05/24/01 ASCENSION DAY THE DAILY RECKONING BALTIMORE, MARYLAND THURSDAY, 24 MAY 2001 * * * * * * * * * * * * * * * * * * * * * * * * * Nasdaq takes a bullet… A lucky shot? Or is Mr. Bear
planning to attack? Is he a demoblican or a republicrat? Does it make any
difference? Why trust in God when you have lawyers?… Dell
overheats… and more…
* * * * * * * * * * * * * * * * * * * * * * * * * * * I asked my friend, Eric Fry, to begin writing the market
notes. Eric, editor of Grantsinvestor.com, has his office
on Wall Street and watches the markets more closely than I
do. Eric will also be the guest host on CNN-FN next week,
9:30 - 11 E.S.T. You'll see my letter, below, as usual. From Eric: *** The new and improved, post-bubble Nasdaq isn't
bulletproof after all. After six straight days of gains,
the index finally took one between the eyes, falling more
than 70 points. The Dow also staggered a bit, falling 151
points. *** The real reason for the decline is anybody's guess.
Probably folks just decided to take a break from buying
stocks for one day to go on a picnic or to fly a kite. But,
according to the mouths on TV, politics is to blame. It
seems that Sen. James M. Jeffords, a Vermont Republican, is
toying with switching parties to join up with the Democrats
because of disputes with the White House. This would give
the Democratic Party a clear 51-to-49 majority in the
Senate. Jeffords will let us know in which trough he
feeds sometime today. *** Another reason for yesterday's sell-off may be that
business across the board just isn't very good. Fred Hickey
observes, "Ingram Micro, the world's leading distributor of
computer and networking products ($30 billion annually)
held their quarterly conference call with analysts this
week. CEO Kent Foster stated in no uncertain terms: "We see
no evidence at all of a turnaround." *** "According to Gartner Dataquest, U.S. PC unit sales
fell 3.5% in Q1, the first quarterly sales decline since
they started keeping records." *** The Fed surveys "professional forecasters" to see where
they think the economy is headed. The soothsayers have
lowered their forecast for economic growth this year, says
the Philadephia Fed, from 2.2% to 1.2%. *** Profits are headed down, too. High inventories and
excess capacity prevent them from raising prices…while
energy costs and a high dollar squeeze out profits. In the
first quarter of this year, profits were only half that of
the year before. *** Washington Post columnist Fred Barbash takes the grim
numbers at face value. "The last I heard, profits were
tanking almost across the board as far as the eye could
see, especially in technology," a puzzled Barbash writes in
the International Herald Tribune. "Chief executives were
complaining of a lack of 'visibility' as they handed out
earnings warnings." Although Barbash acknowledges the
presumed effect of 5 straight rate cuts and understands the
theory "that the market anticipates an economic turnaround
even before things turnaround," he is skeptical that
nothing but clear skies lie ahead. So are we. *** The clear-sailing crowd will not be troubled in the
least that the US current account now plumbs record
deficits. At 4.6% of GDP, the current account deficit
exceeds the levels that our 1980s investor forebears found
so alarming. "For perspective," James Grant observes, "the
deficit peaked a 3.5% of GDP in the mid-1980s, a foreign
exchange era best remembered for the dollar bear market
that preceded a famous stock-market panic." *** The palpable, although perhaps not imminent, risk of
the current account undermining the dollar's value prompts
Jim Grant to wonder, "What are the risks to a natural owner
of dollars of choosing to own nothing but dollars?" Grant
provides an implicit answer to his rhetorical question by
contrasting today's US dollar with 1970s-era Swiss franc. *** "A quarter-century ago, the Swiss offered protection
against the ravages of price inflation. Today, the dollar
provides exposure to the sweets of asset inflation. A
quarter-century ago, the mythology of the Swiss gnomes lent
value to the franc. Today, the vaunted reputation of Alan
Greenspan enhances the value of the dollar. In the early
1970s, the Swiss Government charged negative interest rates
to dissuade nonresident speculators from holding francs. In
2001, the Federal Reserve is chipping away at the funds
rate, but not with the object of discouraging monetary
inflows; on the contrary, the current account deficit (and
the world's willingness to finance it) is at the heart of
the American system." *** More on the dollar, Alan Greenspan and life in the 21st
century…below… *** An early snow-melt looks likely to boost hydro-electric
power production in the Northwest, thereby alleviating the
California crisis…temporarily. Dennis Gartman predicts:
"The media this week will be filled with news of collapsing
energy prices in the West…[But] more, not fewer, rolling
blackouts will take place in California as the summer
progresses, for the hoped for benefits of renewed hydro-
power will prove modest and temporary." *** "The snow pack is approximately 58% of the 100-year
average in the Northwest…" Gartman continues. "Once the
market realizes that the reservoir elevations are not where
they normally are at the onset of summer [and] that the
snow melt has stopped in early July as opposed to the end
of August…prices will resume upwards again and rolling
blackouts will resume." *** Why trust in God to fill the reservoirs when you have
lawyers on staff? The Wall Street Journal reports,
"California's two top-ranking Democratic state lawmakers
sued the Federal Energy Regulation Commission (FERC)…to
force the FERC to cap wholesale electric power." If
Greenspan can establish a "just and reasonable" interest
rate for the entire economy, how come FERC can't pick the
right electricity rate for a state with only 30 million
residents? *** Maybe tech is getting a little too hot. Yesterday, my
office received an "Important Safety Recall Notice" from
Dell Computer notifying us that Dell is recalling "certain
batteries" that power certain kinds of Dell laptops. It
seems that the defective batteries "are subject to
overcharge, potentially causing them to overheat, release
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then you be the judge: Safety…And Future Profits * * * * * * * * * * * * * * * * * * * * * * * * * * * ASCENSION DAY You may recall Mr. Goupil? Weeks after we bought our house in France, Mr. Goupil
arrived at the front door. A short, stout man with a round
face and bright blue eyes, he informed us that he was our
plasterer, by right of birth. His father, his uncle and his
father's father had done the plaster work on the Chateau
d'Ouzilly. He would continue to do so…and we would
continue to pay him. Mr. Goupil's vision of how the world should work is a
peculiar combination of red and purple… Everyone has his
place, his duties and his responsibilities in Mr. Goupil's
cosmology…but they may be assigned by the State or by
God. He is a God-fearing communist, I believe, sure that
everything should be carefully organized and not
particularly concerned about who does it… I mention Mr. Goupil because the euro fell again yesterday.
In fact, it dropped below 86 cents - bringing it closer to
its record low. This decline comes at a most unlikely time
- that is, just days after a record jump in the U.S. trade
deficit and the most recent of 5 rate cuts by the
custodians of the dollar. Neither theory nor experience
provides an explanation. "Here we have an economy that is running a current account
deficit of 4% a year," writes Larry Elliott in the British
on-line publication, the Guardian Unlimited. "It is one
that has an overvalued currency and one where the corporate
sector is showing all the classic signs of distress:
falling profitability, cutting investment and laying off
staff. It is an economy dependent on constant flows of hot
money but which also gives investors the absolute right to
leave with their money whenever they want. Faced with a
similar set of circumstances in Thailand, dealers could not
get out fast enough."
"The rise in the dollar since February has been puzzling",
says Elliott, quoting the Bank of England, "as it has been
associated with falls in US growth forecasts and short-term
interest rate expectations relative to some of its major
trading partners". Elliott translates: "all our models say
the dollar should be falling like a stone but for some
reason it is going up." One of the wonders of the modern world is the dollar. The
US is not Thailand and the dollar is not the baht… But
like the baht, the dollar is paper… backed by
nothing…and minded only by an organization - the Federal
Reserve System - whose motives are suspect and whose
competence is doubtful. But, as Elliot tells us, "the herd mentality is powerful
and, at the moment, the herd believes that Alan Greenspan
has the situation under control, or at least pretends that
it does." Does he? One feels like a fool for merely asking the question. How
could a single mortal control an entire global economy…
involving billions of people making billions of decisions
every day? Perhaps he is not mortal, after all. No mortal man - even a former Randite - could stand in the
way of fundamental economic re-adjustments…or the re-
balancing of the yin and yang of nature itself. "We are now in the midst of a capital goods recession,"
writes Marshall Auerback, "capital expenditure,
particularly in high tech, is in sharp decline. It is
falling from an unprecedented lofty peak. It is being
slowed down by the sheer burden of debt and the consequent
inability to service that debt as saturation dynamics take
hold. We have not seen anything approximating this
condition in the US economy since the 1930s. The most
comparable post-war situation is the bubble economy of
Japan in the 1980s, during which a capital expenditure boom
(also fuelled primarily by debt) reached an unprecedented
25 percent of GDP at its peak. "The Japanese analogy is also instructive in many other
ways. In the aftermath of such excesses, the unwinding
generally persists for a long time and proves surprisingly
impervious to repeated interest rate cuts." Cutting rates and debasing the currency are the only tools
Mr. Greenspan has. Will they be enough to fix what
economist Anirvan Banerji of the Economic Cycle Research
Institute describes as "the the worst global cyclical
outlook in 20 years?" Can Greenspan hold back the cycles of
commerce and investment…greed and fear…expansion and
contraction…that have marked human action since the
beginning of time? The Fed's record of protecting the dollar's value is
pathetic. Nor is the history of managed currencies free
from sturm und drang. In fact, Elliott makes the point that
there have been twice as many financial crises since 1973,
when gold was removed from the international monetary
system, than before. Still, who am I to argue with the market? The dollar is up.
But Mr. Goupil gave me a clue as to why the dollar has held
up so well against the euro recently. "I'm sorry I am so far behind schedule," he replied to an
obvious question. "But all of a sudden everyone has work
they want me to do. Mr. Morrant, for example. I know he's
been planning to redo his kitchen for at least 10 years.
Now, he wants to do it right away. I told him I couldn't do
it until next year. So, he asked me if he could pay me for
it now…" "What's going on?" I asked. "Everyone wants to get rid of francs before we have to
switch next January… You know, if you try to exchange
more than a certain amount, they're going to ask where you
got them. And a lot of people don't want to have to answer
that question…" It is a funny old world, as Maggie Thatcher put it. For
now, the dollar's value rests on hot money…'dirty'
money…and an absurd faith in the chairman of the Federal
Reserve. But come January, the 'dirty' money in Europe
should all have been laundered - thanks to Mr. Goupil and
the world currency markets. The hot money may well have
cooled off towards the dollar. And Mr. Greenspan's control
over the world financial system may no longer be in
question. Most likely, it will be clear by then that the
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