The Drunk Simply Won't Leave the Party

May 8, 2001

The action in the stock market yesterday was very interesting. Before the market opened, unemployment numbers caught Wall Street off guard because they were much higher than expected. Actually the consensus was for a slight gain in employment. So when the numbers came out that the unemployment rate had INCREASED to 4.5% from 4.3% in March, the market gapped down the limit on the futures. The rise in unemployment stunned Wall Street as it was the highest loss in payroll numbers since the 1990-91 recession.

At the same time as unemployment was rising, wages were also rising at an unexpectedly high 0.4% for the month which is likely to continue putting pressure on corporate profits.

But why worry? Why would anyone think what goes on in America has anything to do with Wall Street? What a goofy notion to think corporate and personal balance sheets should have anything whatsoever to do with stock prices? There is no need to worry about economic reality. Why? Because our financial system can always create more money. So, after the market gapped down after about 30 minutes or so, a rumor circulated of an imminent 75 basis point rate cut. That was followed by a White House announcement that the first quarter GDP number would likely be revised lower.

So despite the fact that the economic information coming out into the market yesterday provided greater evidence of a recession, the market chose to look at that as good news. Why? Because all the banking system needs to do to fix all our problems is print more money.

This of course is an absurd notion but it is one now that is being mindlessly accepted with about the same level of intelligence that an alcoholic displays when at 2:00 in the morning he continues drinking because he is just having such a damn good time. Unfortunately, that kind of behavior eventually ends in death and destruction. And, death and destruction also awaits the U.S. economy. In fact, I am convinced the U.S. addiction for money and debt creation has progressed to the point where there will not be any easy way out.

Drunk on the profits stolen from unsuspecting Americans, Wall Street's view of our future is as distorted as that of a total drunk who barely has the capacity to stand up. Another "drink or two" in the form of rate cuts (which means the creation of massive amounts of money out of thin air) and our Wall Street Drunk will flat on his face, out for the count. That will happen when at some point - perhaps very soon - the rest of the world will have gotten their fill of the U.S. dollar, just as they did in the late 1960's except this time, there will be no saving grace for the American economy because the world will simply not want any more of our worthless paper. In fact, our economy (and our nation) is suffering through a moral decay that I believe accept for the grace of God is irreversible.

A BRIGHT RED APPLE EATEN AWAY INSIDE

Our economy can be compared to a bright shiny red apple on the outside, but inside, the structural integrity of the apple is being eaten away so at some point, when a slight amount of pressure is exerted inward on the apple, it will collapse. Dr. Ravi Batra, Ian Gordon and David Tice all suggested to me when I interviewed them that the most likely event that will trigger a collapse of our system, which is rotten with debt, will be a decline in the dollar.

A collapse of the dollar also seems to me the most likely trigger for our ultimate plunge in to the depths of the Kondratieff winter. I say that because the primary reason that foreigners were willing to plow their billions of dollars (earned via trade) back into the U.S. was because of the promise of higher returns in America. But now with a recession clearly starring us in the face and with America so hugely indebted not only to itself but to the world, high returns on investment for foreigners are likely to evaporate. And just like that, so will the dollar's strength evaporate such that we could have a quick and horrendous plunge in the dollar. That would most likely be good for gold and I believe would, at least in the early stages of the Kondratieff winter result in rising prices, at least on imported goods.

THE POWER OF MONEY By READ DOUG NOLAND At

www.prudentbear.com

In his weekly "Credit Bubble Bulletin", Doug Noland wrote an extremely insightful piece this week titled, "The Power of Money." Doug discusses the extreme levels of credit and how this "drug" is and has been in the process of destroying the American economy. Specificially, Doug has noted how in the American economy, money and credit (debt) is being expanded outside of the commercial banking industry. In fact he notes that the monetization of all sorts of assets, most notably real estate, is leading to absurd levels of liquidity and debt and that the growth of this liquidity is taking place at an accelerated rate of speed.

There is so much of Doug's wisdom that I would like to share with you but that is not possible because this weekly missive is itself becoming too lengthy. But I would urge you to visit www.prudentbear.com and read his article as well as the daily columns of Lance Lewis and a host of other writers. This week there is a very insightful article titled, "Lies, Damned Lies, and Economic Data written by Guest Analyst Mark Rostenko which I urge you to read.

One thing from Doug Noland's extensive article that I am going to share with you however, is the following quote from White House Economic Advisor, Lawrence Lindsey, taken from a speech he made on Monday of this past week at the annual convention of the Society of American Business Editors and Writers.

"I do think it is important that we all keep this in mind: we have had 20 years of expansion - 18 actually, going on 19. And it has been an extraordinary period. But that does not mean that everything is AOK. And I think that it is important to keep in mind what I think are three imbalances. They actually all come up to one imbalance. And let me sum it up with these statistics. Last year the private sector spent $700 billion more than it earned after taxes. (repeating) The private sector spent $700 billion more than it earned after-tax. Now that is 7% of GDP. We have never been there before. We are making up that 7% essentially from two sources. The public sector ran a 3% of GDP, roughly, surplus. And we took in 4% of GDP by borrowing from abroad. But in terms of being overextended, we have never been that overextended before.

"There is a lot of confusion between the health of the government's books and the health of America's books - they are not the same thing. The public sector ran a healthy surplus...taking a record share from the private sector. The private sector is running a record deficit. We are in uncharted territory. We don't know how this is going to work out. But it is unlikely that we could forever borrow 4% of GDP from the rest of the world. Or more precisely if you look at trends, we are borrowing increasing amounts from the rest of the world.

"Imagine going to your banker and saying "we thank you very much for the $280 (billion) you lent us in 1999, and the $400 (billion) you lent us in 2000, and it looks like this year it is going to come in about $520. We are going to need $650 in additional cash in '02, probably $800 in '03." Getting the picture? This is otherwise known as "evergreen" financing. And it won't work. At some point, it is going to have to be adjusted.

"I remember stories from the '80s. Many of you are probably too young. But our personal savings rate - that we moaned as being far too low – averaged 9.1% of GDP. Last year we were in negative territory. The first quarter of this year was minus 1%, the lowest since 1933. Similarly, if you combine personal savings with gross private savings minus gross private spending, we were short last year 5.4% of GDP. That is also a record. Unprecedented. It has to be adjusted. Something has got to give here..."

UPDATE ON RICHARD RUSSELL'S VIEWS ON THE MARKET

Where Is the Stock Market Headed? Here is what RICHARD RUSSELL, one of Wall Streets most experienced and successful independent analysts had to say last week in the midst of the most recent rally.

"Overall, however, is the problem of values. The S&P is selling at over 25 times earnings and six times book while yielding a paltry 1.25% These are statistics for above (more overvalued) than any which existed at previous tops, including the tops of 1929, 1937, 1966, and 1977. I think these super-high valuations tend to put a top on this market. The market may bounce around, testing highs and lows, but over time I don't see this market going anywhere.

"The great opportunities to make fortunes in the stock market come when the market is at or near a bear market bottom. Ironically, these are the times when the news and market sentiment is so bad, that "no one" wants to own stocks.

"Brilliant economist and author Peter Bernstein shows that there is a definite correlation between the dividend payout ratio and the percentage change in earnings per share. The trend of dividend payouts leads the percentage change in corporate earnings per share by roughly five years.

"The dividends payout ratio turned down in early 1997, and it has been declining ever since. The latest figure is that the dividends payout has sunk to 32%, the lowest level in stock market history.

"This has very bearish implications for corporate earnings over the coming years going right up to 2005. The implications are that the market in the largest sense will go nowhere. What we will see is ralilies and declines, all within the context of an extended, ongoing bear market. A good many of the rallies and declines will simply be based on changes in interest rates and stock valuations adjusted to those changes in rates.

"By the way, according to S&P, 'Dividends on the S&P 500 fell 2.5% for all of 2000, the first yearly drop since 1991 and the largest decline since 1951. With corporate profit weakness continuing, we estimate a 3% to 5% decline in dividends on the S&P 500 for the full year 2001.'"

18 karat gold is 75% pure gold.

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