| WACHT AM RHEIN THE DAILY RECKONING BONN, GERMANY
WEDNESDAY, 17 NOVEMBER 1999 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
In Today's Daily Reckoning: *** Greenspan boosts rates
*** Stocks rally
*** What else is new? * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** Well…stocks rallied following a quarter-point
interest rate hike by the Fed yesterday…as predicted. *** The Fed not only raised rates, it signaled to the
market that it was adopting a neutral bias…and was
not likely to increase rates again anytime soon. Stock
bulls took this as a green light… *** But the OECD threw a little cold water on the
celebration…saying that a rate increase may well be needed… *** Now we will have to wait to see whether the old
Wall Street adage, "Three hikes and a tumble," is still
valid. Maybe it no longer applies…maybe it's time to
throw it into the round file, along with all the other truths,
rules and wisdom of the graybeards on Wall Street… *** I'm sitting in a room at the Rhein Hotel…on the banks
of the river of the same name. No English newspapers.
And I can't connect to the World Wide Web either…hmmm.
So I'm watching CNBC, which makes me question a
fundamental premise of the Internet Revolution -- that
access to information will lead to greater prosperity.
CNBC gives you more info than you could ever use. And
if you sat there absorbing it…your brain would go dark and
you wouldn't get anything done. You might even mistake
all this urgent information for something important. I was
impressed by the correspondent from Singapore, though.
She was so beautiful I couldn't take my eyes off her. I have
no idea what she said. *** One interesting thing in the wake of the interest rate
hike -- the yen actually rose against the dollar. This is
not supposed to happen. More below… *** "Would you rather buy a good stock during a bear
market," asks Richard Russell, "or a bad stock during a
bull market?" Russell answers that he'd rather have the
bad stock in a bull market. A bull market tends to raise
even bad companies, while a bear market drags down
even good companies. Of course, it's all a matter of
degree. http://www.dowtheoryletters.com *** And Warren Buffett would say that you can't know
whether it's a bull market or a bear market…so you
should buy the good company at a "fair" price. But there's
the key. At the end of a bull market, prices are usually no
longer fair…they're too high. That's the situation today…
and it's why Buffett isn't buying… *** Russell quotes Joe Granville's market prediction:
"I look for the Dow to go to 6,000 within six to 10 months."
Granville, by the way, is a great showman. He once installed
a plank just under the surface of his backyard pool. Then,
to the astonishment of a group of investors, he strode
across the pool…to prove that he walked on water. *** It was snowing when I left Charles de Gaulle Airport.
Unusually cold for early November. I came to Germany
with a financial analyst, Rafael, to visit our partners at
Verlag Rentrop and discuss new projects. Verlag Rentrop
is not a typical German business. Even though employees
are addressed formally -- Herr Graf…Fraulein Schmidt --
they are also allowed to bring their dogs to work.
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WACHT AM RHEIN
Gotterdammerung…zeitgeist…Weltanschauung…drang
nach osten… There…those are all the pretentious German terms I know…
Now I can go on with this letter…without bothering you with them… Germany is probably the country closest to the United States
in cultural terms. Yet we know little about it. This is the
result of history…and foreign policy. Pat Buchanan dared
to question the orthodox view of WWII and has paid a price.
I have nothing to lose. And it is not WWII that I question…
but WWI. It can be argued that the United States should have stayed
out of WWI. The two sides were exhausted by the time
Pershing announced, "Lafayette…we are here." Some
historians believe that a negotiated peace was near at hand.
But when the United States entered the war, the Allies were
emboldened to require a total German capitulation. Had the
Germans been able to bring an honorable settlement to the
war…there would have been no reparations…no hyper inflation…
no Nazis…no Reichstag fire…no Holocaust…no WWII. And
Uncle Albert would have been compos mentis…and able
to give me Christmas presents. At least, that's the argument. The other thing that would have happened is that we would
have a greater appreciation of German culture. As it is, we
recognize Rommel and Goering…but couldn't pick Schiller or
Goethe out of a police lineup. The Second World War was not kind to German architecture,
either. Houses and public buildings that had been constructed
with a grace and charm that had evolved over the centuries were
destroyed…and then reconstructed as though they were army
barracks or mobile home factories. Concrete and glass…and
parking lots. Most of what you see is as ugly as post-WWII
building in America. Maybe worse. Among the people that owe
the rest of the world an apology are surely the post-War architects. While the architects were making a mess of the landscape,
after WWII the American-led overseers were making a mess
of Germany's economy…with the same kind of strong controls
and weak currency that always makes a mess of things.
Finally, Ludwig Erhard defied the allies and established a
solid deutschemark…and the economy took off. A half-century later, it is the U.S. economy which is
endangered by its currency. The yen has been going up against the dollar for most
of the year…despite higher U.S. interest rates. Stock market investors are not the least bit interested or
concerned. But they should be. Look at the enormity of
the trade and current account deficit. The United States needs to import nearly $1 billion per
day to fill the gap. This is, as Dr. Kurt Richebacher…
German economist and veteran of the Erhard era…as well
as author of the "Richebacher Letter," which we publish…
says, "the Catch-22 Dilemma" of the U.S. economy. The pope may no longer be infallible…but in the minds
of many people…Alan Greenspan still is. And his artful
move yesterday…raising interest rates a wimpy quarter point…
while simultaneously giving the markets the go-ahead by
proclaiming a shift to a "neutral bias" on interest rates…was
just more proof. Stocks can now go up…while Greenspan
has done his duty by raising rates.
And what will happen when the U.S. economy inevitably softens?
People expect that Greenspan will lower interest rates and all
will be well again. But this is where the problem arises…
because you can't lower interest rates when you need to
attract $1 billion a day from overseas. Especially not in a
softening economy -- which would be producing lower profits
and lower stock prices. The magic only works, in other words,
when it is not needed. One way or another, the "chronic trade deficit will have to be
reduced," says the Klein-Wolman letter, quoted by Richard
Russell. "And the path to reducing it will not be pleasant. It
may require higher interest rates in the United States or a
reduction in consumption or a decline in the value of the dollar.
None of these alternatives are favorable for the U.S. stock market." Auf wiedersehen
Bill Bonner
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