Mission Impossible

“During the Clinton years,” writes executive editor David Ignatius in the International Herald Tribune, “treasury secretaries Robert Rubin and Lawrence Summers and the Fed chairman, Alan Greenspan, were able to move quickly and quietly when disaster loomed…”

The “pros” as he calls them, were called the ‘Committee to Save the World,’ “because of their success in averting financial disasters.”

“Tending Global Finances is a Mission for Experts,” proclaims the headline of Mr. Ignatius’ article. But what do the experts do? Well, we’re told that it involves “negotiating with banks, [and] imposing harsh conditions on foreign countries…”

Negotiating with banks must be a drag, but imposing harsh conditions on foreign countries could be fun. Who could not vastly improve some of these forlorn, Third World sink holes? Take a country like Albania, for example, a misbegotten muck of a nation. How easy it would be make that place better!

You could force everyone to wear those funny folk costumes with tassels. And anyone who didn’t look good in tassels would be deported to Bulgaria, which as far as I know is tassel-free. All buildings constructed after WWII should be razed…and replaced with traditional-style Albania architecture. I don’t know exactly what that is…but it is bound to be better than the Stalinist monstrosities that blemish the landscape today. Also, all motorized vehicles should be outlawed. This would seem like a “harsh condition,” but it would pay big dividends. Not only would the energy bill be cut in half…the country would be so picturesque! Tourists would flock to Albania and soon turn it into one of the richest nations on earth.

But do you think the honchos who run the treasury, the World Bank or the IMF would think of such a thing? Should I watch my mail for a note of “thanks” from the Albanian Economic Development Agency? No chance. They lack the necessary imagination.

You may recall, dear reader, that a lack of imagination lies at the heart of so many of the world’s troubles. People seem unable to imagine the consequences of their own actions – even when the results are as obvious and predictable as the IHT’s editorial comments.

Modern humans seem unable to imagine a world more complicated than say, an automobile engine or a grapefruit juicer. That is how the “pros” are supposed to be able to do their work – these experts are thought to understand how the machine works…they know what levers to pull and what screws to turn.

People understand, more or less, how machines work. Yet, when they try to apply the same metaphor to human society, the results are disastrous. Lenin, whose death we celebrate with loud hosannas today, had a machine-like vision for how Soviet society ought to function. The trouble was that people were never willing to follow the plan. This led to one economic calamity after another. But rather than revise his view of how the world works, he and his successor, Josef Stalin, decided to force people to do as they were told. Over the course of the 70 years of Soviet rule – including wars, economic programs, starvations, mass deportations, gulags, purges and other ‘harsh conditions’ – an estimated 20 million people were killed. And when it was over – the resulting national carcass was as lean as a New York anorectic.

In the U.S. voters still believe that Mr. Bush or Mr. Clinton ‘run things’. Many people still think that you can make goods and services more affordable by decree – as President Nixon did with his wage/price controls. Some still believe that rent controls reduce the cost of housing, and you can or that pass a law (minimum wage) that will make people richer.

And yet, experience shows that none of these measures work. Human society is far too complex for these simple-minded fixes.

Investors, many of them, still think that Greenspan and other experts can avoid financial hardship simply by negotiating with banks, imposing conditions on foreign countries…and setting interest rates at the correct point. And it has been so long since the last serious economic downturn in America that we have no personal experience to contradict it.

What about America’s Great Depression? What about Japan? Well, those were a long time ago, or a long way away. Besides, Alan Greenspan explains:

“While bubbles that burst are scarcely benign, the consequences need not be catastrophic for the economy. The bursting of the Japanese bubble a decade ago did not lead immediately to sharp contractions in output or a significant rise in unemployment. Arguably, it was the subsequent failure to address the damage to the financial system in a timely manner that caused Japan’s current economic problems. Likewise, while the stock market crash of 1929 was destabilizing, most analysts attribute the Great Depression to ensuing failures of policy.”

Apparently, the Japanese didn’t know what knob to turn. Hoover and his Fed chairman pulled the wrong lever. But, is the ‘Committee to Save the World’ infallible?

I put it to you, dear reader, that it doesn’t really matter. There is some suffering – like an overdue visit to the dentist – that cannot and should not be avoided. It is best to get it over with as soon as possible.

“The way to deal with a collapse of exchange,” wrote Freeman Tilden in 1935, “is not to pretend that ‘prosperity’ is merely in a temporary eclipse, to return again if everybody will act optimistically; but frankly to acknowledge that conditions were unsound, and permit the natural impulses of trade to rectify them. This prescribes a bitter medicine, which people do not like and politicians cannot collect upon; but quack remedies merely put off the final day of reckoning.

“The natural remedies, if the credit-sickness be far advanced, will always include a redistribution of wealth: the further it is postpones, the more violent it will be. Every collapse of credit expansion is a bankruptcy, and the magnitude of the bankruptcy will be proportionate to the magnitude of the debt debauch. In bankruptcies, creditors must suffer.”

Your ever-optimistic correspondent…

Bill Bonner Paris, France January 22, 2001

*** Poor Michael Milken. Bill Clinton handed out pardons, er…liberally – including one for his drug dealing half- brother, Roger, and Whitewater stonewaller Susan McDougal. But no pardon for Milken.

*** Despite reading the press reports at the time, I never was able to figure out what Milken had done wrong. He was the junk bond king on the throne of aggressive capitalism… and maybe that was crime enough for the proles who sit in prosecutors’ offices and on juries.

*** But what happened to investors who bought Milken’s junk? Ah, what about the victims? Well, it turns out, they did well. The rate of return on Milken’s junk was healthy and, in some cases, spectacular.

*** And it is thanks largely to the return on Milken’s junk that investors today are rushing back to buy high yield debt. Despite defaults at the rate of one a day – including, last week, high-profile Globalstar (which made our list of Financial Darwin Award winners) and the improbable Chiquita Banana, investors are confident that this junk will survive and reward them just as Milken’s did.

*** But that has been the way of things for the last decade or so… Every time things looked as though they might go very wrong – well, something happened…and they turned out all right after all. There was the crash of ’87…the fall of Japan, Inc…the Gulf War…the LTCM crisis…Russian debt…Asian currencies. Every story had a happy ending. So, investors might be forgiven for coming to believe that something good always happens in the investment markets and that things always turn out for the better. But do they? See below…

*** The Dow fell 90 points on Friday. It was dragged down by Home Depot – whose stock fell 7.3% after a disappointing announcement. Harley Davidson dropped 7% too. Walmart fell 4%. And GE ended the day down 1%.

*** But all the news wasn’t bad. Microsoft rose 10%. And some other techs and Internets managed a decent performance. The Nasdaq rose nearly 2 points.

*** “The Nasdaq is going back up,” Benoit remarked to me yesterday as we filled our stonewall with concrete. “I thought you said it was dead.”

*** “Did I say that?” I replied, feeling as though I had already slipped from hero to fool in less than 3 weeks, “Well, I still think it is dying…”

*** The Nasdaq is in the middle of what appears to be a bear market rally. It has bounced back up less than a fifth of the 2757 points it fell since last March and could go much further. Stocks crashed in October of ’29 – from 381 in September to 198 in November. Then, they began a rebound that lasted until April and took the Dow back up to 294 – recovering more than half its losses. But then, as Bill King puts it, stocks began their “death march” that took the Dow all the way down to 41 points in July of ’32.

*** “The high of the post-crash bounce was on April 17, 1930,” says William Fleckenstein, “from which the market collapsed nearly 90 percent. The moral of that story is that folks shouldn’t confuse the bounce that is under way with a return to prosperity – no matter how long it lasts…”

*** So relax, Benoit. The Nasdaq could go up another 800 points or so – and still be within the range of a typical bear market rally.

*** Friends from New Canaan, CT, report that they had to top the offer price to buy a condo in town – and still got into a bidding contest. But the WSJ reports that expensive properties are taking longer to sell – and sellers are becoming less confident.

*** The University of Michigan reports that consumer sentiment has dropped to its lowest level in 4 years. And the trade deficit fell for the second month in a row, in November, to just a little more than $1 billion per day. It looks as though the deficit may have peaked in September.

*** Still, that does not seem to have reduced the demand for credit – at least, not yet. Doug Noland, of The Prudent Bear team, reports that MBNA, the largest credit card lender in America, increased loans by 20% (annualized) in the 4th quarter of last year. MBNA added $16.5 billion to its lending total during the year. Much of that amount is securitized and sold, by the way.

*** Providian, a sub-prime credit card lender, increased its lending in the 4th quarter at a 50% rate. The weakest credit risks are borrowing at the fastest pace, in other words.

*** Capital One added – could this be right? – 47,000 new accounts a day…bringing the total to 33.8 million accounts by year-end. “Consumer loan balances” at Capital One grew at a 22% rate in the 4th quarter.

*** But 57% of investment advisors are bullish; only 32% are bearish.

*** Yet, “on the basis of the 200-day moving average,” writes Harry Schultz, “the US stock market is bearish.” All of the major indices are below their 200-day moving averages, with the exception of one: the Value Line Index.

*** Globally it doesn’t look so hot either. As of January 12th, says Harry, only one index is above its 200-day moving average:

Brazil’s Bovespa

The following indexes are BELOW their 200-day moving averages:

Australia’s All Ords (by 2 points)

Belgium’s BEL 20 (by 2 points)

Canada’s Toronto 300

Finland’s Helsinki General

France’s CAC 40

Germany’s DAX

Greece’s General Share

Hong Kong’s Hang Seng

Italy’s MIBtel

Japan’s Nikkei 225

London’s FTSE 100

Malaysia’s KLSE Composite

The Netherland’s AEX

New Zealand’s Cap 40

Norway’s Total Share

Singapore’s Straits Times

Spain’s Madrid General

Sweden’s Stockholm General

Switzerland’s SMI (barely)

Taiwan’s Taiwan General

Thailand’s SET (by 2 points)

“Of the 23 stock markets above,” Harry opines, “1 is long- term bullish, 22 are long-term bearish, based upon their 200-day moving averages as the key criteria.”

*** Consensus earnings for 2001 are now nearly even with those of 2000. Analysts do not expect earnings to rise. Yet, the Dow is still selling at a P/E over 20. Why would people pay nearly twice the historical average P/E for stocks that aren’t growing earnings?

*** Oh what a mess of things! “Gasoline Shortages Possible,” AP reports from California. A pipeline operator was on a “service interruption contract” with the utilities. When the juice stopped coming, the gas stopped pumping. And now what? Gas lines in the Information Age?

*** Meanwhile… “The CIA predicts a world population of 7.2 billion in 2015…” writes John Myers, “…95% of this increase will occur in developing countries, and most of that in already rapidly expanding Third World cities. Yet, four-fifths of the world still lives agrarian lives. No society can go from the hoe to the Internet without stopping first to use a tractor. In short, 5 billion people need cars, electricity and the infrastructure that goes with a developing economy. The process is already underway. And if world growth represents anything like post-World War II Western growth, commodities at today’s prices are a tremendous opportunity.”

*** Vladimir Ilych Ulyanov, better known to the world as Nikolai Lenin, died on this day in 1924 of a cerebral hemorrhage. Lenin, a violent believer in New Eras, once said: “Electricity will replace God.”… if this is true, it would appear residents of California are in serious trouble.