Fleck: Postbubble Casualties: The Dollar, Jobs, Retirement Dreams
By Bill Fleckenstein
03/05/2003 17:36
Index Close Change
Dow 7775.60 +70.73
S&P 500 829.85 +7.86
Nasdaq Composite 1314.40 +6.63
Nasdaq 100 990.23 +7.25
Russell 2000 356.54 +0.03
Semiconductor Index (SOX) 288.38 +4.48
Bank Index 713.35 +8.89
Amex Gold Bugs Index 129.96 -0.10
Dow Transports 2036.97 +2.61
Dow Utilities 199.84 +2.50
NYSE advance-decline +266 +1,196
Nikkei 225 8472.62 -7.60
10-year Treasury Bond 3.62% -0.025
Snow Talks, Dollar Squawks : Overnight, the foreign markets snoozed. The big news was the dollar's rout, on the back of a comment by our newest treasury secretary, John Snow, that he was "not particularly concerned" about its decline. In the ensuing decline, the dollar spent much of the morning flirting with the $1.10 level vs. the euro, a price not seen since about four years ago. For anyone who might not remember, the euro made its debut at right around $1.15, and promptly spent the next three years sliding, ultimately bottoming out at about 84 cents.
Turning to the stock market, we opened under a little bit of pressure and straight off had a rally, which was immediately clubbed. A couple hours into the day, we were lower than at the open, though the indices were just down 0.5%. After the morning selloff, the market spent the rest of the day working its way higher in fits and starts, and closed near its best levels. Today's themes, once again, were sell housing stocks and buy tech stocks, though the box scores show that financial stocks also got into the act. There's no reason to make much out of today's action, however, since it was basically a replay of what we've been seeing for the last couple of weeks. Away from stocks, the metals tried to go higher before closing slightly lower, with gold down a dime and silver down 3 cents. Bonds were up fractionally and oil was down fractionally. The euro closed at $1.096, up 0.5%.
Counterparty Boy : Following up on yesterday's column in which I reprised Warren Buffett's view that derivatives are a time bomb, I neglected to point out that one of the biggest champions of derivatives, who regarded them not as a time bomb but basically the greatest thing since sliced bread, is none other than our Fed chairman. In a variation on his hymn to the "productivity miracle," here is how he suggested to Congress, in March 2002, that derivatives were also a source of newfound wonders (and as you read these comments, keep Buffett's sober warning in mind):
"New financial products -- including derivatives, asset-backed securities, collateralized loan obligations, and collateralized mortgage obligations, among others -- have enabled risk to be dispersed more effectively to those willing to, and presumably capable of, bearing it. Shocks to the overall economic system are accordingly less likely to create cascading credit failure. Lenders have the opportunity to be considerably more diversified, and borrowers are far less dependent on specific institutions for funds." Greenspan continued: "Financial derivatives, particularly, have grown at a phenomenal pace over the past 15 years, evidently fulfilling a need to hedge risks that were not readily deflected in earlier decades. Despite the concerns that these complex instruments have induced (an issue I will address shortly), the record of their performance, especially over the past couple of stressful years, suggests that on balance, they have contributed to the development of a far more flexible and efficient financial system -- both domestically and internationally -- than we had just 20 or 30 years ago." So, folks can decide whose view makes more sense.
Flawed Unemployment Report : Turning to today's news, which got its start in the Fed chair's bubble, The Wall Street Journal carried a story (the second in a little series called "Retirement, Interrupted") about someone who retired but now needs to work, due to the implosion of his portfolio. On page one, however, there is a more heart-wrenching article about innocent casualties of the bubble's aftermath, titled "A Worker's Quest for a Job Lands on a Street Corner." Of course, in profiling the case of a manwhose job search takes him to a busy intersection, with placard in hand, the Journal manages to incorrectly identify the cause of his desperation: "Looking for work is never easy. But in this era of post-terror turbulence the emphasis is mine , times are especially tough." Well, times are especially tough, but it's not a function of post-terror turbulence. It's a function of postbubble turbulence .
In any case, I'm sure there are countless stories like these. While it has always been such that after good times, there are bad times followed again by good times, a bust can be made particularly devastating if during the prior boom, we acted particularly irresponsibly, such as we did. That is why prudent central bankers should always go out of their way to prevent a bubble, because the pain and suffering of the postbubble bust are radically disproportionate and longer lasting than whatever fleeting feelings of euphoria occurred on the upside. |
