastes are modest. I
just need to buy a few Christmas presents for the
kids...and, oh yes, Elizabeth had her eye on a gold
necklace. And, well, the car broke down a couple of weeks
ago...and there are still five children to put through
college. And part of the chateau needs a new roof...and
there's Mr. Deshais, the gardener...and repairing the stone
walls...and furniture for the grand salon...and we need a
bigger apartment...and...
... For the love of God, please buy something!
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"It is only with the heart that one can see rightly. What is
essential is invisible to the eye."
Antoine de Saint-Exupery
No place in America is feeling the downturn in tech stocks
more sharply than the San Francisco Bay Area. An article in
the San Francisco Chronicle tells how dot-com failures and
tech setbacks affect ordinary people:
"Roman Foldr has gone from dot-com gamekeeper to dot-bomb
grim reaper in a matter of months," reports a recent
article. "The 40-year-old entrepreneur has made a good
living in the past few years renting foosball tables, video
games and other cushy amenities to Internet startups. All
across the Bay Area, cheers would rise up from the ranks as
he rode up in his truck to install old Pac Man games and
pool tables in their spanking new offices."
That was then...when those who "got it" were still were on
the receiving end of billions of dollars from those who
didn't.
"But these days, with hundreds of Net firms folding across
the country during the past year and even more cutting
costs," reports the Chronicle, "Foldr finds himself
repossessing foosball tables on a regular basis. His arrival
more often than not sends dot-commers scrambling to update
their resumes."
I have been looking at the consequences of "the pretense of
knowledge" and at the way markets become most risky at the
very moment when investors come to believe that risk is
totally absent. The further the delusion rises above the
truth...the further you have to fall, and the harder the
concrete of reality.
The trouble is, when you are flying high on fantasy...the
cement below is almost invisible. "The truth is hard to
see..."
People speak casually about the truth -- as if it were
something that they could look up in an encyclopedia and zap
around the Internet. The "digital men" seemed to think that
truth was the same as information...and that the key to
success in life was having more of it than the next guy.
And yet, even in the sciences, truth is unreliable.
"Every day," writes historian Jacques Barzun in Forbes ASAP,
"the truths of geology, cosmology, astro-physics, biology
and their sister sciences are upset. The earth is older than
was thought; the dinosaurs are younger, the starts in huge
galaxies have so much space they can't collide, yet they
collide just the same; after being dry as dust, Mars has
liquid water. The human bones in Central Africa do not mean
what they were said to mean, and a new fossil shows the
origin of birds to be entirely different from the view that
was thought true yesterday..."
But there are two kinds of truth...just as there are two
kinds of knowledge. One may furnish the brain...but the
other dresses out the heart. There is the truth that you can
find in the sciences, in textbooks and as observable fact:
such as the length of a meter, the boiling temperature of
water, and what Bill Clinton may have done with Monica
Lewinsky.
And there is the truth you get from personal experience --
the truth that helps you figure out what the facts really
mean and what to do with them. The first kind of truth is
cheap. It's the second kind that is dear. Like a Big Bottom,
it doesn't come along very often -- and then, only at great
cost and after great suffering.
Smithers and Wright remarked that, "investors who lived
through these [downturn] periods would have found that these
bear markets had a large negative impact on their living
standards." But at least they would have learned something.
And thus, truth is emerging in San Francisco: "Financial
losses associated with the shakeout are rippling through the
Bay Area's service economy like so many aftershocks,"
continues the Chronicle report, "affecting everyone from
public relations and party planning firms to landlords and
vendors."
San Francisco's digital industry generated more revenues
than its retail sector...with tech workers "pulling in an
average income of $78,429."
"When a dot-com is folding, and they tell you to pick up
your equipment, you better be there in half an hour," said
Foldr, who founded his South San Francisco business in 1989.
"You never know when they're shutting the doors."
Foldr is experiencing the trickle down financial effects of
a mania meltdown. "There's been a bloodbath in our
industry," said James Collins, a Sausalito recruiter for
Toronto's Cyberplex.
"Even commercial real estate, long considered the most
visible indicator of dot-com opulence, is cooling off. The
once white-hot market has become a renter's market in areas
outside the Financial District, according to Robert
Larscheid, a principal at Corporate Real Estate Service
Providers, which represents commercial tenants.
"As companies shut down and lay off workers, they give up
all or some of their office space. The result is a sudden
flood of offices being subleased."
Meanwhile, on another bay, the Miami Herald records the
bewilderment of investors discovering a similar truth.
"I got in just a little bit before the peak," laments Melvin Klahr, a North Miami-Dade investor. "I just saw this stuff going up and up."
"His biggest regret," the article tells us, "was not getting timely advice to sell. "Nobody rang the bell for me and told me that was the high point."
"Few saw it coming," says the reporter, referring to the approach of the dot-com crash -- which anyone who cared to look could not have missed. Bells had been ringing so loud and for so long that those of us listening practically went deaf.Mr. Klahr's net worth may be impoverished by the experience of a bear market, but his life is enriched by the truth.
Your correspondent, searching for the truth...
Bill Bonner
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Last modified: April 01, 2001
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