The existential economist. Paris, France. (FWD)

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Mar 22, 2001, 6:47:28 PM3/22/01




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*** Sellers dominate the market, but still no
panic selling...

*** Another bad day for the Dow...the giants are

*** "The biggest insanity every"...brokerages
stumble...analysts brought to heel...smooching in
Paris...and more!

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*** Karim Rahemtulla, who heads our venture
capital club, writes: "Two stockbrokers whom I
have known for more than 15 years called me today.
They are toast. The first one saw his account drop
from 800k to 70k and today he is being forced to
liquidate his account to cover his margin. Lesson
- margin costs a lot more than 8% a year.

"The second one saw his account go from 400K to -
30k - how, he borrowed money to fund his margin
calls - now he owes that money too.

"Yesterday and this morning I saw the first signs
of the capitulation process. It is just beginning.
Stocks begin to trade with wider spreads, the bid
and offer on Corning, a big tech stock, expanded
from 6 cents to over a dollar at one point. THE
are saying 'SELL IT TO ME CHEAPER.'"

*** The Dow went down a further 234 points
yesterday. The Nasdaq retreated 27 points. Three
times as many stocks fell on the NYSE as rose.

*** The giants are falling. Microsoft lost 5% of
its value. GE fell 3%.

*** Two bits of financial news shaded yesterday's
action. First, the trade gap for January rose to
$33.2 billion - the second biggest deficit ever.
And consumer prices rose a bit more than expected
- up 0.3% in Feb.

*** The Dow is off 3.4% so far this week. With
more than 50% of American families invested in
stocks - and an average of 60% of their assets in
equities - these stock market losses must have an
effect, sooner or later, on the economy.

*** A Newsweek poll found that "55% of Americans
say they have already delayed or cancelled major
expenditures on items like cars, home renovations
or vacations. And 69% plan to limit those
purchases further in coming months."

*** Americans have used the stock market to
replace savings. But now, says TIME magazine, our
"savings" are getting "vaporized in front of our
eyes." Not surprisingly, people are looking for
safer places to put their money. Mutual funds are
experiencing net outflows of capital. In mid-
March, the weekly outflow hit $8.9 billion - the
second highest ever.

*** But - despite the losses - there is not yet
any panic among investors. Investors Intelligence
reports that advisors have become even more
bullish - 51.6% are bullish, and only 30.9% are

*** "Never before in U.S. history has this much
capital built up on the market sidelines with only
one place to go," says and email message from the
very bullish Michael Murphy. "Where? Back into
stocks and mutual funds! Institutions get 'paid
to play,' plain and simple-not to stockpile cash
on the market sidelines. And individuals aren't
going to settle for 5% annual growth in money
market funds, giving up their dreams for a lavish
retirement, the kids' college education, or that
special dream house.

"And that means there's a MONSTROUS BUYING PANIC
coming soon."

[If there is a buying panic at these levels - it
will surely be a hideous monster.]

"I beg you," Murphy continues, with perhaps a bit
of copywriting flourish, with which your editor is
all-too familiar, "this is the most important
decision you'll make in your entire investing
career - don't let Wall Street fool you into
making the wrong one!"

*** "Many people still deny that the end of the
bubble is a fundamental change for the American
economy," writes Floyd Norris in the NY TIMES.
"Companies and investors expect stocks to recover.
The economy may be down but surely this is just an
inventory correction that the Fed will be able to
fix in a quarter or two."

*** By contrast, "the stock market is not the
economy. And the Fed does not control either of
them," says today's Washington Post. Which is it?
Is the Fed in control, or not? More below...

*** The brokerages are stumbling. Bear Stern's
first quarter profits fell 40%, reports Money
Daily, and Morgan Stanley's fell 30%. Lehman's
profits fell 29%.

*** "The biggest financial insanity ever in any
nation in history" - Sir John Templeton.
Interviewed by, Templeton said he
believes the recent bubble was the worst ever and
will lead to "a stock market crash greater than
the Great Crash of 1929."

*** "What Michael Dell has done," according to
economist Barcley Lieb, passed on to me by our own
Kevin Klombies, "is create a brilliant company -
but then turned its valuation into something akin
to a Ponzi scheme... cash from Dell's PC
operations came in the front door, and the
majority of it went right out the back door to its
employees and to Michael Dell himself." Through a
stock-buyback program Dell repurchased 350 million
of its own shares in the last three years. The
stock rose from $4 to a high of $59. And Lieb
reports that "between August of 1997 and present
Michael Dell personally sold almost 10 million
shares netting himself over $810,000,000."

*** On the 21st anniversary of the Hunt Bros.
silver debacle, Lieb notes: "Michael Dell is
surely more savvy than either Herbert or Nelson
Bunker Hunt, but isn't the behavior similar? The
basic game is to use other people's money to
leverage up an asset you believe in. The only
major difference is that Michael Dell has refined
his exit strategy far better than was ever
afforded to the Hunt brothers by the New York
Comex Exchange." (see related article: Corporate
Profit Oddities: How Bad Is Bad?

*** John Myers: "Dick Cheney estimates that the
United States will need 1,300 new power plants
over the next 20 years. A back of the envelope
calculation reveals that's 65 new plants each
year. And guess what type of source he is talking
about? Coal."

*** Gold rose $1.40 yesterday. But the dollar rose
too - sending the euro back below 90 cents.

*** "JP Morgan Reigns in Analysts," says The Times
of London. The head of equity research for the
firm told analysts that it was "mandatory" that
analysts send research reports to the companies
covered, and to the relevant investment bankers.
Analysts are to "incorporate the changes requested
or communicate clearly why the changes cannot be
made." For whom do JP Morgan's analysts labor?
What is the value of the information they deliver?
The firm...and zero, respectively.

*** It has been raining in Paris for days. Parts
of the country are flooded...and here in the city,
the Seine has risen so high the tour boats no
longer fit beneath the bridges. River traffic has
been halted.

*** Maria and I went out to dinner at a nice place
on the Avenue Victor Hugo last night. At a nearby
table, a couple embraced in a way that you
normally only see in bad movies. "Aren't they a
little old to be doing that?" asked Maria, 15. The
woman looked as though she was in her mid-forties.
The man was a little older. But he looked tired.
Both of them were old enough to know better than
to make a spectacle of themselves in public. But
it's Paris. And yesterday was the first day of

After about an hour of holding hands and, shall I
say, 'French' kissing, the couple got up and went
outside. They embraced again - madly,
passionately, longingly. And then, she turned and
walked down the street and he mounted his
motorcycle and rode off.

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"Always and everywhere, markets make opinions."
James Grant

Christopher Wood reminds us that in the late '80s
people who thought the Japanese economy was a
bubble were considered 'off the wall.'

More recently, when a comparison between the
Japanese economy of the late '80s and the American
economy of the late '90s was made - that too was
said to be 'off the wall.'

'Off the wall' turned out to be a good place to be
in the first instance. Will it in the second?

After the Japanese bubble popped, American
economists began hectoring Japan's government to
do something about it. Japanese officials were
urged to lower interest rates, increase government
spending, and 'restructure' the economy, along
American lines.

No dopes, the Japanese lowered interest rates to
zero, and spent more money on public works than
any government in history. On restructuring,
however, the evidence is mixed.

Whatever they did, it didn't work. But American
economists are sure that if Japan had merely
listened more carefully, the 'lost decade' in
Japan would never had happened.

"Mr. Mori and his politically battered Liberal
Democratic Party," says a recent editorial in the
International Herald Tribune, "seem to lack the
will and the imagination to set a course for
recovery. Americans once worried about seemingly
invincible Japanese competition. Now Washington
needs to help reverse Japan's economic decline."

"Halfway measures are unlikely to revive Japan,"
the paper concludes.

But half measures is what Japan got, according to
the existential economist Paul Krugman, writing in
the NY TIMES. On Monday, the Bank of Japan
announced a return to zero interest rates. On
Tuesday, the Fed cut rates by 50 basis points. "In
each case," says Krugman, "the measures taken were
halfhearted - moves in the right direction, but
almost certainly too weak to do the job."

In today's letter, we return to the pseudo-
intellectualism of the last few days - that is, to
economics and philosophy, or a look at the dismal
science from the perspective of an even more
dismal one.

My working hypothesis is that markets not only set
prices - but also set the going rate for ideas
too. Just as a soldier may 'get religion' on the
eve of battle, so does an investor return to
values, rules, and fundamentals when prices fall.
Confident of his ability to choose winning stocks
in a bull market, he becomes a humbler, more
agreeable person in a downturn. He becomes - as
the old saying has it - older, wiser, and poorer.
Popular philosophy adjusts to market conditions...
not the other way around.

But economists and philosophers are probably
hopeless. Rather than roll with the market's
punches - they stand stolid, still and dumb as

The June bug is not credited with the arrival of
spring. Nor is the brown leaf blamed for the
approaching autumn. But markets - in the mythology
of the existential economists - are the product of
human choices. Presumably, investors - and Alpha
Male of all humans active in the market, Alan
Greenspan - may now choose to avoid a more serious
bear market.

"In ripe middle age," writes James Grant, "Alan
Greenspan was an acolyte of the individualist
philosopher and novelist, Ayn Rand. He could not
have imagined at that stage of his life, that he
would wind up on the federal payroll as the living
symbol of that rarest of 20th-century creatures,
the successful economic planner. Yet in the shank
of the boom, he personified the myth of government
control. He would set the correct interest rate.
He would orchestrate the correct fiscal policy..."

Greenspan is not the only player, of course:

"True, a lot of our stock market wealth is getting
vaporized in front of our eyes," the current issue
of TIME tells us, "but how bad it gets still
depends on how spooked we get."

It's up to us!

This line of thinking leads to errors - but never
on the part of the economists themselves. Instead,
they interpret bear markets and recessions as the
consequences of the 'mistakes' of others.

The Great Depression, for example, need not have
happened. It was the result of policy errors made
by the Hoover Administration...and a slavish
fidelity to the gold standard.

All of these errors have been identified long ago
- and corrected. The gold standard problem, for
example, was corrected so completely that gold no
longer stands in the way of any central bank on
the planet. [Though it may eventually trip them up
as they run to shelter from falling managed
currencies...but that is another story for another

And then, there was the Great Inflation of the
'70s - which was to blame for crashing share
prices, stagflation and other financial calamities
of the time. That, too, was the result of errors
which have since been corrected. After all, there
is no sign of consumer price inflation today!

Finally, there is Japan. Oh Japan! If only it had
taken the advice offered by Krugman and others,
what a different world we would have. Instead of
having the top two of the world's economies both
falling into recession, we would have just one -
the United States. And, as Krugman explains, a
slump in the U.S. is easily reversed: "The Fed
has a powerful conventional tool at its disposal.
Since U.S. interest rates remain well above zero,
there is still room for substantial cuts."

Alas, rate cuts have not done the trick. But,
fortunately for the existential economists, errors
seem to come along just when you need them. "While
the Fed has room for substantial cuts," Krugman
explains, "it does not have unlimited room, which
is what makes Tuesday's half-measure so disturbing.
The point is that every time the Fed cuts rates
but doesn't turn things around, its credibility
is eroded. Tuesday's market plunge was in effect
a vote of no confidence in Alan Greenspan and his
colleagues, and that very lack of confidence will
now become a drag on economic recovery."

People expect so much - perhaps too much - of Alan
Greenspan. They expect his aim to be perfect. No,
he has not yet set interest rates at the precise
level they need to be to revive the stock market.
But he still has room to try.

Maybe he will get it next time. Or maybe he will
make another 'mistake.' Then again, maybe there is
no fed funds rate so winsome that it inspires an
immediate bull market. Maybe autumn follows summer
whether we like it or not.

"America is not Japan," Krugman concludes, "and
the Fed is not the Bank of Japan, but they don't
seem quite as different today as they did a few
months ago. That is the bad news."

A modest prediction: expect a bear market in the
Fed chairman's prestige...and in existentialism
among investors.

Your humble pen pal,


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