WAITING FOR THE OTHER SHOE TO DROP
by J. Christoph Amberger
"Are you better off than you were two years ago?" a
garrulous Al Gore recently asked of an obedient audience
attending a Democratic "Where Are They Now" event. The
response, as planned, was synchronous head wagging and
the mouthing of a collective "no!"
It made me think.
"Better off" implies a comparative process, whose result
depends on evaluating two states of being. But to
evaluate properly and reasonably, you have to be able to
apply the same criteria. If you aren't able to do that,
your results are questionable at best.
For example, you could make a valid claim that each and
every German back in 1923 was a multimillionaire. Of
course, that was during the Inflationszeit, and a
billion Reichsmark was just enough to buy a stale loaf
of bread at the local baker's, who in turn "stretched"
the flour used to make it by adding sawdust. Today, few
Germans are millionaires when you compare their numbers
to those of 1923. (Especially now that the former
Deutschmark-millionaire requires twice as many Euros to
keep his status.)
The last bout of "hyperinflation" we experienced here in
the States might not have affected the buying power of
the currency or the cost of living. But it created an
illusion of wealth by over-inflating the paper
valuations of companies and the equity stakes they
issued. In this regard, the goateed Internet millionaire
whose million-dollar mortgage and car loan for his
Ferrari were secured by his overvalued stock options was
much like the Hausfrau of the early Weimar Republic who
carted billions of Reichsmarks to the grocery store in a
wheelbarrow.
Or take that other terminal affliction of the late 20th
century: collectible toys. Contemporary with Pets.com,
smallish stuffed animals and trading cards developed
value trajectories that can only be compared to the
launching phase of intercontinental missiles. Three
trademarks stand out in my memory: Beanie Babies,
Pok‚mon, and Tickle-Me-Elmo. Their real values
fluctuated between those of a roll of dental floss and
the promotional matchbook of a dancing school for Mormon
singles. After all, they were nothing but stuffing,
miniature glass eyes, cloth, and stiff paper.
And yet, people were willing to pay through the nose.
Beanie Babies retailed for between five and ten dollars.
Some wily storeowners in resort towns managed to sell
them for fifteen. And at the height of the frenzy, there
were collectors who would pay several hundred dollars
for special "retired" models...each of which cost about
50 cents to make.
The "values" for Pok‚mon cards made Mary Meeker look
like Little Orphan Annie. The Holographic Charizard. A
simple, uninspired card with holographic foil at times
switched hands for fifty dollars or more. Not bad at all
for a card whose production cost and inherent value was
less than a penny.
Adding up the year 2000 "valuations" of the toys that
are scattered like the dead of the Battle of Austerlitz
throughout my children's rooms, I could have sighed
contentedly and folded my hands above my stomach:
Harvard, here we come!
Unfortunately, the Beanie Baby math of 2000 that
determined empirically that I was way ahead of the game
had just about the same shelf life as Clinton Era
prosperity.
To arrive at an objective comparison of "how well off"
we are today compared to the year 2000, wouldn't you
have to adjust the perceived (and politically more
marketable) reality of that year by taking into
consideration what we know today?
If companies were able to leverage each other to the
hilt based on crooked Enron-style deals, suspicious AOL-
style double-booking of revenues, and balance sheets
whose "gains" reflected mostly stock appreciation (which
in turn depended on media manipulators), shouldn't there
be something like a restatement of stock market gains
and GDP for the late 90s, allowing us to compare apples
to apples and Milk Duds to Milk Duds?
In other words: were we really "better off" in 2000 when
the price for the Holographic Charizard represented a
full day of work for a minimum-wage laborer? Or did we
mainly feel better because we were blissfully ignorant
of the fact that most of the perceived wealth of that
era consisted of smoke and mirrors, fluff, and
holographic foil?
Shouldn't Al Gore's question have been: are you smarter
today than you were two years ago? There, the only
appropriate reply would have been: you betcha!
But of course, nobody trying to muscle back into public
office would like to ask that question.
The hubris that shaped the attitudes of the year 2000 -
and still appears to tinge the rosy nostalgia of liberal
entertainers and politicians - was not quite
unreasonable at its core. After all, the Western world
had just stared down the biggest bugbear of a half-
decade. The Y2K debacle that wasn't. When the lights
didn't go out on New Year's Eve, wishful thinking became
common knowledge. The system was simply too big to fail.
Of course, the cautionary lesson of the 20th century was
that nothing is too big or stable or important to fail.
This lesson should have been learned when the Titanic
sank, the Soviet Union imploded, and Kevin Costner's
"Waterworld" was pulled down into box office pond scum
by its own overblown sense of importance.
You may be able to delay terminal failure. But there is
an immutable law of nature that you can't do so
interminably.
This appears to be the realization of Heizo Takenaka,
Japan's new economics minister, who seems determined to
put his country's "too big to fail" banks out of their
decade-long misery.
Japanese banks are presiding over untold billions in bad
loans. And yet, under the Japanese brand of capitalism,
they thus far have been allowed to "save face."
Bankruptcies and serious restructuring that would have
cleansed the industry - and indirectly, the Japanese
economy - have been delayed for ten years now for fear
of the short-term political and economic repercussions.
But these corporate patch-up jobs have created their own
nightmares. Japanese banks now also hold grandiose
positions in corporate equity. Each drop in the markets
- the most recent triggered by fears of Takenaka's
terminal accountability - translates into yet another
dent in their capital.
In the first couple of trading days in October, latent
losses on shares held by the 12 largest commercial banks
in Japan jumped by a stomach-churning 46% to US$41
billion, according to the Daiwa Institute of Research.
With the Nikkei 225 at the 8,600 level, the capital-to-
asset ratio of these banks is a bit more than 9%. That's
a smidgen above the minimum 8% required for banks to
operate internationally. A drop of the Nikkei below
8,000 - a mere 7% drop below today's close at 8686 - and
some banks may indeed find themselves behind the eight
ball very, very soon.
(After all, what's another 686 points considering the
Nikkei has already lost four times that in less than two
months?)
U.S. banks are coming to grips with their own hangovers
caused by the binge of leveraging cable, telecom and
Internet companies to the hilt while the going was good.
They now find themselves saddled with the assessment
that 13% of all outstanding loans are either in default
or unlikely to be repaid. Risky loans, according to a
survey by the Fed, rose to US$236.1 billion in the year
ended June 30, up from US$192.8 billion a year before.
This means we probably haven't seen the end of the Big
Bubble Hangover yet. Japan may still have a few thousand
points to shave off the index before there are lasting
improvements.
But there are early indications that there may be an end
to the dry spell in the markets. In early October,
Thomson Financial indicated that U.S. insider selling in
September fell to its lowest monthly level in eight
years, dropping 55% from US$1.5 billion in August to
US$671 million in September.
That's the lowest volume since December 1994.
Executive purchases totaled US$130 million in September,
about half August's level.
What is that telling us? We have three ways of looking
at these numbers: One, corporate executives are still so
comfortably off that selling their positions at these
prices won't make a difference. Two, they have stopped
paying attention to their monthly portfolio statements -
like the rest of America. Or, three, they're expecting a
rebound.
Insider buying has picked up on Lucent, Microsoft,
Intel, Motorola, Campbell Soup, B/E Aerospace,
Chesapeake Energy, and MetLife Inc. And there's another
thing. Stocks are getting dirt cheap. You can buy Ford
for seven bucks and change, the most innovative chip
manufacturer for five dollars and change, and the patent
holder of a revolutionary self-contained heart pump...
will cost you half the price of a Beanie Baby.
Sincerely,
Christoph Amberger,
for The Daily Reckoning
P.S. At the Taipan Group, we'll be using every dip as a
buying opportunity. If you are waiting for 1,000 on the
Nasdaq or 6,800 on the Dow, there's a good chance you'll
see these levels. But, although it may be heresy to say
in The Daily Reckoning, we don't expect the market to
linger there. Three months from now, we expect it won't
matter exactly where you enter the market, as long as
you are long. |
